Katie's Karate Dojo has a committed line of credit with a maximum of $350,000 and interest rate of 6% (EAR).The loan has a commitment fee of 0.5% (EAR).If the firm borrows $300,000 at the start of the year and repays it at the end of the year,what is the total cost of the loan?

Question

Quizplus · Accepted Answer

The commitment fee is 0.5% of $300,000, which is $1,500 (EAR).

The interest expense is 6% of $300,000, which is $18,000 (EAR).

Therefore, the total cost of the loan is $1,500 + $18,000 = $19,500 (EAR).

Note: The question specifies that the interest rate is EAR (effective annual rate), so we need to use EAR to calculate the costs.

Katie's Karate Dojo Has a Committed Line of Credit with a Maximum