Reference no: EM13927590
Your company is considering manufacturing protective cases for a popular new smart-phone. Management decides to borrow $200,000 from each of two banks, First American and First Citizen. On the day that you visit both banks, the quoted prime interest rate is 7%. Each loan is similar in that each involves a 60-day note, with interest to be paid at the end of 60 days. The interest rate was set at 2% above the prime rate on First American’s fixed-rate note. Over the 60-day period, the rate of interest on this note will remain at the 2% premium over the prime rate regardless of fluctuations in the prime rate. First Citizen sets its interest rate at 1.5% above the prime rate on its floating-rate note. The rate charged over the 60 days will vary directly with the prime rate.
Create a spreadsheet to calculate and analyze the following for the First American loan:
a) Calculate the total dollar interest cost on the loan. Assume a 365-day year.
b) Calculate the 60-day rate on the loan.
c) Assume that the loan is rolled over each 60 days throughout the year under identical conditions and terms. Calculate the effective annual rate of interest on the fixed-rate, 60-day First American note.
Next, create a spreadsheet to calculate the following for the First Citizen loan:
d) Calculate the initial interest rate.
e) Assuming that the prime rate immediately jumps to 7.5% and after 30 days it drops to 7.25%, calculate the interest rate for the first 30 days and the second 30 days of the loan.
f) Calculate the total dollar interest cost.
g) Calculate the 60-day rate of interest.
h) Assume that the loan is rolled over each 60 days throughout the year under the same conditions and terms. Calculate the effective annual rate of interest.
i) Which loan would you choose, and why?
|
Excess cash to complete a stock repurchase
: A firm has a market value equal to its book value. Currently, the firm has excess cash of $700 and other assets of $6,300. Equity is worth $7,000. The firm has 400 shares of stock outstanding and net income of $684. What will the new earnings per sha..
|
|
What is cost of equity-how does function in cost of capital
: What is cost of equity and how does it function in the cost of capital? To increase a firm’s value, results should show your WACC is moving in which direction? What are those skills?
|
|
Which project does a risk averse manager prefer
: Project A generates $5,000.00 in revenue two years from today and costs $4,000.00. Project B generates $4,000.00 (50% probability) or $6,000.00 (50% probability) one year from today and costs $4,500.00. Assuming a discount rate of 12% for both projec..
|
|
What is the net result of increasing the cash discount
: Fizzy Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is considering a 3 percent cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are 400 films per year..
|
|
Manufacturing protective cases for popular new smart-phone
: Your company is considering manufacturing protective cases for a popular new smart-phone. Management decides to borrow $200,000 from each of two banks, First American and First Citizen. Calculate the total dollar interest cost on the loan. Assume a 3..
|
|
Desires a weighted average cost of capital
: Central Systems, Inc. desires a weighted average cost of capital of 7 percent. The firm has an after-tax cost of debt of 5 percent and a cost of equity of 9 percent. What debt-equity ratio is needed for the firm to achieve its targeted weighted avera..
|
|
Contemplating the acquisition of some new equipment
: Daily Enterprises is contemplating the acquisition of some new equipment. The purchase price is $31,000. The equipment has a 4-year life. The company expects to sell the equipment at the end of year 4 for $6,000.
|
|
Opted to sell your rights rather than exercise personally
: You currently own 6 percent of the 2.4 million outstanding shares of Webster Mills. The company has just announced a rights offering with a subscription price of $40. One right will be issued for each share of outstanding stock. This offering will pr..
|
|
What is the after-tax return on the preferred stock
: Lovell Co. purchased preferred stock in another company. The preferred stock’s before-tax yield was 8.4%. The corporate tax rate is 40%. What is the after-tax return on the preferred stock, assuming a 70% dividend exclusion?
|