Musk Corporation needs $225,000 to pay its bills. Musk's bank offers a one-year 12 percent simple interest loan that requires a 25 percent compensating balance to be maintained with the bank. Musk currently holds no funds at the lending bank. How much must Musk borrow to ensure that it has $225,000 to pay its bills?

Question

Musk Corporation needs $225,000 to pay its bills. Musk's bank offers a one-year 12 percent simple interest loan that requires a 25 percent compensating balance to be maintained with the bank. Musk currently holds no funds at the lending bank. How much must Musk borrow to ensure that it has $225,000 to pay its bills?

Quizplus · Accepted Answer

To determine how much Musk must borrow, we need to use the formula:

Amount borrowed = Amount needed / (1 - Compensating balance rate)

The compensating balance rate is 25%, which means that the bank requires Musk to maintain a 25% of the loan amount ($56,250) in its account.

So, the amount Musk needs to borrow is:

Amount borrowed = $225,000 / (1 - 0.25) = $300,000

Therefore, the best choice is B, $300,000.

Musk Corporation Needs $225,000 to Pay Its Bills