Credit agreement question?

Question

Pyramid Products company has a revolving credit agreement with its bank. The company can borrow up to $1 million under he agreement at an annual interest rate of 9 percent. Pyramid is required to maintain a 10 percent compensating balance on any funds borrowed under the agreement and to pay a 0.5 percent commitment fee on the unused portion of the credit line. Assume that Pyramid has no funds in the account at the bank that can be used to meet the compensating balance requirement. Determine the annual financing cost of borrowing each of the following amounts under the credit agreement:

a. $250,000

b. $500,000

c. $1,000,000

Answer 1

c.  

1,000,000 x 9% = 90,000 - this is the annual interest

1,000,000 x 10% = 100,000 - this is the compensating balance that is required.  They will have to leave this money with the bank.

1,000,000 x 0.5% = $5000

So for $1M the cost would be $195K

following this same philosophy...

a.  = 48,750 and b.  = 97,500