Estimate the effective cost of the credit line

Reference no: EM13305167

You recently approached your bank about a credit line. The terms offered to you include a rate of prime plus 1 percent on the amount borrowed. Prime is currently 3.25%. There is also a commitment fee of 20 basis points on the unused portion of the credit line and a compensating balance of 15% on the amount borrowed.

You decide to establish the line of credit for $40 million. Currently, your company does not hold balances in their accounts at the bank and pays fees for all cash management services.

A. Estimate the yearly cost of the credit line if the average monthly amount used is $30 million.

B. If your company chose to start keeping the compensating balance at the bank, estimate the effective cost of the credit line.

Reference no: EM13305167

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