Brown Inc.needs to borrow $250,000 for the next 6 months.The company has a line of credit with a bank that allows the company to borrow funds with an 8% interest rate subject to a 20% of loan compensating balance.Currently,Brown Inc.has no funds on deposit with the bank and will need the loan to cover the compensating balance as well as their other financing needs.How much will Brown Inc.need to borrow?

Question

Quizplus · Accepted Answer

To calculate the amount to be borrowed, we need to find out the compensating balance.

Compensating balance = 20% of loan amount = 0.20 x $250,000 = $50,000

The actual amount the company will receive from the bank = loan amount - compensating balance

Let X be the loan amount. Then the equation becomes:

X - $50,000 = $250,000

Solving for X:

X = $300,000

Therefore, the company will need to borrow $300,000.

Brown IncNeeds to Borrow $250,000 for the Next 6 Months