Marlow Industries has a 50 million committed credit line with an annual commitment fee of 0.30% on the undrawn portion. It draws an average of 20 million over the year at an interest rate of 6%. The annual cost of the line as a percentage of the amount drawn is closest to:
Show the answer and explanation
Answer: B. 6.45%
Interest = 20 million x 6% = 1,200,000. Fee = 30 million x 0.30% = 90,000. Total = 1,290,000. Cost = 1,290,000 / 20 million = 6.45%.
Why the other options are wrong:
A. 6.00% - Ignores the commitment fee charged on the 30 million left undrawn.
C. 6.75% - Charges the fee on the whole 50 million facility, but the stem says it applies to the undrawn portion only.