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.What will be the annual percentage rate,or APR,for this financing?

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The annual percentage rate (APR) is the effective interest rate charged on a loan, taking into account the compounding of interest. In this case, the loan is for 6 months, and the interest rate is 8%. The compensating balance requirement means that Brown Inc. will need to keep 20% of the loan amount on deposit with the bank. This means that the effective interest rate will be higher than the stated interest rate, as the company will not be able to use the full amount of the loan.The APR can be calculated using the following formula:APR = (1 + (r/n))^(n) - 1where:r is the stated interest raten is the number of compounding periods per yearIn this case, the stated interest rate is 8%, and the loan is for 6 months, so the number of compounding periods per year is 2.Plugging these values into the formula, we get:APR = (1 + (0.08/2))^(2) - 1= (1 + 0.04)^2 - 1= 1.0816 - 1= 0.0816Converting this to a percentage, we get an APR of 8.16%. However, we need to take into account the compensating balance requirement. This means that Brown Inc. will only be able to use 80% of the loan amount. Therefore, the effective APR will be:Effective APR = APR / (1 - compensating balance requirement)= 0.0816 / (1 - 0.20)= 0.1019Converting this to a percentage, we get an effective APR of 10.19%.

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