Suppose that Dynamic Sofa (a subsidiary of Dynamic Mattress) has a line of credit with a stated
Question:
a. If the firm needs $10,000, how much will it need to borrow?
b. Suppose that Dynamic's bank offers to forget about the compensating balance requirement if the firm pays interest at a rate of 12%. Should the firm accept this offer? Why or why not?
c. Redo part (b) if the compensating balance pays interest of 4%. Warning: You cannot use the formula in the chapter for the effective interest rate when the compensating balance pays interest. Think about how to measure the effective interest rate on this loan.
Line of Credit
A line of credit (LOC) is a preset borrowing limit that can be used at any time. The borrower can take money out as needed until the limit is reached, and as money is repaid, it can be borrowed again in the case of an open line of credit. A LOC is...
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a The firm can use only 75 of the amount it borrows So if x is the amount i...View the full answer
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Related Book For 
Fundamentals of Corporate Finance
ISBN: 978-1259024962
6th Canadian edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus, Devashis Mitra, Elizabeth Maynes, William Lim
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