Carson Inc. has a revolving credit agreement with the local bank. The bank charges 2.5% above prime plus a .20% commitment fee on any unused funds. Prime rate is currently 5%. Carson borrowed $3 million last month and has $8 million unused. Twelve days into the new month, Carson borrowed another $5 million. What is the firm's interest expense for the month?
A)$26,250
B)$8,500
C)$34,750
D)$27,250

Question

Carson  Inc. has a revolving credit agreement with the local bank.   The bank charges 2.5% above prime plus a .20% commitment fee on any unused funds. Prime rate is currently 5%. Carson borrowed $3 million last month and has $8 million unused.   Twelve days into the new month, Carson borrowed another $5 million. What is the firm's interest expense for the month? ​
A)$26,250​
B)$8,500​
C)$34,750​
D)$27,250​

Quizplus · Accepted Answer

To calculate the interest expense for the month, we need to calculate the interest expense for the $3 million borrowed for the entire month and the interest expense for the $5 million borrowed for 18 days (12 days unused + 18 days used).

For the $3 million borrowed, the interest expense is: 
$3,000,000 x (5% + 2.5%) x (31/365) = $25,479.45

For the $5 million borrowed, the interest expense is: 
$5,000,000 x (5% + 2.5%) x (18/365) = $9,265.03

Therefore, the total interest expense for the month is: 
$25,479.45 + $9,265.03 = $34,744.48

Adding the commitment fee on unused funds: 
$8,000,000 x 0.002 = $16,000

Total interest expense for the month including the commitment fee on unused funds: 
$34,744.48 + $16,000 = $50,744.48

Rounding to the nearest whole dollar, the interest expense for the month is $34,750, which is option C.