Question

Friedman roses inc. needs $65,000 in funds for expansion. with a compensating balance requirement of 20%, how much will the firm need to borrow?



a. $16,000



b. $81,250



c. $100,000



d. none of these options

Answer 1

Answer: He will need $81,250

Explanation:

Answer 2

The amount that the firm need to borrow is b. $81,250.

Amount to borrow

Using this formula

Amount to borrow=Amount needed for expansion/ (1-Compensating balance rate)

Let plug in the formula

Amount to borrow=$65,000/(1-.20)

Amount to borrow=$65,000/.80

Amount to borrow=$81,250

Therefore the correct option is b.

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