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Cost of borrowing

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Pyramid Products Company has a revolving credit agreement with its bank. The company can borrow up to $1 million under the agreement at an annual interest rate of 9 percent. Pyramid is required to maintain a 10 percent compensating balance on any funds borrowed under the agreement and to pay a 0.5 percent commitment fee on the unused portion of the credit line. Assume that Pyramid has no funds in the account at the bank that can be used to meet the compensating balance requirement. Determine the annual financing cost of borrowing each of the following amounts under the credit agreement:

a. $250,000
b. $500,000
c. $1,000,000

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Solution Summary

The expert examines the cost of borrowing for Pyramid Products Company.

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A.
Cost = Interest expense of borrowing + fee on unused portion of credit line
Cost = 9% * ...

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