ESTIMATING THE COST OF BANK CREDIT Paymaster Enterprises has arranged to finance
ID: 2621103 • Letter: E
Question
ESTIMATING THE COST OF BANK CREDIT Paymaster Enterprises has arranged to finance its seasonal working-capital needs with a short-term bank loan. The loan will carry a rate of 12 percent per annum with interest paid in advance (discounted). In addition, Paymaster must maintain a minimum demand deposit with the bank of 10 percent of the loan balance throughout the term of the loan. If Paymaster plans to borrow S100,000 for a period of 3 months, what is the cost of the bank loan? Note: Consider the loan will be made on a discount basis. That is, the loan interest will be deducted from the loan amount before the funds are transferred to the borrower. DATA Annual interest rate Minimum demand deposit Loan Months 12% 10% S100,000 SOLUTION Monthly interest rate Number of 3-month periods in a year Interest Demand deposit Amount available from the loan APR Requirements 1. Start Excel. Download and open the workbook named: Keown Martin Petty Problem 15-4 Start. Important note: All calculations must be shown using cell references. Do NOT enter numerical values in the cells 2. In cell B13, calculate the monthly interest rate. (1 point) 3. In cell B14, calculate the number of 3-month periods in a year. (1 point) 4. In cell B15, calculate the total interest to be paid for the loan. (1 point) 5. In cell B16, calculate the total demand deposit. (1 point) 6. In cell B17, calculate the total amount available from the loan. (1 point) 7. In cell B18, calculate the APR of the loan. (1 point)Explanation / Answer
Since, multiple questions have been posted, I have answered the first one.
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Question 1:
The completed tables are given as below:
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Notes:
The formula used to calculate APR is given as below:
APR = Interest/Principal Amount*Time
where Principal = Total Amount - Demand Deposit Balance - Loan Interest (as the interest amount is deducted from the amount of loan before the funds are transferred)
DATA Annual Interest Rate 12% Minimum Demand Deposit 10% Loan 100,000 Months 3 SOLUTION: Monthly Interest Rate (12%/12) 1% Number of 3-Months Period in a Year (12/3) 4 Interest (100,000*1%*3) 3,000 Demand Deposit (100,000*10%) 10,000 Amount Available from the Loan (100,000 - 10,000 - 3,000) 87,000 APR [(3,000/87,000)*1/(3/12)or (3,000/87,000)*4] 13.79%Related Questions
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