Problem
Olympics Ltd. Revolving Credit agreement was approved by the bank of Nova Scotia beginning on Jan 1, 2017. Based on credit assessment of Olympics, the bank assigned an interest rate of prime plus 2.0%. Interest is payable at the end of each month and includes a commitment fee of 0.85 % and compensating balance requirement of 10%.
During the month of January, the loan balances were:
Jan 1- 10 CAD $ 160,000
Jan 11- 20 CAD $ 210,000
Jan 21-31 CAD $ 250,000
The prime rate increased from 5% to 5.5% on January 25, 2017.
$ 500,000 CAD limit was negotiated for the revolving credit agreement which is scanned by inventory and Accounts Receivable, the collateral is verified at the end of each month and the margin ratios are 40% for Inventory and 90% for Accounts Receivable on Jan 31, 2017 Inventory had a balance of $ 250,000 CAD and Accounts Receivable had a balance of CAD $ 290,000.
Task
A) Calculate Olympics annual effective cost of borrowing relating to revolving credit agreement for January.
B) How much more could Olympics borrow on its revolving credit agreement at the end of the January is required?