Sanders Enterprises arranged a revolving credit agreement of $9,000,000 with a g

Question

Sanders Enterprises 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

Total loan Commitment 9000000 Borrowed Fund (Used Portion) 6000000 Unused Portion (9000000-6000000) 3000000 Annual Commitment Fee for unused Portion 0.50% Commitment Fee 3000000*0.05% 15000 Borrowed Fund (Used Portion) 6000000 Interest Rate (3.25%+1.5%) 4.75% Interest Cost (6000000*4.75%) 285000 Total dollar Annual Cost (15000+285000) $        300,000

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