1. Jane and John Boilermaker wish to purchase a 40 acre tract of land valued at $1,900 per acre. The lender charges a $500 loan application fee and $250 for a real estate appraisal. Fees totaling 1% of the loan amount are also required to complete the loan. The fees can be added to the original loan amount The lender requires $24,000 initial equity for this loan. The contractual interest rate is 7%. The fixed annual payments are based on a 25 year amortization period. The interest is calculated using the remaining balance method. a. What is the effective annual interest rate for the loan? b. What is the effective annual interest rate of the loan if semiannual payments are made? Explain the difference from answer a. c. Assume the lender has given John and Jane the option of reducing (buying down the contractual rate from 7.0% to 6.8% by paying a fee of 1% of the loan amount. This amount can be added to the loan. If John and Jane have a 10 year planning horizon and a 10% cost of capital, should they buy down the interest rate? (Note: disregard potential changes in income taxes.) 2. Irene and Frank Adam plan to purchase an 80 acre tract of land valued at $2,200 per acre. The lender charges a $500 loan application fee and $250 for a real estate appraisal. A stock requirement of 5% of the loan amount (after addition of fees) is required. The fees and stock requirement can be added to the original loan amount. The original stock value will be returned upon retiring the loan. The contractual rate is 8%. The fixed annual payments are based on a 20 year amortization period. The interest is calculated using the remaining balance method. a. What is the effective annual interest rate for the loan? b. What is the effective annual interest rate for the loan if there is no stock requirement? c. What is the effective annual interest rate if the amortization period is lengthened to 30 years using the conditions of question a? Explain the difference from the answer in a 3. Julie and Bill Stevens are purchasing a tractor and will need a $50,000 loan. The contractual rate is currently 7% with five equal annual payments. Their lender uses the add-on method of calculating interest. a. What are the annual payments? b. What is the effective interest rate of the loan? c. What is the effective interest rate if the lender uses the remaining balance method of calculating interest? Explain the difference from problem b. 4. Suppose Farm and Ranchers Bank and Trust uses the discount method of calculating interest. Discount the loan using the conditions in problem 3. a. What are the annual payments? b. What is the effective interest rate of the loan? Extra credit challenge. (5 pts) Determine the cost of capital for preferred stock if the annual dividend is expected to be $3.50 per share. The current price of the stock is $45 per share and selling costs are $2.00 per share. 1. Jane and John Boilermaker wish to purchase a 40 acre tract of land valued at $1,900 per acre. The lender charges a $500 loan application fee and $250 for a real estate appraisal. Fees totaling 1% of the loan amount are also required to complete the loan. The fees can be added to the original loan amount The lender requires $24,000 initial equity for this loan. The contractual interest rate is 7%. The fixed annual payments are based on a 25 year amortization period. The interest is calculated using the remaining balance method. a. What is the effective annual interest rate for the loan? b. What is the effective annual interest rate of the loan if semiannual payments are made? Explain the difference from answer a. c. Assume the lender has given John and Jane the option of reducing (buying down the contractual rate from 7.0% to 6.8% by paying a fee of 1% of the loan amount. This amount can be added to the loan. If John and Jane have a 10 year planning horizon and a 10% cost of capital, should they buy down the interest rate? (Note: disregard potential changes in income taxes.) 2. Irene and Frank Adam plan to purchase an 80 acre tract of land valued at $2,200 per acre. The lender charges a $500 loan application fee and $250 for a real estate appraisal. A stock requirement of 5% of the loan amount (after addition of fees) is required. The fees and stock requirement can be added to the original loan amount. The original stock value will be returned upon retiring the loan. The contractual rate is 8%. The fixed annual payments are based on a 20 year amortization period. The interest is calculated using the remaining balance method. a. What is the effective annual interest rate for the loan? b. What is the effective annual interest rate for the loan if there is no stock requirement? c. What is the effective annual interest rate if the amortization period is lengthened to 30 years using the conditions of question a? Explain the difference from the answer in a 3. Julie and Bill Stevens are purchasing a tractor and will need a $50,000 loan. The contractual rate is currently 7% with five equal annual payments. Their lender uses the add-on method of calculating interest. a. What are the annual payments? b. What is the effective interest rate of the loan? c. What is the effective interest rate if the lender uses the remaining balance method of calculating interest? Explain the difference from problem b. 4. Suppose Farm and Ranchers Bank and Trust uses the discount method of calculating interest. Discount the loan using the conditions in problem 3. a. What are the annual payments? b. What is the effective interest rate of the loan? Extra credit challenge. (5 pts) Determine the cost of capital for preferred stock if the annual dividend is expected to be $3.50 per share. The current price of the stock is $45 per share and selling costs are $2.00 per share
