Crenshaw Inc.has a $400,000 line of credit with a local bank.The bank requires a compensating balance of 10% of the loan and extends credit to Crenshaw at 1% over the current prime rate.Crenshaw needs the use of $200,000 for the three-month period.They currently have no deposits with the lending bank.
a.What will the effective annual cost of this credit be? (Assume a 360-day year and a 9% prime rate.)
b.Using the above information,what would be the effective interest rate if the firm discounted the interest on the loan?

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The Answer of Crenshaw Inc.has a $400,000 line of credit with a local bank.The bank requires a compensating balance of 10% of the loan and extends credit to Crenshaw at 1% over the current prime rate.Crenshaw needs the use of $200,000 for the three-month period.They currently have no deposits with the lending bank.
a.What will the effective annual cost of this credit be? (Assume a 360-day year and a 9% prime rate.)
b.Using the above information,what would be the effective interest rate if the firm discounted the interest on the loan?