1) John has applied for the revolving credit line of= $6 million to assist in marketing the new product line. Terms of loan are as follows:
a) Will not be the discount loan
b) Commitment fee of 0 percent on the unused portion of the loan will be charged
c) No compensatory balance requirements
d) Bank will pay 4% interest on demand deposits
e) Rate of interest to be charged will be prime rate, 10%, plus 3%
Loan officer evaluates Mr. John will utilize 60% of credit line. Required reserve ratio on demand is 20%. Calculate effective cost to Mr. John
a) 14.7%
b) 14.9%
c) 15.3%
2) XYZ cushions, non traditional pillow producer, are considering new capital investment project that needs a $40 million investment today. Next year, project will make expected pre tax cash flows of= $2 million, all of which are taxable. Following year, expected cash flows will produce by 2.5%, and constant annual growth will continue everlastingly. Suppose that project will forever be backed by debt equal to 60% of contemporaneous project value. Tax rate is= 34%, debt will have required return= 6% and equity will have required return= 9%. Determine the projected NPV according to WACC method?