Question

Blossom Cosmetics management is setting up a line of credit at the company’s bank for $5 million for up to two years. The interest rate is 4.00 percent and the loan agreement calls for an annual fee of 55 basis points on any unused balance for the year. If the firm borrows $1.6 million on the day the loan agreement is signed, what is the effective rate for the line of credit? (Round answer to 2 decimal places, e.g. 12.25%.

Answer 1

Blossom cosmetics management set up a line of credit limit of $5.0 million out of which it borrowed $1.6 Million at rate of 4% and the unused balance has annual fee of 55 basis points that means 0.55% so, we need to calculate effective rate for line of credit.

Solution - BLOSSOM COSMETICS MI ENT Given Informations line of credit = $5,000,000 Interest Rate on loans 4.4. Annual fee on unused balance = 55 basis point z 0.55 / Amount borrowed = $1,600,000 Unused Balance = line of credit limit- Amount - Borrowed 7 $5,000,000 - $1,600,000 3 $3,400,000 Annual fee on unused balance of $3,400,000 a 0.55 $ 3,400,000 100 y $3,400,00 3 $ 18,700

Interest Expenses Interest Rate on loan x Amount Boroowed = 4% X $ 1,600,000 Yox $ 1,600,000 = $ 64,000 Now, we will calculate effective rate for the line of credit by dividing total of interest expenses and annual fee by amount borrowed. So, Effective Rate = Interest Expenset Annual fee on unused balance Amount borrowed $64,000 + $ 18,700 $1,600,000 z 0.0516875 Od 5.168754. 03 5.17%. (approx) Answer Here, (Interest Expense + Annual fee on unused balance) is the cost of borrowing.