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What is the effective annual cost of the rbc operating line

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Question - RBC has recently offered AGC a one-year $2 million operating line of credit (LOC) at a rate of 6.25% in anticipation for year 2020. There is a monthly 0.75% commitment fee on the unused amount. AGC is considering taking this LOC, and wants to estimate its cash needs for the month of September 2020.

The owner is looking for at least two other short-term financing options AGC could employ to assist with future cash flow shortages.

He does not understand how revolving loans work and how they are beneficial to AGC. Explain.

The owner estimates that if AGC takes the LOC, it will borrow only $1.25 million during January-September 2020 and further reduce by $0.2 million for the remaining 3 months.

What is the effective annual cost (in percent) of the RBC operating line of credit arrangement?

Reference no: EM133125466

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