Cost of a short-term bank loan) Jimmy Hale is the owner and operator of the grai
ID: 2809607 • Letter: C
Question
Cost of a short-term bank loan) Jimmy Hale is the owner and operator of the grain elevator in Brownfield, Texas, where he has lived for most of his 62 years. The rains during the spring have been the best in a decade, and Mr. Hale is expecting a bumper wheat crop. This has prompted him to rethink his current financing sources. He now believes he will need an additional $280,000 for the 3-month period ending with the close of the harvest season. After meeting with his banker, Mr. Hale is puzzling over what the additional financing will actually cost. The banker quoted him a rate of 1 percent over prime (which is currently 8 percent) and also requested that the firm increase its current bank balance of $4,000 up to 22 percent of the loan. a. If interest and principal are all repaid at the end of the 3-month loan term, what is the annual percentage rate on the loan offer made by Mr Hale's bank? b. If the bank were to offer to lower the rate to prime if interest is discounted, should Mr. Hale accept this alternative? Note: Assume a 30-day month and 360-day year. a. The annual percentage rate on the loan offer made by Mr. Hale's bank is | %. (Round to two decimal places.) b. If the bank were to offer to lower the rate to prime if interest is discounted, the annual percentage rate of this alternative is l to two decimal places.) %. (Round Therefore, Mr. Hale's should accept this alternative. (Select from the drop-down menu.)Explanation / Answer
Loan Amount=$280000
22%of loan=$61,600
Increase in current bank balance=(61600-4000)=$57,600
Amount of Loan in hand=280000-57600=$222,400
Interest rate=(8+1)=9%
Interest to be paid after 3 months=280000*0.09*(3/12)=$6,300
Total amount to be paid to the bank after 3 months=280000+6300=$286,300
Amount liquidated from current bank balance=$57,600
Net amount paid back =(286300-57600)=$228,700
Amount of loan received in hand=$222,400
Three months Interest rate paid=(228700/222400)-1=0.028327
Annual Interest rate =4*0.028327=0.113309
Annual interest rate in percentage=11.33%
Annual interest rate in percentage
11.33%
IF INTEREST IS DISCOUNTED AT PRIME RATE:
Rate of interest =8%
Interest for 3 months =280000*0.08*(3/12)= $ 5,600
Increase in current bank balance=(61600-4000)=$57,600
Amount Received on hand=280000-57600-5600= $ 216,800
Amount to be repaid after 3 months=$280,000
Out of this current bank balance will provide $57,600
Net amount to be repaid=280000-57600=$222,400
Interest rate for three months=(222400-216800)-1= 0.025830
Annual Interest rate=4* 0.025830 = 0.103321
Annual interest rate in percentage=10.33%
Annual interest rate in percentage
10.33%
Therefore ,Mr Hale should Accept this alternative
Annual interest rate in percentage
11.33%