Marshall's Has a $75,000 Line of Credit with Tabor Bank

question 192

Multiple Choice

Marshall's has a $75,000 line of credit with Tabor Bank. The line of credit calls for an interest rate of 8.5% and a compensating balance of 6%. The compensating balance is based on the total amount borrowed and will be held in an interest-free account. What is the effective annual interest rate if the firm borrows $49,000 for one year?

• A) 8.28%
• B) 8.78%
• C) 9.04%
• D) 9.23%
• E) 9.31%

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Definitions:

Interest Revenue

Earnings received from lending activities or from investments in interest-bearing assets.

Operating Lease

A lease agreement allowing a user to rent an asset without the benefits or responsibilities of ownership, typically with shorter lease terms.

Debt to Stockholders' Equity

A financial ratio that measures the company's financial leverage by comparing its total liabilities to stockholders' equity.

Capital Lease

A lease treated like a purchase by the lessee in accounting, meaning the leased asset is included on the balance sheet, and the corresponding lease obligation is treated as a liability.