Annual financing cost of borrowing $2 million under the credit agreement:
Interest rate = Prime rate + 1.5% = 9.5% + 1.5% = 11%
Compensating balance = 10% of $2 million = $200,000
Commitment fee = 0.50% of ($10 million - $2 million) = 0.50% of $8 million = $40,000
$5 million
Annual financing cost of borrowing $5 million under the credit agreement:
Interest rate = Prime rate + 1.5% = 9.5% + 1.5% = 11%
Compensating balance = 10% of $5 million = $500,000
Commitment fee = 0.50% of ($10 million - $5 million) = 0.50% of $5 million = $25,000
$8 million
Annual financing cost of borrowing $8 million under the credit agreement:
Interest rate = Prime rate + 1.5% = 9.5% + 1.5% = 11%
Compensating balance = 10% of $8 million = $800,000
Commitment fee = 0.50% of ($10 million - $8 million) = 0.50% of $2 million = $10,000