Merc Express Has a $50,000 Line of Credit with Crossroads

question 117

Multiple Choice

Merc Express has a $50,000 line of credit with Crossroads Bank. The loan agreement requires that 3.5% of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance. The interest rate on the borrowed funds is 2.4% per quarter. Merc Express' short-term investments are paying 1.75% per quarter. What is the effective annual interest rate on the line of credit if Merc Express borrows the entire $50,000 for one year? Assume any funds borrowed or invested use compound interest.

• A) 9.84%
• B) 9.95%
• C) 10.05%
• D) 10.11%
• E) 10.37%

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Definitions:

Owners' Equity

The residual interest in the assets of a business after deducting its liabilities, representing the ownership's value in the firm.

Net Worth

The total assets of an individual or company minus its total liabilities, representing the financial value of the entity.

Net Income

The total profit of a company after all expenses and taxes have been deducted from revenue.

Financial Reporting

The process of producing statements that disclose an organization's financial status to management, investors, and the government.