The Kittanning Company has a $2 million line of credit with First Interstate Bank under which it

Question:

The Kittanning Company has a $2 million with First Interstate Bank under which it can borrow funds at 1.5 percentage points above the prime rate (currently 9 percent). The company plans to borrow $1.5 million and is required by First Interstate to maintain a 10 percent compensating balance. Determine the annual financing cost of the loan under each of the following conditions:
a. Kittanning currently maintains $100,000 in its account at the bank that can be used to meet the compensating balance requirement.
b. The company currently has no funds in its account at the bank that can be used to meet the compensating balance requirement.

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...