Question

Find the annual financing cost of a 45 day revolving credit agreement with a 0.5% commitment...

Find the annual financing cost of a 45 day revolving credit agreement with a 0.5% commitment fee. Assume you borrow $231,886m at 5.53%. You can borrow up to $500,000.

Homework Answers

Answer #1

The answer is 6.1%

Working Notes

Annual Financing Cost = (interst cost +commitment fee) / usable funds * 365 / time period of aggrement

1. Borrowed Amount = $ 231886

Interest Rate = 5.53%

Interest Cost = Borrowed amount * Interest rate * time period of aggrement

= 231886 * 5.53 / 100 *45/365

= $1581

2. Commitment fee is calculated on the unused portion of the credit / borrowing limit.

Commitment fee = 0.5%

Borrowing Limit = $ 500000

Borrowed amount or used portion of borrowed limit (usable funds) = $ 231886

Unused portion = $ 500000 - $ 231886 = $ 268114

Commitment fee = unused portion * fee rate * time period of aggrement

= 268114 * 0.5/100 * 45/365

= $ 165

3. Annual Financing Cost = (interst cost +commitment fee) / usable funds * 365 / time period of aggrement

Annual Financing Cost = ($1581 + $165) / 231886 *365/45

= 1746 / 231886 *365/45

= .061 or 6.1%

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