Question

Lily Shinto Inc. needs to raise $1m. Lily Shinto has the choice between using a revolving credit agreement or a discount bank loan.
Lily Shinto has negotiated a revolving credit agreement with bank A. The bank will loan Lily Shinto up to $1.2m at an annual interest rate of 6.5% and requires a 0.5% commitment fee on the unused
portion of the credit agreement.
Bank B offers a discount bank loan with an interest rate of 6.75%. The bank's standard policy requires all loan customers to maintain a 5% compensation balance on any amount borrowed. Lily Shinto
currently maintains an average balance of $35,000 that can be used to meet part of the compensating balance requirements.
Compute the annual financing cost of the two alternatives assuming that Lily Shinto needs the $1m for 45 days.
For the revolving credit agreement:

What is the amount of interest?
What is the amount of usable funds?
What is its AFC?
For the bank loan:
What is the amount of interest?
What is the amount of usable funds?
What is its AFC?

Answer 1

			Revolving credit agreement			Discount Bank loan
			BANK A			BANK B
Loan amount Required			1000000.00	Note:1		1000000.00	Note:1
Loan amount sanction			1200000.00			1015000.00	note 2
Amount of Interest		A	9616.44	Note 3	A	8446.75	Note 3
Commitment fee		B	1000.00	Note 4		0.00
compensation amount			0.00		B	50000.00	note 2
what is AFC		A+B	10616.44		A+B	58446.75
amount of usable funds			1000000.00			1000000.00
Note 1	Lily Shinto Inc need $ 1million exactly so compensation amount and other costs are exclusive of 1 million
	and have no amount to pay such other costs so these amount is also raised.
Note 2	total compensation amount				1000000*5%	A	50000
	amount LILY Shinto already have					B	35000
	extra amount to raised with 1000000					A-B	15000
Note 3	interest A	(1200000*6.5%)45/365			Present value factor ignore
	interest B	(1015000*6.75%)45/365			Present value factor ignore
note 4	commitment fee		(12000000-1000000)*.5%