(a) Coles is one of the largest retailing businesses in Australia. The company has recently approached...

 

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(a) Coles is one of the largest retailing businesses in Australia. The company has recently approached Westpac Banking Group to seek AUD 2.0m for two years to finance its project of building a new warehouse in Sydney. Daniel - a credit analyst at Westpac - is assigned to handle Coles' loan application. After a long process of credit analysis and loan pricing, he decides to set the following terms for the loan: • The annual interest rate is set at 8% per annum (BR = 5% and m = 3%). • A 3% compensating balance is required to be deposited at the bank, which earns an interest rate of 1.5% per annum. • The reserve requirement ratio in Australia is currently set to zero. Besides, Daniel has also estimated the following loan service costs that might occur each year. • Loan origination and processing fees are 0.20% and 0.35%, respectively; these fees are calculated based on the total loan value. • The account management of AUD 5,000. • The wire transfer cost of AUD 2,500. • Cost of funds raised of AUD 85,000. Based on the above information, estimate the expected (net) rate of return over the two years of borrowing, knowing that Coles' default probability is minimal at 2% throughout this period. Please clearly demonstrate your workings and round all (a) Coles is one of the largest retailing businesses in Australia. The company has recently approached Westpac Banking Group to seek AUD 2.0m for two years to finance its project of building a new warehouse in Sydney. Daniel - a credit analyst at Westpac - is assigned to handle Coles' loan application. After a long process of credit analysis and loan pricing, he decides to set the following terms for the loan: • The annual interest rate is set at 8% per annum (BR = 5% and m = 3%). • A 3% compensating balance is required to be deposited at the bank, which earns an interest rate of 1.5% per annum. • The reserve requirement ratio in Australia is currently set to zero. Besides, Daniel has also estimated the following loan service costs that might occur each year. • Loan origination and processing fees are 0.20% and 0.35%, respectively; these fees are calculated based on the total loan value. • The account management of AUD 5,000. • The wire transfer cost of AUD 2,500. • Cost of funds raised of AUD 85,000. Based on the above information, estimate the expected (net) rate of return over the two years of borrowing, knowing that Coles' default probability is minimal at 2% throughout this period. Please clearly demonstrate your workings and round all

Answer rating: 100% (QA)

Answer The net expected rate of return over the two years of borrowing is 339 Explanation The e... View the full answer