Crawley, Inc
Subject:FinancePrice:2.87 Bought7
Crawley, Inc. has a line of credit with HNC Bank that allows the company to borrow up to $800,000 at an interest rate of 12 percent. However, Crawley, Inc. must keep a compensating balance of 18 percent of any amount borrowed on deposit at the bank. Crawley, Inc. does not normally keep a cash balance account with HNC Bank. What is the effective annual cost of credit?
a. 15.47% b. 12.40% c. 14.63% d. 12.83%
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Answer:
Effective interest rate = interest / available funds
interest cost is $96,000 = ($800,000 × 12%)
available funds is $656,000 [$800,000 - (18% × $800,000)]
effective interest rate = ($96,000/$656,000) = 14.63%
