Question: Matthews Manufacturing is negotiating a 1-year credit line with its bank, Worldwide Bank. The amount of the credit line is $5.5 million with an interest rate set at 1.5% above the prime rate. A commitment fee of 1.5% (150 basis points) will be charged on the unused portion of the line. No compensating balances are required, and the loan is made on a 365-day basis.
1. If the prime rate is assumed to be constant at 3.75% during the term of the loan and if Matthews's average loan outstanding during the year is $4 million, then calculate the firm's effective borrowing rate. Round your answer to two decimal places. %
2. What effect would an increase in the prime rate to 4.25% for the entire year have on Matthews's EBR calculated in part (a)? Round your answer to two decimal places. Change is %
3. What effect would a decrease in Matthews's average loan outstanding during the year to $3 million have on the EBR calculated in part (a)? Round your answer to two decimal places. Change is %