CMA Study Group

Question: 16 A company has a revolving credit arrangement with its bank that specifies that the company can borrow up to $5 million at an annual interest rate of 9% payable monthly. In addition, the company must pay a commitment fee of 0.25% per month on the unused portion of the line, payable in the following month. The company expects to have a $2 million cash balance and no borrowings against this line of credit on April 1, net cash from operations inflows of $2 million in April, net outflows from operations of $7 million in May, and net inflows from operations of $4 million in June. If all cash flows occur at the end of the month, approximately how much will the company pay to the bank during the second quarter related to this revolving credit arrangement?
A. $60,100
B. $62,500
C. $47,600
D. $52,600
Answer (D) is correct.
The company's cash inflows, outflows, and balances for the quarter are presented in this table:
Inflows
Outflows
Balance
April 1
$ 2,000,000
April 30
$2,000,000
4,000,000
May 31
$(7,000,000)
(3,000,000)
June 30
$4,000,000
1,000,000
The monthly equivalent of the annual interest rate is .75% (9% ÷ 12 months). Because the company had to borrow the June commitment fee, its interest expense is $22,594 ($3,012,500 × .75%). The interest expense and commitment fees on its revolving line of credit can be calculated as follows:
April Activity
May Activity
June Activity
Used portion
$ 0
$ 0
$3,012,500
Times: Interest rate
× 0.75%
× 0.75%
× 0.75%
Interest expense
$ 0
$ 0
$ 22,594
Unused portion
$5,000,000
$5,000,000
$1,987,500
Times: Fee percentage
× 0.25%
× 0.25%
× 0.25%
Commitment fees
$ 12,500
$ 12,500
$ 4,969
Totals
$ 12,500
$ 12,500
$ 27,563