Judy’s Rugs, Inc. needs an additional $50,000 to support an expansion of fixed assets. A banker...

Judy’s Rugs, Inc. needs an additional $50,000 to support an expansion of fixed assets. A banker has offered to loan the money at 14 percent interest but also requires a compensating balance of 25 percent of the loan amount. What is the effective rate of the one year loan?

Expert Solution

Compensating balance = Loan amount × 25%

= 50,000 × 25%

= 12,500

Loan actually disbursed = Loan amount – Compensating balance

= 50,000 – 12,500

= 37,500

Interest amount = Loan amount × 14%

= 50,000 × 14%

= 7,000

Effective rate = (Interest amount / Loan actually disbursed) × 100

= (7,000 / 37,500) × 100

= 18.67% (Answer)

jeff jeffy answered 2 hours ago

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