Friedman Roses Inc. needs $65,000 in funds for expansion. With a compensating balance requirement of 20%, how much will the firm need to borrow?

Question

Quizplus · Accepted Answer

Compensating balance requirement indicates that the bank will hold back a certain percentage of the loan as a reserve, which means only a portion of the loan will be available to the borrower. To determine how much Friedman Roses Inc. will need to borrow, we need to do the following calculation:

Amount needed / (1 - compensating balance percentage)

$65,000 / (1 - 0.2) = $81,250

Therefore, the firm needs to borrow $81,250.