The Boyles Ceramics, 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, Boyles had no deposit with the bank. Shortly after signing the agreement, Boyles
needed $240,000 to pay off a note that was due. It borrowed the $240,000 from the bank by drawing
on the line of credit. What is the effective annual cost of credit?
A) 8.85% B) 12.50% C) 11.11% D) 10.67%
D
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