Schubert Manufacturing borrows from the bank at 8% with a .30% commitment fee on any unused funds. The company borrowed $4 million last month with another $6 million available on their revolving line of credit. Fifteen days into the new month the company borrowed another $2 million. What is the firm's interest expense for the month? Assume a 30 day month.
A)$35,500
B)$33,500
C)$35,000
D)$34,000

Question

Schubert Manufacturing borrows from the bank at 8% with a .30% commitment fee on any unused funds. The company borrowed $4 million last month with another $6 million available on their revolving line of credit.   Fifteen days into the new month the company borrowed another $2 million.   What is the firm's interest expense for the month? Assume a 30 day month. ​
A)$35,500​
B)$33,500​
C)$35,000​
D)$34,000​

Quizplus · Accepted Answer

The interest expense for the month can be calculated by considering the interest on the borrowed amount and the commitment fee on the unused portion of the credit line. For the first 15 days, Schubert Manufacturing had borrowed $4 million, incurring interest at 8% annually, which translates to a monthly rate of 0.6667% (8% divided by 12). For the remaining 15 days, they had $6 million borrowed, incurring the same annual interest rate. The commitment fee of 0.30% applies to the unused portion of the credit line, which was $6 million for the first 15 days and $4 million for the last 15 days.Interest for the first 15 days on $4 million: ($4,000,000 * 0.6667%) = $26,668Interest for the last 15 days on $6 million: ($6,000,000 * 0.6667%) = $40,002Total interest for the month: $26,668 + $40,002 = $66,670Commitment fee for the first 15 days on $6 million unused: ($6,000,000 * 0.30%) = $18,000Commitment fee for the last 15 days on $4 million unused: ($4,000,000 * 0.30%) = $12,000Total commitment fee for the month: $18,000 + $12,000 = $30,000Total expense for the month = Interest + Commitment fee = $66,670 + $30,000 = $96,670However, there seems to be a mistake in my calculations as none of the options match the calculated total expense. Let's correct the approach based on the given options and the correct method to calculate the interest and commitment fee:For the first 15 days, interest on $4 million at an annual rate of 8%: $$ \text{Interest} = \$4,000,000 \times \frac{8\%}{12} \times \frac{15}{30} = \$13,333.33 $$For the last 15 days, interest on $6 million (since an additional $2 million was borrowed, making it a total of $6 million borrowed): $$ \text{Interest} = \$6,000,000 \times \frac{8\%}{12} \times \frac{15}{30} = \$20,000 $$Commitment fee on the unused portion of the credit line for the entire month on $6 million (since $4 million was initially borrowed out of $10 million, leaving $6 million unused): $$ \text{Commitment Fee} = \$6,000,000 \times 0.30\% = \$18,000 $$Adding the interest and commitment fee together gives the total expense for the month:$$ \$13,333.33 + \$20,000 + \$18,000 = \$51,333.33 $$This calculation still does not align with the provided options, indicating a misunderstanding in the approach. The correct calculation should focus on the interest for the borrowed amounts and the commitment fee on the unused portion correctly aligned with the given options. Given the mistake in the recalculated approach, let's simplify to match the options provided:- Interest for $4 million for 15 days and $6 million for the remaining 15 days.- Commitment fee on the unused portion of the credit line.Correctly, the interest for the first half of the month on $4 million and the second half on $6 million, plus the commitment fee on the unused portion, should be calculated based on the daily interest rate and the specific days, but without the detailed numbers aligning with the options, the correct answer should reflect the understanding of these components. The initial detailed calculation was incorrect, and without the precise recalculated figures aligning with the options, the correct methodology involves calculating the interest on the amounts borrowed for the specific periods and the commitment fee on the unused portion of the credit line. The correct answer, based on the options provided, should reflect an understanding of these calculations.

Schubert Manufacturing Borrows from the Bank at 8% with a .30