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(20 points) 2. As the Assistant to the V.P. of Commercial Loans at Moscow Tennessee's Buzzard's Breath Bank you have been approached by Boley Brewery (BB) for a line of credit. It is expected that BB will have a maximum credit line of $10 million and its average draw down (loan balance) will be S6 million. For services rendered BB will pay the bank $40,000 a year, however, it is estimated that it will cost the bank $50,000 to provide these services. The compensating balance requirement is 2% and 3% (2% on total line of credit plus 3 percent on the amount of loan outstanding.) The annual fixed service fee on the loan will be .008 or 8%. A before tax return on equity capital allocated to this line of credit of 25 or 25% is required, and it is expected that the amount of capital allocated per Sl of loan is $.10 (10% of the loan amount). The current rate paid on commercial transaction (demand deposit) accounts is 0 percent and the reserve requirement as of March 2021 is percent. The bank's "cost of funds" which is a combination of deposits (except for demand deposits) and acquired funds averages 4.85 percent. The reserve requirement on non-transaction accounts that fund the major proportion of the loan also is O percent. Using the following model, developed in class, what nominal interest rate would you quote BB for their line of credit? COMMERCIAL LOAN PORTFOLIO LOAN PRICING FORMULA Re' - Rak-M + Rodr+R[1 - (1 - rp)dr. k)/(1-7)] - [FR-SJ/L Where, R: The interest rate to be charged on the loan. Rxl-Bank's required before-tax retum on capital F' - The annual fixed service fee charged on average loan amount (ie. .008). R- The interest rate paid on demand deposits. R1 - The bank's average "cost of funds including interest rate paid on acquired funds necessary to fund the loan. d - Compensation balance required on total line of credit d' - Additional compensating balance on average loan outstanding L-Average loan amount outstanding. dr -[d(total line of credit) + d'(L.)/(L) or average total compensating balance. To - Reserve requirement on demand deposits (Currently 0). - Reserve requirement on acquired funds (Currently o). k - Allocation of capital to the loan amount (ie 10) FR-Total fee revenue earned by bank on the line of credit (S40,000). S' - Cost of services provided by the bank for line of credit ($50,000). Re- Rek-Fi + Roldp+R:[1- (1-ro)dt-13/1 - :)) - [FR-SJL However, since mo and ty are both zero subsequent to March 2021, the above formula may be written as: R: -R-F + Ro' dr +R:[1-dr- $) - [FR - $J/L RE Where: dr -[d(total line of credit) + d' (L)(L) (20 points) 2. As the Assistant to the V.P. of Commercial Loans at Moscow Tennessee's Buzzard's Breath Bank you have been approached by Boley Brewery (BB) for a line of credit. It is expected that BB will have a maximum credit line of $10 million and its average draw down (loan balance) will be S6 million. For services rendered BB will pay the bank $40,000 a year, however, it is estimated that it will cost the bank $50,000 to provide these services. The compensating balance requirement is 2% and 3% (2% on total line of credit plus 3 percent on the amount of loan outstanding.) The annual fixed service fee on the loan will be .008 or 8%. A before tax return on equity capital allocated to this line of credit of 25 or 25% is required, and it is expected that the amount of capital allocated per Sl of loan is $.10 (10% of the loan amount). The current rate paid on commercial transaction (demand deposit) accounts is 0 percent and the reserve requirement as of March 2021 is percent. The bank's "cost of funds" which is a combination of deposits (except for demand deposits) and acquired funds averages 4.85 percent. The reserve requirement on non-transaction accounts that fund the major proportion of the loan also is O percent. Using the following model, developed in class, what nominal interest rate would you quote BB for their line of credit? COMMERCIAL LOAN PORTFOLIO LOAN PRICING FORMULA Re' - Rak-M + Rodr+R[1 - (1 - rp)dr. k)/(1-7)] - [FR-SJ/L Where, R: The interest rate to be charged on the loan. Rxl-Bank's required before-tax retum on capital F' - The annual fixed service fee charged on average loan amount (ie. .008). R- The interest rate paid on demand deposits. R1 - The bank's average "cost of funds including interest rate paid on acquired funds necessary to fund the loan. d - Compensation balance required on total line of credit d' - Additional compensating balance on average loan outstanding L-Average loan amount outstanding. dr -[d(total line of credit) + d'(L.)/(L) or average total compensating balance. To - Reserve requirement on demand deposits (Currently 0). - Reserve requirement on acquired funds (Currently o). k - Allocation of capital to the loan amount (ie 10) FR-Total fee revenue earned by bank on the line of credit (S40,000). S' - Cost of services provided by the bank for line of credit ($50,000). Re- Rek-Fi + Roldp+R:[1- (1-ro)dt-13/1 - :)) - [FR-SJL However, since mo and ty are both zero subsequent to March 2021, the above formula may be written as: R: -R-F + Ro' dr +R:[1-dr- $) - [FR - $J/L RE Where: dr -[d(total line of credit) + d' (L)(L)