Compensating balances suppose that dynamic sofa

Reference no: EM131104066

Compensating Balances. Suppose that Dynamic Sofa (a subsidiary of Dynamic Mattress)

has a line of credit with a stated interest rate of 10 percent and a compensating balance of

25 percent. The compensating balance earns no interest.

a. If the firm needs $10,000, how much will it need to borrow?

b. Suppose that Dynamic's bank offers to forget about the compensating balance require- ment if the firm pays interest at a rate of 12 percent. Should the firm accept this offer? Why or why not?

c. Redo part (b) if the compensating balance pays interest of 4 percent. W arning: You can- not use the formula in the material for the effective interest rate when the compensating balance pays interest. Think about how to measure the effective interest rate on this loan.

Reference no: EM131104066

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