# Loan Sce - Running head ASSIGNMENT LOAN SCENARIOS 1...

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Running head: ASSIGNMENT: LOAN SCENARIOS 1 Assignment: Loan Scenarios Nikki Vergets FIN/200 5/15/2011 John Simulcik

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ASSIGNMENT: LOAN SCENARIOS 2 Assignment: Loan Scenarios Gordon 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, 9¾ 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. #1, Total Amount of Loan is \$500,000 Compensating Balance Requirement \$100,000 20% * \$500000 = Amount available to company \$400,000 \$100000 - \$500000 = Interest on Loan \$41250 8.25% * \$500,000 = Effective Cost of Loan 10.31% 000) (41250/400 = #2, Total Amount of Loan is \$500,000 Amount available to company \$400,000 \$100000 - \$500000 = Interest on Loan \$48750 9.75% * \$500,000 = Other Fee = 5500 Total Cost of borrowing 54250 5500 48750 = + Effective Cost of Loan: 10.85% 000) (54250/500 =
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