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Georgia Peaches Corporation (GPC) has a line of credit with Trust Company Bank that allows GPC to ...

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Georgia Peaches Corporation (GPC) has a line of credit with Trust Company Bank that allows GPC to ...

Georgia Peaches Corporation (GPC) has a line of credit with Trust Company Bank that allows GPC to borrow up to $300,000 at an annual interest rate of 5.5%. However, GPC must keep a compensating balance of 20% of any amount borrowed on deposit at the Trust Company Bank. GPC does not normally have a cash balance account with the Trust Company. What is the effective annual cost of credit?
A) 6.875%
B) 6.975%
C) 7.075%
D) 7.775%

Textbook

Financial Management: Principles and Applications

Edition: 13^th

Authors: Titman, Keown, Martin

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