Calculate the effective borrowing rate

Reference no: EM131316810

Rosa Inc. has arranged a one-year, $2 million credit line with its lead bank. The bank set the interest rate at the prime rate plus a spread of 1.50 percent. The prime rate is expected to remain stable at 5.25 percent during the coming year.

In addition, the bank requires Rosa to pay a 0.50 percent commitment fee on the average unused portion of the line. Assume a 365-day year.

a. Calculate the effective borrowing rate (EBR) on Rosa's line of credit during the coming year assuming an average loan balance outstanding during the year is $1.8 million.

b. Calculate Rosa's EBR on the line of credit during the coming year assuming the average loan balance outstanding during the year is $0.8 million.

c. Compare and contrast the EBRs calculated for Rosa Inc. in parts (a) and (b). Explain the causes of the differences in EBRs.

Reference no: EM131316810

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