Fancy Footwear Has a Line of Credit with a Local

question 109

Multiple Choice

Fancy Footwear has a line of credit with a local bank in the amount of $80,000.The loan agreement calls for interest of 7 percent with a compensating balance of 5 percent,which is based on the total amount borrowed.The compensating balance will be deposited into an interest-free account.What is the effective interest rate on the loan if the firm needs to borrow $75,000 for one year to cover operating expenses?

• A)7.37 percent
• B)7.43 percent
• C)7.56 percent
• D)8.17 percent
• E)8.33 percent

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Definitions:

Short Run

A time period in economics during which at least one input, such as plant size, is fixed and cannot be changed.

Average Fixed Cost

The total fixed costs of production divided by the quantity of output produced; it decreases as production increases.

Market Price

The current price at which an asset or service can be bought or sold in the marketplace.

Marginal Revenue

is the additional income generated from selling one more unit of a product or service, crucial for understanding profitability and making production decisions.