UAE Small Business Loan (A). Mohammad tried one last time to explain the loan structure offered by the company’s Emirates bank. His boss just stared at him. Mo explained the detailed calculation of annual interest and principal payments, step-by-step, as detailed by the bank.

The loan was for USD5 million, for five years, with an 8.200% interest rate.

Step 1: Calculate simple interest on Loan Principal for one year.

Step 2: Multiply that interest by the number of years of the loan. The bank labeled this

“Total Interest.”

Step 3: Add the calculated Total Interest to the Loan Principal.

Step 4: Divide this calculated total by the number of years of the loan. This is the annual payment due on the loan (principal and interest).

Step 5: Using the calculated annual payment from Step 4, structure the repayments to make all interest payments (totaling to Total Interest from Step 2) up-front. Once all interest has been paid, the remaining cash flows associated with the annual payment are considered repayment of principal.

a. Complete the full calculation of the proposed loan, including all five years of principal, interest, and total payments.

b. Estimate the all-in-cost of this financing.

c. Recalculate all principal and interest payments for the same 5-year USD5 million dollar loan using traditional Western financial calculations. Include the all-in-cost of funds in your calculations.

d. Compare the two loan structures. Why do you think the Emirates bank prefers this structure?