A bank is in the processing of rescheduling a $10 million loan paying 14% interest. If liquidated, it expects to receive $8.4 million. The rescheduling terms are as follows: Amount $10,000,000 in year 0 New maturity in years 5 Interest rate 8% Principal payments in millions $5,000,000 each in years 4 and 5 Upfront-fee 1.00% Cost of capital after rescheduling 14.00% Should the bank reschedule the loan? A Yes, reschedule the loan because the NPV is greater than liquidation value B No, do not reschedule the loan because the liquidation value is lower than the NPV C Reschedule the loan only if the cost of capital after rescheduling is 12% D Reschedule the loan only if the cost of capital after rescheduling is 15%
A bank is in the processing of rescheduling a $10 million loan paying 14% interest. If liquidated, it expects to receive $8.4 million. The rescheduling terms are as follows: Amount $10,000,000 in year 0 New maturity in years 5 Interest rate 8% Principal payments in millions $5,000,000 each in years 4 and 5 Upfront-fee 1.00% Cost of capital after rescheduling 14.00% Should the bank reschedule the loan? A Yes, reschedule the loan because the NPV is greater than liquidation value B No, do not reschedule the loan because the liquidation value is lower than the NPV C Reschedule the loan only if the cost of capital after rescheduling is 12% D Reschedule the loan only if the cost of capital after rescheduling is 15%
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
A bank is in the processing of rescheduling a $10 million loan paying 14% interest. | |||||||
If liquidated, it expects to receive $8.4 million. The rescheduling terms are as follows: | |||||||
Amount | $10,000,000 | in year 0 | |||||
New maturity in years | 5 | ||||||
Interest rate | 8% | ||||||
Principal payments in millions | $5,000,000 | each in years 4 and 5 | |||||
Upfront-fee | 1.00% | ||||||
Cost of capital after rescheduling | 14.00% | ||||||
Should the bank reschedule the loan? |
A |
Yes, reschedule the loan because the NPV is greater than liquidation value |
|
B |
No, do not reschedule the loan because the liquidation value is lower than the NPV |
|
C |
Reschedule the loan only if the cost of capital after rescheduling is 12% |
|
D |
Reschedule the loan only if the cost of capital after rescheduling is 15% |
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