The Stant Shoe Company established a line of credit with a local bank. The maximum amount that can be borrowed under the terms of the agreement is $100,000 at an annual rate of 5%. A compensating balance of 10% of the amount borrowed is required. What is the largest amount of money Stant will actually be able to use from the line of credit?
A) $90,909
B) $90,000
C) $111,111
D) $100,000

Question

Quizplus · Accepted Answer

To find the largest amount of money Stant will actually be able to use from the line of credit, we need to subtract the compensating balance (10%) from the maximum amount that can be borrowed ($100,000).

Compensating balance = 10% of $100,000 = $10,000 
Maximum amount that can be borrowed - Compensating balance = $100,000 - $10,000 = $90,000

However, we need to take into account the annual rate of 5%. The interest on the borrowed amount will also need to be paid back. To figure out the actual amount that Stant can use from the line of credit, we use the following formula:

Amount available to borrow = Maximum amount that can be borrowed - Compensating balance / (1 - Interest rate)

Plugging in the values: 
Amount available to borrow = $100,000 - $10,000 / (1 - 0.05) = $90,909

Therefore, the largest amount of money Stant will actually be able to use from the line of credit is $90,909.

The Stant Shoe Company Established a Line of Credit with a Local