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- Lincoln Industries has a line of credit at Bank Two that requires it to pay 11% interest on its borrowing and to maintain a compensating balance equal to 15% of the amount borrowed. The firm has borrowed $800,000 during the year under the agreement. Calculate the effective annual rate on the firm’s borrowing in each of the following circumstances: 1.The firm normally maintains no deposit balances at Bank Two. Format: 11.11% 2. The firm normally maintains $70,000 in deposit balances at Bank Two. Format: 11.11% 3.The firm normally maintains $150,000 in deposit balances at Bank Two. Format: 11%Charlton Enterprises negotiated a line of credit at the bank that requires it to pay 12.5% interest on its borrowing. The firm is required to maintain a compensating balance equal to 10% of the amount borrowed. The firm borrowed $500,000 during the year. a.Calculate the effective annual rate on the firm’s borrowing if the firm normally maintains no deposit balances at the bank.b.Calculate the effective annual rate on the firm’s borrowing if the firm normally maintains a deposit balance of $45,000 at the bank. c.Calculate the effective annual rate on the firm’s borrowing if the firm normally maintains a deposit balance of $145,000 at the bank. d.What is the change in the effective annual rate when the deposit balances increase?Jhar Industries has borrowed $125,000 under a line-of-credit agreement. While the company normally maintains a checking account balance of $15,000 in the lending bank, this credit line requires a 20% compensating balance. The stated interest rate on the borrowed funds is 10%. Show Solutions and Explanation. A. What is the effective annual rate of interest on the line of credit? (Format: 11.11%)
- The Premiere Company obtained a short-term bank loan for P1,000,000 at an annual interest rate 12%. As a condition of the loan, Premiere is required to maintain a compensating balance of P300,000 in its checking account. The checking account earns interest at an annual rate of 3%. Premiere would otherwise maintain only P100,000 in its checking account for transactional purposes. Required: Compute for the effective interest rate assuming: a. Loan is not discounted. Loan is without compensating balance. b. Loan is discounted. Loan is without compensating balance. c. Loan is not discounted. Loan is with compensating balance. d. Loan is discounted. Loan is with compensating balance. e. Which of the loan arrangements above is most beneficial to the firm? Justify.Holland Construction Company has an outstanding 180-day bank loan of $393,000 at an annual interest rate of 9.7%. The company is required to maintain a 14% compensating balance in its checking account. What is the effective interest rate on the loan? Assume the company would not normally maintain this average amount.A company has borrowed $210,000 under a line-of credit agreement. It must pay a stated interest rate of 12% paid at maturity and maintain, in its checking account, a compensating balance equal to 14% of the amount borrowed. a. Calculate the compensating balance amount. b. Calculate the effective interest rate? c. Calculate the effective interest rate if the interest paid in advance?
- Your company has arranged a revolving credit agreement for up to $82 million at an interest rate of 1.51 percent per quarter. The agreement also requires your company to maintain a compensating balance of 4 percent of the unused portion of the credit line, to be deposited in a non-interest bearing account. Your company's short-term investment account at the same bank pays an interest rate of .65 per quarter. What is the effective annual interest rate if your company does not use the revolving credit arrangement during the year? Multiple Choice O O O O 3.30% 6.18% 3.85% 2.89% 2.63%(Cost of short-term bank loan) On July 1, 2018, the Southwest Forging Corporation arranged for a line of credit with the First National Bank (FNB) of Dallas. The terms of the agreement call for a $120,000 maximum loan with interest set at 1 percent over prime. In addition, the firm has to maintain a 19 percent compensating balance in its demand deposit account throughout the year. The prime rate is currently 11 percent. Note: Interest is not paid in advance (discounted). a. If Southwest normally maintains a $22,800 to $34,800 balance in its checking account with FNB of Dallas, what is the effective cost of credit under the line-of-credit agreement when the maximum loan amount is used for a full year? b. Compute the effective cost of credit if the firm borrows the compensating balance and the maximum possible amount under the loan agreement. Again, assume the full amount of the loan is outstanding for a whole year. C a. If Southwest normally maintains a $22,800 to $34,800 balance in its…Busch Corporation has an existing loan in the amount of $6 millionwith an annual interest rate of 6.0%. The company provides an internal companyprepared financial statement to the bank under the loan agreement. Two competingbanks have offered to replace Busch Corporation’s existing loan agreement with a newone. United National Bank has offered to loan Busch $6 million at a rate of 5.0% butrequires Busch to provide financial statements that have been reviewed by a CPA firm.First City Bank has offered to loan Busch $6 million at a rate of 4.0% but requires Busch toprovide financial statements that have been audited by a CPA firm. Busch Corporation’scontroller approached a CPA firm and was given an estimated cost of $35,000 to performa review and $60,000 to perform an audit.a. Explain why the interest rate for the loan that requires a review report is lower thanthat for the loan that did not require a review. Explain why the interest rate for the loanthat requires an audit report is lower…
- NOP Co. has agreed to the following loan proposal by a bank:▪ Stated interest rate of 10% on a one-year discounted note ▪ 15% of the loan as compensating balance with zero-interest current account to be maintained with the bank. ▪ The loan will have net proceeds of P1,500,000. Required:1. How much is the principal amount of the loan?A bank offers your firm a revolving credit arrangement for up to $68 million at an interest rate of 1.70% per quarter. The bank also requires you to maintain a compensating balance of 4% against the unused portion of the credit line, to be deposited in a non interest- bearing account. Assume you have a short-term investment account at the bank that pays 1.05% per quarter, and assume that the bank uses compound interest on its trevolving credit loans. (Do not round intermediate calculetions. Round the final answers to 2 decimal places.) a. What is your effective annual interest rate (an opportunity cost) on the revolving credit arrangement if your firm does not use It during the year? Effective annual Interest rate b. What is your effective annual interest rate on the lending arrangement if you borrow $35 million immediately and repay it in one year? Effective annual interest rate 1% c. What is your effective annual interest rate if you borrow $68 milion Immediately and repoy it in one…A bank offers your firm a revolving credit arrangement for up to $86 million at an interest rate of 2.15 percent per quarter. The bank also requires you to maintain a compensating balance of 2 percent against the unused portion of the credit line, to be deposited in a non-interest-bearing account. Assume you have a short-term investment account at the bank that pays 1.50 percent per quarter, and assume that the bank uses compound interest on its revolving credit loans. a. What is your effective annual interest rate (an opportunity cost) on the revolving credit arrangement if your firm does not use it during the year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Effective annual interest rate % b. What is your effective annual interest rate on the lending arrangement if you borrow $50 million immediately and repay it in one year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2…