Fancy Footwear Has a Line of Credit with a Local

Fancy Footwear has a line of credit with a local bank in the amount of $175,000. The loan agreement calls for annual interest of 6.8 percent with a compensating balance of 3 percent of the total amount borrowed. The compensating balance will be deposited into an interest-free account. What is the effective interest rate on the loan if the firm needs $125,000 to cover expenses for one year?

A) 7.01 percent
B) 7.13 percent
C) 6.94 percent
D) 7.17 percent
E) 7.08 percent