June Bug Bank and Trust has received $750 million in total funding, consisting of $200 million in checkable deposit accounts, $400 million in time and savings deposits, $100 million in money market borrowings, and $50 million in stockholders’ equity. Interest costs on time and savings deposits are 2.50 percent, on average, while noninterest costs of raising these particular deposits equal approximately 0.50 percent of their dollar volume. Interest costs on checkable deposits average only 0.75 percent because many of these deposits pay no interest, but noninterest costs of raising checkable accounts are about 2 percent of their dollar total. Money market borrowings cost June Bug an average of 2.75 percent in interest costs and 0.25 percent in noninterest costs. Management estimates the cost of stockholders’ equity capital at 12 percent before taxes. (The bank is currently in the 35-percent corporate tax bracket.) When reserve requirements are added in, along with uncollected dollar balances, these factors are estimated to contribute another 0.75 percent to the cost of securing checkable deposits and 0.50 percent to the cost of acquiring time and savings deposits. Reserve requirements (on Eurodeposits only) and collection delays add an estimated 0.25 percent to the cost of the money market borrowings.
(a) Calculate June Bug’s weighted average interest cost on total funds raised, figured on a before-tax basis.
(b) If the bank's earning assets total $700 million, what is its break-even cost rate?
(c) What is June Bug's overall historical weighted average cost of capital?