The Pulaski Company has a line of credit with a bank under which it can borrow funds at an 8 percent interest rate. The company plans to borrow $100,000 and is required by the bank to maintain a 15 percent compensating balance.
Determine the annual financing cost of the loan under each of the following conditions:
a. The company currently maintains $7,000 in its account at the bank that can be used to meet the compensating balance requirement.
b. The company currently has no funds in its account at the bank that can be used to meet the compensating balance requirement.