start-up entrepreneur wants to determine how much he can borrow in the form of a fixed-rate...

start-up entrepreneur wants to determine how much he can borrow in the form of a fixed-rate 20-year loan from bank. The loan for 20 years carries a fixed interest rate of 9.00%. He estimates that he can pay a maximum of $25,000 annual repayment (interest plus principal).

How large a loan can he afford, assuming he makes steady repayments of $25,000 per year for 20 years? How much total interest will be paid over the 20-year life of the mortgage? How much interest will be paid during the first year of the mortgage? How much principal will be repaid in the first year? How much of the final $25,000 payment at the end of 20 years will be interest and how much will be principal?

Solutions

Expert Solution

We will have to calculate the maximum loan amount by using the PV function
Amount of loan = Annual payment*(1-(1+r)^-n)/r
Amount of loan = 25000*(1-(1+0.09)^-20)/0.09
Amount of loan = 25000*(1-(1.09)^-20)/0.09
Amount of loan = 25000*9.128546
Amount of loan	$228,213.64
The loan that can be taken is $228,213.64

Total payment on loan	25000*20	$500,000.00
Loan amount		$228,213.64
Total interest paid on loan		$271,786.36
The total interest paid on loan is the difference between the total payment made over 20 years and the loan amount

Interest payment in first year = Loan amount*Interest rate
Interest payment in first year = 228213.64*9%
Interest payment in first year	$20,539.23

Principal repaid in first year = Annual payment - Interest payable in first year
Principal repaid in first year = 25000 - 20539.23
Principal repaid in first year	$4,460.77

We will have to calculate the balance of loan at end of 19 years so as to calculate interest and principal repayment
Loan balance at end of 19 years	25000*(1-(1.09^-1)/0.09
Loan balance at end of 19 years	25000*0.917431
Loan balance at end of 19 years	22935.78

Interest payable in year 20	22935.78*9%
Interest payable in year 20	$2,064.22
Principal repayment in year 20	25000-2064.22
Principal repayment in year 20	22935.78

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Tom wants to purchase a property for $300,000. He can borrow a 80% LTV fixed-rate loan,...

Tom wants to purchase a property for $300,000. He can borrow a 80% LTV fixed-rate loan, with 4.5% annual interest rate and a 3% origination fee. Or, he can borrow a 90% LTV fixed-rate loan, with 5.5% annual interest rate, and a 3% origination fee. Both loans have a 30 year amortization period. If he plans to prepay the loan at the end of 3rd year, what will be the incremental cost of borrowing for him to to borrow the...

A ) An entrepreneur invests $40,454.00 into a start-up business today. He expects the business will...

A ) An entrepreneur invests $40,454.00 into a start-up business today. He expects the business will generate $60,003.00 per year for 14.00 years, and then it will generate $137,194.00 per year for the following 16.00 years. Suppose he wants a 9.00% annual return to run the business. What is the value of this business today if his forecasts are accurate? (HINT: Discount all cash flows to today and subtract start-up investment.) B) A young graduate is planning on saving $600.00...

Shark A offers entrepreneur B to invest $5m in entrepreneur B’s start-up, for 20% in the...

Shark A offers entrepreneur B to invest $5m in entrepreneur B’s start-up, for 20% in the start-up’s equity. Entrepreneur B, however, believes that the start-up has current premoney valuation of $35m and thus counters by offering Shark A the following: “Shark A would invest the $5m in entrepreneur B’s start-up in exchange for alpha percent in the start-up’s equity”. What pre-money valuation of the start-up does Shark A’s offer reflect? What is alpha (i.e., the percentage in the start-up’s equity...

Assume firm A wants to borrow float while firm B wants to borrow fixed. Firm A...

Assume firm A wants to borrow float while firm B wants to borrow fixed. Firm A is offered 10% fixed borrowing cost and LIBOR + 0.3% float borrowing cost while firm B is offered 11.2% fixed borrowing cost and LIBOR + 1% float borrowing cost. (a) Show how the two firms can reduce their borrowing costs equally by entering into an interest rate plain vanilla swap? Use a table to demonstrate your solution (b) If the agreed-upon notional amount is...

Assume firm A wants to borrow float while firm B wants to borrow fixed. Firm A...

Assume firm A wants to borrow float while firm B wants to borrow fixed. Firm A is offered 10% fixed borrowing cost and LIBOR + 0.3% float borrowing cost while firm B is offered 11.2% fixed borrowing cost and LIBOR + 1% float borrowing cost. Show how the two firms can reduce their borrowing costs equally by entering into an interest rate plain vanilla swap? Use a table to demonstrate your solution If the agreed-upon notional amount is $100m (no...

Assume firm A wants to borrow float while firm B wants to borrow fixed. Firm A...

SBC Inc. needs floating rate dollars, which it can borrow at LIBOR + 1%. Fixed rate...

SBC Inc. needs floating rate dollars, which it can borrow at LIBOR + 1%. Fixed rate dollars are available to the firm at 8.0% per year. CCS Steel Corp. can borrow fixed-rate dollars at annual rate of 11% or floating rate dollars at LIBOR + 2% per year. CCS would prefer to borrow fixed rate dollars. Is it possible to arrange a swap agreement so that both firms benefit equally from the swap? If yes, explain how much SBC would...

Teenager Mike wants to borrow the car. He can ask either parent for permission to take...

Teenager Mike wants to borrow the car. He can ask either parent for permission to take the car. If he asks his mom, there is a 20% chance she will say ”yes,” a 30% chance she will say ”no,” and a 50% chance she will say, ”ask your father.” Similarly, that chances of hearing ”yes”/”no”/”ask your mother” from his dad are 0.1, 0.2, and 0.7 respectively. Imagine Mike’s efforts can be modeled as a Markov chain with state (1) talk...

A. Sometimes an entrepreneur may be frustrated with attempts to find appropriate start up capital but...

A. Sometimes an entrepreneur may be frustrated with attempts to find appropriate start up capital but a method of financing a business with a little or no capital is called “ Bootstrap” Using an example from an organization of your choice, explain the ways to bootstrap one business. B. Raise the main demerits of using debt finance to finance a startup business

As a young entrepreneur, you are planning to open a budget hotel with a start-up capital...

As a young entrepreneur, you are planning to open a budget hotel with a start-up capital of RM 350,000. The hotel will have single-bed rooms with an expected rate of RM 90 per room. An average room occupancy rate is about 250 per month. Annual operating expenses for which cover administration, utility and maintenance costs are about RM 80,000. The cash flows will be expected to remain unchanged for the next 10 years. It is expected that the before-tax minimum...

Subjects