Penn 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,Penn 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.How much will Penn Inc.need to borrow?

Question

Quizplus · Accepted Answer

To calculate how much Penn Inc. will need to borrow, we need to first calculate the compensating balance:
20% of loan = 20% x $250,000 = $50,000
So, the total amount of funds required by Penn Inc. is $250,000 + $50,000 = $300,000.

However, the bank requires Penn Inc. to maintain a compensating balance of 20% of the loan amount, which means that Penn Inc. can only access 80% of the loan amount. To calculate the amount that Penn Inc. needs to borrow, we need to use the following formula:
Amount needed to borrow = (Desired loan amount) / (1 - Compensating balance rate)
Amount needed to borrow = $300,000 / (1 - 0.20) = $300,000 / 0.80 = $375,000

Therefore, Penn Inc. will need to borrow $375,000 in order to have access to $300,000.

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