A firm arranged a revolving credit agreement of $9,000,000 with a group of banks

Question

A firm 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?

Explanation / Answer

Hi,

Please find the answer as follows:

Annual Cost = 3000000*.5% + (9000000 - 3000000)*(3.25% + 1.5%) = 300000

Answer is 300000

Thanks.

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