The Babco Co

question 60

Multiple Choice

The Babco Co. has a $200,000 line of credit with an 8% interest rate and a 10% compensating balance requirement which is based on the total amount borrowed. What is the effective interest rate if the firm uses this source of funding to purchase a $117,000 piece of equipment? The company plans on repaying the loan in a lump sum at the end of one year.

• A) 7.20%
• B) 7.27%
• C) 8.08%
• D) 8.80%
• E) 8.89%

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