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What is the cost of revolving credit for Gorman Inc.?

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Gorman Inc. has arranged a $10,000,000 revolving credit agreement with a group of banks. The firm paid an annual commitment fee of 0.5% of the unused balance of the loan commitment. On the used portion of the revolver, it paid 1.5% above prime for the funds actually borrowed on a simple interest basis. The prime rate was 9% during the year. If the firm borrowed $3,500,000 immediately after the agreement was signed and repaid the loan at the end of one year, what was its total dollar cost for the year?

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Solution Summary

The total dollar cost for the year is calculated.

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