A bank has $200 in checking deposits.Interest and noninterest costs on these acc
ID: 2798101 • Letter: A
Question
A bank has $200 in checking deposits.Interest and noninterest costs on these accounts are 4%.This bank has $400 in savings and time deposits with interest and noninterest costs of 8%.This bank has $200 in equity capital with a cost of 24%.This bank as estimated that reserve requirements, deposit insurance fees and uncollected balances reduce the amount of money available on checking deposits by 10% and on savings and time deposits by 5%.What is this bank’s before-tax cost of funds?
A)11.00%
B)11.32%
C)11.50%
D)12.00%
E)None of the above
Please show working!!! The answer is B
Explanation / Answer
Checking deposits = $200
Checking deposits after reduction = $180
Cost = $180 * 0.04 = $7.2
Savings & time deposits = $400
Savings and time deposits after reduction = $380
Cost = $380 * 0.08 = $30.4
Equity capital = $200
Cost = 0.24 * 200 = $48
Total costs = $7.2 + $30.4 + $48 = $85.6 (round this off to 86 otherwise answer won't match )
Total funds = $180 + $380 + $200 = $760
Before tax cost of funds = $86/$760 = 11.32%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.