Digital Access Inc. needs $400,000 in funds for a project. (Assume the loan term
ID: 2741807 • Letter: D
Question
Digital Access Inc. needs $400,000 in funds for a project. (Assume the loan term is one year.)
With a compensating balance requirement of 20 percent, how much will the firm need to borrow?
Given your answer to part a and a stated interest rate of 9 percent on the total amount borrowed, what is the effective rate on the $400,000 actually being used? (Input your answer as a percent rounded to 2 decimal places.)
With a compensating balance requirement of 20 percent, how much will the firm need to borrow?
Explanation / Answer
Solution.
Amount need in fund = 400,000
compensating balance requirement of 20 percent,
Amount to be borrow= $400,000 / .80 = $500,000
B.
Interest rate = 9%
Interest = $500,000 x 9% = $45,000
Effective rate = $45,000 / $400,000 = 11.25%