?(Cost of? short-term bank loan?) On July? 1, 2015, theSouthwest Forging Corporation arranged for a line of credit withthe First National Bank? (FNB) of Dallas. The terms of theagreement call for a $140,000 maximum loan with interest set at 1percent over prime. In? addition, the firm has to maintain a 19percent compensating balance in its demand deposit accountthroughout the year. The prime rate is currently 14 percent. Note?:Interest is not paid in advance? (discounted).
a. If Southwest normally maintains a $26,600 to $40,600 balancein its checking account with FNB of? Dallas, what is the effectivecost of credit under the? line-of-credit agreement when the maximumloan amount is used for a full? year?
b. Compute the effective cost of credit if the firm borrows thecompensating balance and the maximum possible amount under the loanagreement.? Again, assume the full amount of the loan isoutstanding for a whole year.
