Transcribed Image Text
(Cost of? short-term bank loan?) On July? 1, 2015, the SouthwestForging Corporation arranged for a line of credit with the FirstNational Bank? (FNB) of Dallas. The terms of the agreement call fora ?$120,000 maximum loan with interest set at 2 percent over prime.In? addition, the firm has to maintain a 19 percent compensatingbalance in its demand deposit account throughout the year. Theprime rate is currently 12 percent. Note?: Interest is not paid inadvance? (discounted).a. If Southwest normally maintains a ?$22,800 to ?$34,800 balancein its checking account with FNB of? Dallas, what is the effectivecost of credit under the? line-of-credit agreement when the maximumloan amount is used for a full? year?b. Compute the effective cost of credit if the firm borrows thecompensating balance and the maximum possible amount under the loanagreement.? Again, assume the full amount of the loan isoutstanding for a whole year.a. If Southwest normally maintains a ?$22,800 to?$34,800 balance in its checking account with FNB of? Dallas, whatis the effective cost of? credit, or APR?, under the?line-of-credit agreement when the maximum loan amount is used for afull? year?_____%b. If the firm borrows the compensating balance and the maximumpossible amount under the loan? agreement, what is the effectivecost of? credit, or APR??____%