2B5DD TODD MANUFACTURING COMPANY NEEDS A $100 MILLION LOAN FOR ONE YE...

184.

CSO: 2B5f

LOS: 2B5dd

Todd Manufacturing Company needs a $100 million loan for one year. Todd’s banker

has presented two alternatives as follows:

Option #1 - Loan with a stated interest rate of 10.25%. No compensating balance

required.

Option #2 - Loan with a stated interest rate of 10.00%. Non-interest bearing

compensating balance required.

Which of the following compensating balances, withheld from the loan proceeds, would

result in Option #2 having an effective interest rate equal to the 10.25% rate of Option

#1?

a.

$250,000.

b.

$2,440,000.

c.

$2,500,000.

d.

$10,250,000.