Question

In: Finance

A farmer is considering borrowing money from a bank. Given the following information: Initial loan amount...

A farmer is considering borrowing money from a bank. Given the following information:

  • Initial loan amount is $88,000.
  • The loan will be fully amortized in 3 years at 12%.
  • Marginal tax rate is 20%.

(i) What is the interest payment in the 1st year?

a.         $12,672.00                             b.         $13,200.00    

c.          $10,560.00                             d.         None of the answers are correct

  

(ii) What is the principal payment in the 1st year?

a.         $20,862.97                             b.         $20,041.13    

c.          $4,400.00                               d.         $26,078.71

(iii) What is the loan balance at the end of 1st year?

a.         $83,600.00                             b.         $67,137.03    

c.          $67,958.87                             d.         $61,921.29

(iv) What is the tax saving in the 1st year?

a.         $2,640.00                               b.         $2,112.00      

c.          $1,689.60                               d.         None of the answers are correct

Solutions

Expert Solution

Annual payment = loan amount /PVA 12%,3

                 =88000 / 2.40183

                = $ 36638.73

**FInd present value annuity factor from annuity table or using the financial calculator .(I=12%,N=3 ,PMT= 1)

i)Interest payment =Amount outstanding * interest rate

                = 88000*.12 = 10560

correct option is "c"

ii)Principal payment =Amount of installment - interest payment

             = 36638.73-10560

              = 26078.73   [approx to 26078.71)

correct option is "D"

iii)Loan balance = Amount of loan - principal payment

                       = 88000 - 26078.71

                        = 61921.29

correct option is "D"

Iv)Tax saving : 10560 * .20 = 2112

correct option is "b"


Related Solutions

A farmer is considering borrowing money from a bank. Given the following information: Initial loan amount...
A farmer is considering borrowing money from a bank. Given the following information: Initial loan amount is $52,000. The loan will be fully amortized in 3 years at 10%. Marginal tax rate is 15%. (i) What is the principal payment in the 1st year? a. $15,709.97 b. $13,029.06 c. $13,353.47 d. None of the answers are correct ENTER RESPONSE HERE: (ii) What is the principal payment in the 2nd year? a. $14,835.71 b. $3,530.58 c. $17,280.97 d. None of the...
A farmer is considering borrowing money from a bank. Given the following information: Initial loan amount...
A farmer is considering borrowing money from a bank. Given the following information: Initial loan amount is $88,000. The loan will be fully amortized in 3 years at 12%. Marginal tax rate is 20%. (i) What is the interest payment in the 1st year? a. $12,672.00 b. $13,200.00 c. $10,560.00 d. None of the answers are correct ENTER RESPONSE HERE: (ii) What is the principal payment in the 1st year? a. $20,862.97 b. $20,041.13 c. $4,400.00 d. $26,078.71 ENTER RESPONSE...
A farmer is considering borrowing money from a bank. Given the following information: Initial loan amount...
A farmer is considering borrowing money from a bank. Given the following information: Initial loan amount is $250,000. The loan will be fully amortized in 3 years at 14%. Marginal tax rate is 15%. (ii) What is the interest payment in the 1st year? a. $41,176.47 b. $29,750.00 c. $40,250.00 d. $35,000.00 ENTER RESPONSE HERE: (iii) What is the interest payment in the 2nd year? a. $21,100.74 b. $29,205.17 c. $28,548.06 d. $24,824.40 ENTER RESPONSE HERE: (iii) What is the...
Given the following information, calculate the Effective Borrowing Cost (EBC). Loan amount: $175,000, Term: 30 years,...
Given the following information, calculate the Effective Borrowing Cost (EBC). Loan amount: $175,000, Term: 30 years, Interest rate: 7 %, Payment: $1,164.28, Discount points: 1 point, Origination fee: $3,250. Assume the loan is held until the end of year 10. A. 0.6% B. 3.8% C. 7.0% D. 7.4% please show how to solve on a financial calculator.
Given the following information: Item Bank A Bank B Loan Amount (1) $860.74 $860.74 Contractual Rate...
Given the following information: Item Bank A Bank B Loan Amount (1) $860.74 $860.74 Contractual Rate (2) 15.74% 17.40% Conversion Periods (3) 4 1 Life of Loan (years) (4) 4 4 Method of Payment (5) Fully Amort. Fully Amort. Fee (6) No No Stock Requirement (7) No No Calculate the APR at Bank A.             a.         2.73%                          b.       15.74%             c.          14.07%                       d.         2.56% Enter Response Here: (ii)       Calculate the effective rate at Bank A.             a.         3.11%              b.       16.69%             c.          2.59%             d.         14.83% Enter Response Here: (iii)      Calculate the APR at Bank B.             a.         11.87%                       b.         2.56%              c.        17.40%                       d.         14.07% Enter...
Given the following information: Activity Amount, K Cash from short-term borrowing 800,000 Cash from issuing capital...
Given the following information: Activity Amount, K Cash from short-term borrowing 800,000 Cash from issuing capital stock 2,000,000 Cash from issuing bonds payable 10,000,000 Dividends paid 1,000,000 Payments to settle short-term debts 5,000,000 Cash from sales of plant assets 3,000,000 Loans made to borrowers 500,000 Purchases of marketable securities 6,000,000 Collections on loans 300,000 Purchases of plant assets 10,000,000 Cash paid to suppliers and employees 20,000,000 Cash received from customers 30,000,000 Income taxes paid 1,600,000 Interest and dividends received 500,000...
Solve each of the following three problems, all of which involve borrowing money from a bank...
Solve each of the following three problems, all of which involve borrowing money from a bank with an APR of 6.5% compounded annually. Look carefully at how the problems differ from one another, in spite of appearing similar. In your solutions, say a few words explaining how you can tell which is the appropriate formula to apply in each case. a. Suppose that you borrow $1000 once per year, beginning today, and ending 10 years from now (so you borrow...
Initial deposit --> university bank ---> loan --> bank #2. --loan--> bank #3---loan --> ($100).                         
Initial deposit --> university bank ---> loan --> bank #2. --loan--> bank #3---loan --> ($100).                                                Deposit--> Deposit--> Deposit--> a. What volume of loans can the banking system in the figure support? _____________ b. If the reserve requirement were 45 percent rather than 75 percent, what would the system’s lending capacity be?  ____________
Given the following information, calculate the balloon payment for a partially amortized mortgage. Loan amount: $84,000,...
Given the following information, calculate the balloon payment for a partially amortized mortgage. Loan amount: $84,000, Term to maturity: 7 years, Amortization Term: 30 years, Interest rate: 4.5%, Monthly Payment: $425.62. $9,458 $30,620 $73,102 $84,000
Your company is considering to take a loan from the local bank. Bank charges a 1.25%...
Your company is considering to take a loan from the local bank. Bank charges a 1.25% interest rate per quarter. Then the rate 1.25*4 =5% is called ____    annual percentage rate discount rate compound interest rate effective annual rate
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT