Corporate Finance and Short-Term Liabilities

[pleasehelpme]

I have been trying to solve the following problem all week. I cannot figure out to set any of it up. My teacher absolutely refuses to help at all. My classmates will not respond to any emails. Can someone please help? I would greatly appreciate it!

Bank A offers the following terms for a $10 million loan:
- interest rate: 8% for one year on funds borrowed
- fees: 0.5% of the unused balance for the unused term of the loan

Bank B offers the following terms for a $10 million loan:
- interest rate: 6.6% for one year on funds borrowed
- fees: 2% origination fee

a. Which terms are better if the firm intends to borrow the $10 million for the entire year?

b. If the firm plans to use the funds for only three months, which terms are better?

The book provides the answers, but I have no idea how to even set these up. Part a.) bank A is 8%, bank B is 6.73%. Part b.) bank A is 9.5%, bank B is 6.73%.

 

[Deleted member 4993]

I have been trying to solve the following problem all week. I cannot figure out to set any of it up. My teacher absolutely refuses to help at all. My classmates will not respond to any emails. Can someone please help? I would greatly appreciate it!

Bank A offers the following terms for a $10 million loan:
- interest rate: 8% for one year on funds borrowed
- fees: 0.5% of the unused balance for the unused term of the loan

Bank B offers the following terms for a $10 million loan:
- interest rate: 6.6% for one year on funds borrowed
- fees: 2% origination fee

a. Which terms are better if the firm intends to borrow the $10 million for the entire year?

b. If the firm plans to use the funds for only three months, which terms are better?

The book provides the answers, but I have no idea how to even set these up. Part a.) bank A is 8%, bank B is 6.73%. Part b.) bank A is 9.5%, bank B is 6.73%.

To start setting this up ? define your unknowns (to be found) as variables

What are the equations that you have been taught in this class?

Which of those are relevant for this problem?

Please share your work with us, indicating excatly where you are stuck - so that we may know where to begin to help you.

 

[Denis]

Bank A offers the following terms for a $10 million loan:
- interest rate: 8% for one year on funds borrowed
- fees: 0.5% of the unused balance for the unused term of the loan
Bank B offers the following terms for a $10 million loan:
- interest rate: 6.6% for one year on funds borrowed
- fees: 2% origination fee
a. Which terms are better if the firm intends to borrow the $10 million for the entire year?
b. If the firm plans to use the funds for only three months, which terms are better?
The book provides the answers, but I have no idea how to even set these up. Part a.) bank A is 8%, bank B is 6.73%. Part b.) bank A is 9.5%, bank B is 6.73%.

I'll believe your sad story :wink:

And I'll be nicer than the cruel Mr Khan :lol:
(only because my grandson Tyler hit 2 home runs last night...
after which I made sure everybody in ballpark knew he was my grandson!)

Part a):
bankA remains at 8%, since the $10million is owing all year
bankB is 6.73: 6.6 times 1.02 = 6.732 = 6.73 rounded

Part b):
bankA charges 8% for 3 months, .5% for 9 months: 4[8(1/4) + .5(3/4)] = 9.5%
bankB stays at 6.73, since no "penalty" on unused portion

 

[Deleted member 4993]

(only because my grandson Tyler hit 2 home runs last night...
after which I made sure everybody in ballpark knew he was my grandson!)

I share your pride. After I myself became grandfather (Ian - rhymes with Khan - 1 yr. old) - I suddenly understand all the "sillyness" grandfathers represent......