CMA Intermediate · Financial Management and Business Data Analytics · Financing Working Capital
Gupta Traders has a cash credit limit of Rs 50 lakh at 12% p.a. on the amount utilised, plus a commitment charge of 1% p.a. on the unutilised limit. Average utilisation over the year is Rs 30 lakh. What is the effective annual cost of borrowing, expressed on the average amount utilised?
Interest is 12% on Rs 30 lakh, or Rs 3.6 lakh. The commitment fee is 1% on the unused Rs 20 lakh, or Rs 0.2 lakh. Total cost of Rs 3.8 lakh over Rs 30 lakh utilised is 12.67% a year.
- A12.00%
- B12.67%Correct
- C13.00%
- D12.33%
Explanation
Interest = 12% x 30 lakh = Rs 3.6 lakh. Commitment charge = 1% x 20 lakh = Rs 0.2 lakh. Total = Rs 3.8 lakh; 3.8/30 = 12.67%. Charging 1% on the full limit adds Rs 0.5 lakh, giving 13.00%, which is the wrong base.
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