A bank has $500 million in checking deposits with interest and noninterest costs

Question

A bank has $500 million in checking deposits with interest and noninterest costs of 6%, $250 million in savings and time deposits with interest and non-interest costs of 14%, and $250 million in equity capital with a cost of 25%. The bank has estimated that reserve requirements, deposit insurance fees and uncollected balances reduce the amount og money avaiable on checkign deposits by 15% and on savings and time deposits by 4%. What is the bank's before tax cost of funds?

PLEASE SHOW WORKING

a. 14.65%

b.15.00%

c.15.74%

d. 13.29%

e. 12.75%

Explanation / Answer

Answer :- Amount in checking deposit= $500 million-15%= $425 million

Amount in saving and time deposit= $250 million-4%= $240 million

Amount in equity capital = $ 250 million

banks before tax cost of funds=

checking deposit = $425*6/100= $25.5 million

Saving and time deposit= $ 240*14/100= $ 33.6 million

equity capital=$250 *25/100= $ 62.5 million

Weighted average cost of funds (WACC)= $25.5+33.6+62.5/($425+240+250)

=$121.6/915= 0.1329 or 13.29%

Hence correct answer is option (d)

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