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Effective Borrowing Rate for Lockbox

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Question 22
What is the effective borrowing rate for a 1-year line of credit, if the total credit line = $3,000,000, average loan outstanding = $1,400,000, commitment fee = 0.5% on the unused portion, and interest rate = LIBOR + 1.5% (LIBOR is currently 6.25%)? There are no compensating balances, and the year basis is 365 days.

a. 7.58%
b. 8.21%
c. 8.25%
d. 8.32%
e. 8.77%

Question 25
Fickle Sickles collects 25,000 checks per 365-day year with average amount $180 and total delay 4 days. A lockbox system would reduce that delay to 2 days, and it would also reduce FISI's check processing costs by $.01 per check. The annual fee on the lockbox would be $2500. What is the annual net benefit associated with using the lockbox? FISI has an 8% cost of capital.

a. - $777
b. - $277
c. $551
d. $603
e. $1695

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Solution Summary

The following posting answers multiple choice questions related to finance. Concepts covered include effective borrowing rate and cost of capital.

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Question 22
What is the effective borrowing rate for a 1-year line of credit, if the total credit line = $3,000,000, average loan outstanding = $1,400,000, commitment fee = 0.5% on the unused portion, and interest rate = LIBOR + 1.5% (LIBOR is currently 6.25%)? There are no compensating balances, and the year basis is 365 days.

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