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1. B = Amount Borrowed
B = $100,000.00 / 0.90
B = $111,111.11
4 . APR = $3,333.33 x 1
($100,000 - $3,333.33) 3 / 12
= 13.79%
B. Assumption: Paymaster needs FULL AMOUNT of $100,000
- Paymaster borrows $100,000 + Compensating Balance + Interest Charge
4 . APR = $3,448.28 x 1
$100,000.00 3 / 12
= 13.79%
Check:
$100,000 = $114,942.53 - $11,494.25 - $3,448.28
18-9 Titman, 12e R. Morin Construction Company Short-term Financing
Given: Interest Rate: 14% p.a. (DISCOUNTED)
Compensating Balance: 15%
Minimum Demand Deposit Maintained: $25,000
Plan to borrow: $100,000 for 1 yr
Requirement:
1. Loan Amount
2. Interest Amount
3. Compensating Balance
4. APR or Cost of Bank Credit
18-9 Titman 12 e
A. Assumption: A. Morin is willing to take home an amount lesser than $100,000
- A. Morin has DD (C/A) Account with bank
1 . B = Amount Borrowed
B = $100,000.00
3 . APR = $14,000.00 x 1
($100,000 - $14,000) 12 / 12
= 16.28%
4 . LOAN
PROCEEDS = $100,000.00 - $14,000.00
= $86,000.00
B. Assumption: A. Morin needs FULL AMOUNT of $100,000
- A. Morin borrows $100,000 + Interest Charge
3 . APR = $16,279.07 x 1
$100,000.00 12 / 12
= 16.28%
Check:
$100,000 = $116,279.07 - $16,279.07
C. Alternative B: Equipment Dealer Financing
APR = $16,300.00 x 1
$100,000.00 12 / 12
= 16.30%
4 . APR = $16,470.59 x 1
$83,529.41 12 / 12 Loan Proceeds: $83,529.41
= 19.72%
4 . APR = $19,718.31 x 1
$100,000.00 12 / 12 Loan Proceeds: $100,000.00
= 19.72%
Check:
$100,000 = $140,845.07 - $21,126.76 - $19,718.31
4 . APR = $5,900.00 x 1
$240,000.00 3 / 12
= 9.83%
LOAN
PROCEEDS = $295,000.00 - $55,000.00
= $240,000.00
Tips:
1. Determine the Loan Amount (B) look for:
a. Amount that the borrower is willing to borrow:
- Not to exceed a specified amount (18-12, Titman 12e Jimmy Hale),
then B = specified amount
- Amount with Loan Proceeds lower than the specified amount, but an
amount that will cover compensating balance and discounted interest
2. Interest Amount
3. Compensating Balance
4. APR or Cost of Bank Credit
Tips:
1. Determine the Loan Amount (B) look for the AMOUNT that the borrower
is willing to borrow:
- Not to exceed a specified amount?
- Borrower willing to accept loan proceeds < specified amount?
- Compensating Balance (CB)? Existing account with the bank?
- Discounted Interest? or end-of-term settlement?
- Loan proceeds = Amount specified? - borrower needs the entire
amount, so B must be enough to cover interest and CB
2. INTEREST: B x rate% x time
3. Compensating Balance = % x Loan Amount (B)
4. APR = (INTEREST / Loan Proceeds ) x (1 / Time)