Question

Sanders Enterprises arranged a revolving credit agreement of $9,000,000 with a group of banks. The firm paid an annual commitment fee of 0.5% of the unused balance of the loan commitment. On the used portion of the revolver, it paid 1.5% above prime for the funds actually borrowed on a simple interest basis. The prime rate was 3.25% during the year. If the firm borrowed $6,000,000 immediately after the agreement was signed and repaid the loan at the end of one year, what was the total dollar annual cost of the revolver?

Answer 1

Answer:

Total dollar Annual Cost = $300,000

Explanation:

• Total loan Commitment = 9000000

• Borrowed Fund (Used Portion) = 6000000

• Unused Portion (9000000 - 6000000) = 3000000

• Annual Commitment Fee for unused Portion = 0.50%

• Commitment Fee = 3000000 x 0.05% = 15000

• Borrowed Fund (Used Portion) = 6000000

• Interest Rate (3.25% + 1.5%) = 4.75%

• Interest Cost (6000000 x 4.75%) = 285000

Total dollar Annual Cost (15000 + 285000) = $300,000