Question

In: Finance

20 years ago DEF Inc. took out a $100 million loan with an interest rate of...

20 years ago DEF Inc. took out a $100 million loan with an interest rate of 6 percent compounded quarterly over its 35 year life. With interest rates now so low, DEF is now looking to potentially refinance the loan.

A) The accounting department would like to know how much interest was paid on this loan last year

B) If new debt with an interest rate of 4.75 percent compounded quarterly can be raised with a 2 percent flotation cost, should they refinance this loan?

Solutions

Expert Solution

A) WE use the function CUMIPMT to find the total interest paid on loans

We first find the total interest paid till 19 years and then total interest paid till 20th year

To find the interest paid last year, we substact total interest paid till 19th year from the  total interest paid till 20th year

The interest rate per period is 6%/4 = 1.5%

nper is the number of monthly periods

Total periods in the loan = 35*4 = 140

Ending payment number for 19th year = 19*4 = 76

Ending payment number for 20th year = 20*4 = 80

Principal

100,000,000

Interest rate

1.50%

Total periods in the loan

140

Starting payment number

1

Ending payment number for 19th year

76

Ending payment number for 20th year

80

Total Interest paid till 19th year

-100357440.6

Total Interest paid till 20th year

-104507218

Total interest paid last year = 104507218 - 100357441 = $4,149,777

B) We first find the monthly installment for the old loan using PMT function in excel

We now find the PV of the future payments

Rate

1.50%

Nper remaining

60

PMT

-1713073.86

PV after 20 years of future monthly payment

67461309.22

Hence, this is the value of the loan amount remaining after 20th year =$ 67,461,309

Floatation cost = 2%*67,461,309 = $1349226.18

Total value of loan remaining if refinanced = $67,461,309+$1349226.18 = $68810535.18

Now , we find the Monthly payment of the refinanced loan and check if this is lesser than the old loan

Rate

1.19%

Nper remaining

60

Loan amount

68810535.2

PMT

($1,610,033)

Here, we observe that after the loan is refinanced, DEF Inc needs to pay $1610033 monthly payment for the next 15 years, if refinance. If not refinance, it will have to pay $1713073.86.

Since, the payment reduced for the next 15 years after refinance, DEF Inc must refinance its loan


Related Solutions

20 years ago XYZ Inc. took out a $100 million loan with an interest rate of...
20 years ago XYZ Inc. took out a $100 million loan with an interest rate of 6 percent compounded quarterly over its 35 year life. With interest rates now so low, XYZ is now looking to potentially refinance the loan. A. Show how much interest was paid on the loan last year B. If new debt with an interest rate of 4.75 percent compounded quarterly can be raised with a 2 percent flotation cost, should they refinance this loan? Please...
Twenty years ago ABC Inc. took out a $100 million loan with an interest rate of...
Twenty years ago ABC Inc. took out a $100 million loan with an interest rate of 6 percent compounded quarterly over its 35 year life. With interest rates now so low, ABC is now looking to potentially refinance the loan. The accounting department would like to know how much interest was paid on this loan last year If new debt with an interest rate of 4.75 percent compounded quarterly can be raised with a 2 percent flotation cost, should they...
Michael took out a loan for $35,500 today. The interest rate on the loan was an...
Michael took out a loan for $35,500 today. The interest rate on the loan was an APR of 12% compounded monthly. Michael pays annual payments of $9,800, how many years will it take before Michael pays back the loan? a. 4.56 b. 5.03 c. 6.25 d. 8.10 e. 5.15
Six years ago you took out a $220,000, 15-year mortgage with an annual interest rate of...
Six years ago you took out a $220,000, 15-year mortgage with an annual interest rate of 6% compounded monthly. i. Estimate your monthly payments on the mortgage. ii. Compute the outstanding balance on your current loan if you have just made the 72th payments?
Eight years ago you took out a $400,000, 30-year mortgage with an annual interest rate of...
Eight years ago you took out a $400,000, 30-year mortgage with an annual interest rate of 6 percent and monthly payments of $2,398.20. What is the outstanding balance on your current loan if you just make the 96th payment?
Five years ago you took out a 10-year amortizing loan to purchase an apartment. The loan...
Five years ago you took out a 10-year amortizing loan to purchase an apartment. The loan has 4.0% APR with monthly payments of $1,800. How much do you owe on the loan today? The remaining loan balance is $________. (round to the nearest dollar) How much interest did you pay on the loan in the past year? The interest paid in year five was $______. (round to the nearest dollar) Over the entire period of 10 years, how much interest...
Two years ago you took out a mortgage at 4.5%. The initial balance of the loan...
Two years ago you took out a mortgage at 4.5%. The initial balance of the loan was $200,000 and it was for 25 years (300 months.) Today, you observe that you could take out a new loan at 4.25% (with a 300 month term), but you would have to pay $5,000 in closing and other fees. What is the current value of the loan (liability from your perspective)? *Note: The answer is $195,579.52. I want to know how to get...
(Determining the outstanding balance of a​ loan) Ten years ago you took out a $ 250,000​,...
(Determining the outstanding balance of a​ loan) Ten years ago you took out a $ 250,000​, 20​-year mortgage with an annual interest rate of 12 percent and monthly payments of ​$2,752.72. What is the outstanding balance on your current loan if you just make the 120th ​payment?
This morning, you took out a loan of $386,000 to purchase a home. The interest rate...
This morning, you took out a loan of $386,000 to purchase a home. The interest rate on the 30-year mortgage is 3.75 percent and you will make monthly payment. You have decided to make additional monthly payment of $360 beginning with the first payment that will occur one month from today. By how many years will you shorten the length of time it will take you to pay off the loan? Group of answer choices 11.06 years 9.33 years 12.84...
You took out a loan to buy a new car. The monthly interest rate on the...
You took out a loan to buy a new car. The monthly interest rate on the loan is 1%. You have to pay $270 every month for 60 months. Attempt 1/5 for 8 pts. Part 1 What is the present value of the cash flows if it's an ordinary annuity? Attempt 1/5 for 8 pts. Part 2 What is the future value of the cash flows if it's an ordinary annuity? Attempt 1/5 for 10 pts. Part 3 What is...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT