Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. accounting
  3. problem: cumberland furniture wishes to establish

Problem: Cumberland Furniture wishes to establish a prearranged borrowing agreement with a local commercial bank....

70.2K

Verified Solution

Question

Accounting

Problem: Cumberland Furniture wishes to establish a prearranged borrowing agreement with a local commercial bank. The bank's terms for a line of credit are 2.80% over the prime rate, and each year the borrowing must be reduced to zero for a 30-day period. For an equivalent revolving credit agreement, the rate is 1.90% over prime with a commitment fee of 0.6% on the average unused balance. With both loans, the required compensating balance is equal to 20% of the amount borrowed. (Note: Cumberland currently maintains $0 on deposit at the bank.) The prime rate is currently 9%. Both agreements have $22,500,000 borrowing limits. The firm expects on average to borrow $9,000,000 during the year no matter which loan agreement it decides to use.

a. What is the effective annual rate under the line of credit?

b. What is the effective annual rate under the revolving credit agreement? (Hint: Compute the ratio of the dollars that the firm will pay in interest and committment fees to the dollars that the firm will effectively be able to use)

c. If the firm does expect to borrow an average of half the amount available, which arrangement would you recommend for the borrower? Explain why.

Answer & Explanation Solved by verified expert
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students

Q

Should Toluene have reacted with Sulfuric Acid, KMnO4, and 2% Bromine? Reaction? I performed these tests in...

Chemistry
Q

Which of these people developed the polio vaccine?Marie CurieIsaac NewtonAlbert EinsteinJonas Salk

Biology
Q

Which of the following is NOT a disadvantage of sole proprietorships The sole proprietor cannot...

Biology
Q

Fir 1 8 x 10 5 N s m and its density is 1 2...

Physics
Q

Use the graph of the piecewise function y fx given above to answer questions 15...

Calculus
Q

Sky High sells helicopters. During the current year, 130130 helicopters were sold resulting in $...

Accounting
Q

Consider the dollar change and the percentage change in Net (Loss)/Income, and the dollar change...

Accounting
Q

5-12. Jefferson County established a capital project fund in 2023 to build low-income housing with...

Accounting
Q

View transaction list Journal entry worksheet 2 5 6 10 GIPI will depreciate the gymnasium...

Accounting
Q

Cmo tributan los ingresos de contribuyentes casados que optan por el cmputo opcional de la...

Accounting
Q

A company had $600,000 and $800,000 in its beginning and finished goods inventory, respectively. Depreciation...

Accounting
Q

Other Data 4. On the firat of each nuedh, the theater poys the instict that...

Accounting