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Problem 16-17 Costs of Borrowing LO3 In exchange for a $400 million fixed commitment line of credit, your firm has agreed to do the following Pay 1 95 percent per quarter on any funds actually

Problem 16-17 Costs of Borrowing [LO3]

In exchange for a $400 million fixed commitment line of credit, your firm has agreed to do the following:
 
1. Pay 1.95 percent per quarter on any funds actually borrowed.
2. Maintain a 4 percent compensating balance on any funds actually borrowed.
3. Pay an up-front commitment fee of 0.3 percent of the amount of the line.
Required:
Based on this information, answer the following:
 
(a)

Ignoring the commitment fee, what is the effective annual interest rate on this line of credit? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

  Effective annual rate %
(b)

Suppose your firm immediately uses $225 million of the line and pays it off in one year. What is the effective annual interest rate on this $225 million loan? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

   
  Effective annual rate %

May 21 2020 View more View Less

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