Fancy Footwear Has a Line of Credit with a Local

Fancy Footwear has a line of credit with a local bank in the amount of $80,000.The loan agreement calls for interest of 7 percent with a compensating balance of 5 percent,which is based on the total amount borrowed.The compensating balance will be deposited into an interest-free account.What is the effective interest rate on the loan if the firm needs to borrow $75,000 for one year to cover operating expenses?

A) 7.37 percent
B) 7.43 percent
C) 7.56 percent
D) 8.17 percent
E) 8.33 percent