Question

Blue Jay Corporation is a new business client for First Commerce National Bank and has asked for a one-year, $10 million loan at an annual interest rate of 6 percent. The company plans to keep a 2.75 percent, $3 million CD with the bank for the loan’s duration. The loan officer in charge of the case recommends at least a 4 percent annual before-tax rate of return over all costs. Using customer profitability analysis (CPA), the loan committee hopes to estimate the following revenues and expenses which it will project using the amount of the loan requested as a base for the calculations:
Estimated Revenues Estimated Expenses
Interest income from loan?.............. Interest to be paid on customer’s $3 million deposit?
Loan commitment fee (0.75%)?..... Expected cost of additional funds needed to support the loan (4%)?
Cash management fees (3%)?...... (on an annual average of $15 million)Labor costs and other operating expenses associated with monitoring the customer’s loan (2%)?
Cost of processing the loan (1.5%)?

a. Should this loan be approved on the basis of the suggested terms?
b. What adjustments could be made to improve this loan’s projected return?
c. How might competition from other prospective lenders impact the adjustments you have recommended?



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  • CreatedOctober 31, 2014
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