Reference no: EM132999466

As treasurer of your firm, you wish to establish a credit line facility to cover an expected average annual borrowing of $13 million. You have asked two banks to submit proposals for a credit line. Based on a credit line of $24 million, Bank of the West proposes a nominal rate of 6.85 percent, a commitment fee of 0.47% on the unused portion of the credit line and a 26 percent compensating balance on the amount borrowed. Bank of the East offers a rate of 7.11 percent if the size of the credit line is $31 million. In addition, the commitment fee on the unused portion of the credit line is 43 basis points and compensating balances of 23 percent will be required on the amount borrowed. Calculate the effective cost of both proposals and indicate which proposal should be accepted.