Reference no: EM13195245
The company needs to finance $8,000,000 for a new factory in Mexico. The funds will be obtained through a commercial loan and by issuing corporate bonds. Here is some of the information regarding the APRs offered by two well-known commercial banks.
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Bank
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APR
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Number of Times Compounded
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National First
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Prime Rate + 7.75%
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Monthly
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Regions Best
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12.57
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Semiannually
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1. Assuming that Coca Cola is considering loans from National First and Regions Best, what are the EARs for these two banks? Hint for National Bank: Go to the St. Louis Federal Reserve Board's website (https://research.stlouisfed.org/fred2/series/MPRIME). Select "Interest Rates" and then "Prime Bank Loan Rate". Use the latest MPRIME. Show your calculations. (15 pts)
Step 1. You need to obtain the prime rate from the website listed above.Follow the instructions above. Once you find the rate, you need to add the prime rate to 7.75% to determine the APR of National First Bank only. For instance, if the prime rate you found is 2%, then the APR of National First would be 2%+7.75%=9.75% and the APR for Regions Best would continue to be 12.57% (no changes in this one).
Step 2. Then you need to find the EAR for the two banks. You need to use the formula located on your book, Formula
5.5. To double check your answer, you can use the calculator I provided located at:www.pine-grove.com/financial-calculators/equivalent-rate.htm
2. Based on your calculations above, which of the two banks would you recommend and why? Explain your rationale. (15 pts)
Here you need to provide a one to two paragraph response. This response is only conceptual in nature, but is based on your calculations on the question above. We had discussed during the week the most appropriate rate to use (EAR or APR) and why. Check my postings on the TDs and your text on EAR and APR.
3. Coca Cola has decided to take a $6,980,000 loan being offered by Regions Best at 8.4% APR for 7 years. What is the annual payment amount on this loan? Show your calculations. Do you agree with this decision when compared to the options listed under Question 1 of this task? Explain your rationale. (20 pts)
Remember that this loan requires equal payments that include interest and principal for a certain period of time, therefore this is an annuity. For guidance, you can refer to the document in Doc Sharing titled "Calculate Loan Payments", that has some examples.
You can calculate this payment using the formulaPVA = C({1 - [1/(1 + r)]t } / r)
For the second part of the question, consider how the loans proposed on item (1) on Task 1, is this the best deal? Why? Hint: Remember that in loans you want to minimize your interest payments if possible. You can simply compare the appropriate interest rate.