Loan Scenarios

# Loan Scenarios - Name Georgia Moore Date Assignment Loan...

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Name: Georgia Moore Date: 03/31/2011 Assignment: Loan Scenarios Midland Chemical Co. is negotiating a loan from Manhattan Bank and Trust. The small chemical company needs to borrow \$500,000. The bank offers a rate of 8 ¼ percent with a 20 percent compensating balance requirement, or as an alternative, 9 ¾ percent with additional fees of \$5,500 to cover services the bank is providing. In either case the rate on the loan is floating (changes as the prime interest rate changes). The loan would be for one year. a. Which loan carries the lower effective rate? Consider fees to be the equivalent of other interest. Amount of loan = \$500,000 Compensating balance = \$500,000*20% = \$100,000 Amount available to company = Amount of loan - compensating balance = 500000 – 100000 = 400000 Interest = \$500,000*8.25% = \$41,250 Effective interest = Interest/Available funds = \$41,250/\$400,000 = 10.31%

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Interest = \$500,000* 9.75% = \$48,750 Cost of borrowing = Interest + Fees = \$48,750 + \$5,500 = \$54,250 Therefore,
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Loan Scenarios - Name Georgia Moore Date Assignment Loan...

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