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# Effective Borrowing Rate for Lockbox

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

#### Solution Preview

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.

...

#### Solution Summary

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

\$2.19