The Boyles Ceramics,Inc.established a line of credit with a local bank.The maximum amount that can be borrowed under the terms of the agreement is $1,000,000 at an annual rate of 8 percent.A compensating balance averaging 25 percent of the amount borrowed is required.Prior to the agreement,Boyles had no deposit with the bank.Shortly after signing the agreement,Boyles needed $240,000 to pay off a note that was due.Boyles decides to borrow an amount sufficient to pay the $240,000 note and also to cover the compensating balance.How much must Boyles Glass borrow?
A) $300,000
B) $320,000
C) $375,000
D) $400,000

Question

Quizplus · Accepted Answer

To pay off the $240,000 note and cover the required compensating balance, Boyles Glass needs to borrow:

$240,000 / (1 - 0.25) = $320,000

This is because the compensating balance requirement reduces the effective amount available for borrowing to 75% of the maximum line of credit.

Therefore, the answer is B, $320,000.