Detailed Answer
Answer (C) is correct. The bank requires a compensating balance of 5% ($5 million ÷ $100 million). The firm’s effective rate on this loan can be calculated as follows:
Effective rate = Stated rate ÷ (1.0 – compensating balance %)
= 8% ÷ (100% – 5%)
= 8% ÷ 95% = 8.42%
The amount of the loan is not needed to calculate the effective rate.