The Jetson Co. has an $80,000 line of credit with a 12% interest rate and a 10% compensating balance requirement which is based on the total amount borrowed. What is the effective annual interest rate if the firm needs $45,000 of cash for one year?

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The effective annual interest rate is calculated by considering the compensating balance requirement. The firm needs to borrow more than $45,000 to account for the 10% compensating balance. The actual amount borrowed is $45,000 / (1 - 0.10) = $50,000. The interest paid is $50,000 * 12% = $6,000. The effective interest rate is $6,000 / $45,000 = 13.33%.