Problem:
Rachel's has a $50,000 line of credit with Uptown Bank. The line of credit calls for an interest rate of 8 percent and a compensating balance of 4 percent. The compensating balance is based on the total amount borrowed and will be held in an interest-free account.
Required:
Question: What is the effective annual interest rate if the firm borrows $35,000 for one year?
Note: Please show basic calculation.