Milo Corporation has a line of credit with a bank for $5,000,000 in June 30, 2018 payable on December 31, 2019. The company has no existing deposit with the bank. The bank requires the borrower a compensating balance of 5% and charges 15% for loans availed. a) How much should the company borrow to have a net proceeds of $5,000,000? b) What is the effective interest rate from this transaction if: b-1) interest rate is paid at the end of the term? b-2) interest is deducted in advance?
Milo Corporation has a line of credit with a bank for $5,000,000 in June 30, 2018 payable on December 31, 2019. The company has no existing deposit with the bank. The bank requires the borrower a compensating balance of 5% and charges 15% for loans availed. a) How much should the company borrow to have a net proceeds of $5,000,000? b) What is the effective interest rate from this transaction if: b-1) interest rate is paid at the end of the term? b-2) interest is deducted in advance?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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2. Milo Corporation has a line of credit with a bank for $5,000,000 in June 30, 2018 payable on December 31, 2019. The company has no existing deposit with the bank. The bank requires the borrower a compensating balance of 5% and charges 15% for loans availed.
a) How much should the company borrow to have a net proceeds of $5,000,000?
b) What is the effective interest rate from this transaction if:
b-1) interest rate is paid at the end of the term?
b-2) interest is deducted in advance?
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