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Concepts Learned to a Real-life Simulation Experience
Finance & Accounting
Pages 11 (2761 words)
Task 1 (i) Air Jet Best Part is planning to purchase a factory in Mexico which amounts to $ 8 million. After careful deliberation, the company has decided to raise the funds required for the project through a combination of loan facility and by issuing corporate bonds.
Now, on the right hand side of the equation, ‘e’ is taken as the number of times the interest is compounded. Now if we substitute the values in the equation we can get the following results. National First Prime Rate 3.25% Floor Rate 6.75% Number of times compounded Semiannually i 0.1 e 2 a 10.25% Regions Best Prime Rate 13.17% Number of times compounded Monthly i 13.17% e 12 a 13.99% (ii) Thus it is apparent from the above calculation that the company should borrow from National First Bank as it is charging interest at a lesser Equivalent rate which is 10.25%. If we suppose that the company acquires loan amounting to $ 8 million, then following will be the annual interest charge that the company will have to record in its income statement Loan Amount Bank Rate on interest Interest Charge $ 8,000,000 National First 10.25% $ 820,000.00 $ 8,000,000 Regions Best 13.99% $ 1,119,200.00 Thus it is apparent from the above calculation that in case of National First Bank, the company would have to pay lesser amount of interest as compared to that if the loan amount was obtained from Regions Best Bank. By adopting to obtain funds from National First, the company will save $299,200 on account of interest payments. ...
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