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The Joker Casino and Resort has a revolving credit agreement with Commerce Bank under which the...

The Joker Casino and Resort has a revolving credit agreement with Commerce Bank under which the company can borrow up to $5 million at an annual interest rate of 1% point above the prime rate (currently 9%). The Joker is required to maintain a 10 percent compensating balance on any funds borrowed under the agreement and to pay a 0.4% commitment fee on the unused portion of the credit line. Both the commitment fee and the interest expense are due at the end of the year. The Joker has no funds in its account at Commerce Bank that can be used to meet the compensating balance requirement. What is Joker’s annual financing cost of borrowing $3 million?

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