Problem:
ABC, 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, ABC had no deposit with the bank. Shortly after signing the agreement, ABC 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.
Requirement:
Question: What is the effective annual cost of credit?
Note: Explain all calculation and formulas.