ABC, Inc. established a line of credit with a local bank. The maximum amount tha

Question

ABC, Inc. established a line of credit with a local bank. The maximum amount that can be borrowed under the terms of the agreement is $1,000,000 at an annual rate of 8 percent. A compensating balance averaging 25 percent of the amount borrowed is required. Prior to the agreement, ABC had no deposit with the bank. Shortly after signing the agreement, ABC needed $240,000 to pay off a note that was due. ABC decides to borrow an amount sufficient to pay the $240,000 note and also to cover the compensating balance. How much must ABC borrow? Please explain answer

Explanation / Answer

Amount borrowed=240000

Compensating balance=25%

So total borrowed amount =240000*1.25=300000

So ABC Inc borrows 300000 , leaves 60000 in the bank and payoffs the note of 240000.

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