Question

In: Finance

Summit Record Company is negotiating with two banks for a $139,000 loan. Fidelity Bank requires a...

Summit Record Company is negotiating with two banks for a $139,000 loan. Fidelity Bank requires a compensating balance of 14 percent, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a compensating balance of 7 percent, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 12 percent. Compensating balances will be subtracted from the $139,000 in determining the available funds in part a.

a-1. Calculate the effective interest rate for Fidelity Bank and Southwest Bank. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

Effective rate of Interest

Fidelity Bank =

Southwest Bank=

b. Recompute the effective cost of interest, assuming that Summit ordinarily maintains $19,460 at each bank in deposits that will serve as compensating balances. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

Effective Rate of Interest

Fidelity Bank =

Southwest Bank=

Solutions

Expert Solution

Fidelity Bank:

Interest = Interest rate ×Principal

= .12 ×$139,000= $16,680

Compensating balance = C ×Principal

= .14 ×$139,000= $19,460

Effective rate of interest = (2 ×Annual number of payments ×Interest) / [(Total number of payments + 1) ×Principal]

= (2 ×4 ×$16,680) / [(4 + 1) ×($139,000 −16,680 - 19,460)]

=$133,440 / $514,300 = 0.2595, or 25.95%

Southwest Bank:

Interest = Interest rate ×Principal

= .12 ×$139,000= $16,680

Compensating balance = C ×Principal

= .07 ×$139,000= $9,730

Effective rate of interest = (2 ×Annual number of payments ×Interest) / [(Total number of payments + 1) ×Principal]

= (2 ×12 ×$16,680) / [(12 + 1) ×($139,000 −16,680 - 9,730)]

=$400,320 / $1,463,670 = 0.2735, or 27.35%

Interest = Interest rate ×Principal

= .12 ×$139,000= $16,680

Compensating balance = C ×Principal

= .14 ×$139,000= $19,460

Effective rate of interest = (2 ×Annual number of payments ×Interest) / [(Total number of payments + 1) ×Principal]

= (2 ×4 ×$16,680) / [(4 + 1) ×($139,000 −16,680 - 19,460)]

=$133,440 / $514,300 = 0.2595, or 25.95%

b). The compensating balance requirement for both banks will be met by the current cash deposits.

Fidelity Bank:

Effective rate of interest = (2 × Annual number of payments × Interest) / [(Total number of payments + 1) × Principal]

= (2 × 4 × $16,680) / [(4 + 1) × ($139,000 − 16,680)]

= $133,440 / $611,600 = 0.2182, or 21.82%

Southwest Bank:

Effective rate of interest = (2 × Annual number of payments × Interest) / [(Total number of payments + 1) × Principal]

= (2 × 12 × $16,680) / [(12 + 1) × $139,000]

= $400,320 / $1,807,000 = 0.2215, or 22.15%


Related Solutions

Summit Record Company is negotiating with two banks for a $136,000 loan. Fidelity Bank requires a...
Summit Record Company is negotiating with two banks for a $136,000 loan. Fidelity Bank requires a compensating balance of 14 percent, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a compensating balance of 7 percent, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 10 percent. Compensating balances will be subtracted from the $136,000 in determining the available funds...
Summit Record Company is negotiating with two banks for a $147,000 loan. Fidelity Bank requires a...
Summit Record Company is negotiating with two banks for a $147,000 loan. Fidelity Bank requires a compensating balance of 30 percent, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a compensating balance of 15 percent, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 8 percent. Compensating balances will be subtracted from the $147,000 in determining the available funds...
Happy, Inc. is negotiating a loan for expansion purposes and the bank requires audited financial statements....
Happy, Inc. is negotiating a loan for expansion purposes and the bank requires audited financial statements. Before closing the accounting records for the year ended December 31, 2017, Happy's controller prepared the following comparative financial statements for 2017 and 2016: Happy, Inc. Balance Sheets December 31, 2017 and 2016 2017 2016 Cash ...................................... $  550,000 $ 300,000 Investment securities (reported at market;   cost, $142,000) .........................   156,000         0 Accounts receivable .......................   974,000   784,000 Allowance for doubtful accounts ...........   (100,000)    (64,000) Inventories ..................................
A company is negotiating loan terms with a bank. The company would like to purchase a...
A company is negotiating loan terms with a bank. The company would like to purchase a property for $2.5 million. The property is projected to produce a first-year NOI of $180,000. Loan: The bank is willing to allow the loan to negatively amortize; however, the loan will need to be paid back at the end of the four-year period. Because of the risky nature of such loan, the bank will allow a 65 percent LTV loan on the property at...
PLEASE SHOW ALL WORK. 2. A bank is negotiating a loan. The loan can either be...
PLEASE SHOW ALL WORK. 2. A bank is negotiating a loan. The loan can either be paid off as a lump sum of $100,000 at the end of five years, or as equal annual payments at the end of each of the next five years. If the interest rate on the loan is 10% regardless of the payment method, what annual payments should be made so that both forms of payment are equivalent? 3. You have an investment opportunity that...
How could the cash budget be used when negotiating the terms of a bank loan?
How could the cash budget be used when negotiating the terms of a bank loan?
The amount of money the Federal Reserve requires banks to hold in cash and not loan...
The amount of money the Federal Reserve requires banks to hold in cash and not loan out? It can be vault cash or cash on deposit at one of the 12 Federal Reserve Banks. 0% to 10% of deposits depending on the amount of money the bank deals with.
1. The entry to record interest expense on a bank loan payable is a debit to...
1. The entry to record interest expense on a bank loan payable is a debit to interest expense and credit to note payable. debit to note payable and credit to interest revenue. debit to interest payable and credit to interest revenue. debit to interest expense and credit to interest payable. 2.Which of the following statements is true? If any portion of a non-current liability is to be paid in the next year, the entire debt should be classified as a...
1. Company: Vix Records: "Fidelity Freefall" Case: Our international record company distributed millions of CD's with...
1. Company: Vix Records: "Fidelity Freefall" Case: Our international record company distributed millions of CD's with a new type of copy protection software on them to prevent piracy. After a short time there was a deluge of very public complaints that the 'protected' CD's were "spying" on the consumer's internet use, left them vulnerable to computer viruses, and did not provide any warning that such software would be installed automatically. After consumer and legal uproar, we have been forced to...
On January 1, 2024, ABC Company borrowed $150,000 from the bank. The loan requires semi-annual payments...
On January 1, 2024, ABC Company borrowed $150,000 from the bank. The loan requires semi-annual payments of $18,000 every June 30 and December 31, beginning June 30, 2024. Assume the loan has an interest rate of 20% compounded semi-annually. Calculate the amount of the note payable at December 31, 2024 that would be classified as a current liability.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT