Dazzly Diamond Corp. called for credit at the Home Alone Bank of Paris, TX. The terms included a ...

Dazzly Diamond Corp. called for credit at the Home Alone Bank of Paris, TX. The terms included a $35,000 maximum loan with interest of 1 percent over prime, and the agreement also requires a 15% compensating balance throughout the year. The prime rate is currently 12 percent.

a.If Dazzly Diamond Corp. maintains a balance in its account of $5,250 to $6,000, what is the effective cost of credit through the line-of-credit agreement where the maximum amount of the loan is used?

b.Recompute the effective cost of credit to Dazzly Diamond if it will have to borrow the compensating balance and the maximum amount possible under the agreement.