Question
The Faulu MFB wants to estimate the annual percentage rate that should be charged in 2016 in order to be sustainable and independent from donor
The Faulu MFB wants to estimate the annual percentage rate that should be charged in 2016 in order to be sustainable and independent from donor support. The table below reports the income statement and balance sheet for 2014 and 2015:
Table 5.1 Balance sheet and income statement (in KSH):
BALANCE SHEET
INCOME STATEMENT
June 2015
June 2014
June 2015
June 2014
ASSETS
OPERATING INCOME
Cash
31,000
30,000
Interests and fees from loans
408,600
314,700
Investments
80,000
100,000
Income from investments
25,000
20,000
Total loan portfolio
850,000
600,000
TOTAL OPERATING INCOME
433,600
334,700
(Loan loss reserve)
(65,000)
(50,000)
Total net loans outstanding
785,000
550,000
OPERATING EXPENSES
Fixed assets
34,500
24,500
Interest and fee expenses
2,200
2,000
(Accumulated depreciation)
(10,400)
(8,000)
Loan loss provision expense
35,000
10,000
Net fixed assets
24,500
16,500
Salaries
155,000
125,000
TOTAL ASSETS
920,500
696,500
Other administrative expenses
35,000
45,000
Depreciation
2,400
1,200
LIABILITIES
TOTAL OPERATING EXPENSES
229,600
183,200
Forced savings
120,000
100,000
Commercial loans
10,000
10,000
NET OPERATING PROFIT / LOSS
204,000
151,500
Subsidized loans
35,000
35,000
TOTAL LIABILITIES
165,000
145,000
NON OPERATING INCOME
Cash donations
0
50,000
EQUITY
Other non-operating income
0
0
Donated equity cumulated
450,000
400,000
Donated equity current
0
50,000
TOTAL NON OPERATING INCOME
0
50,000
Cumulated earnings/losses
101,500
(50,000)
Non-operating expenses
0
0
Current earnings/losses
204,000
151,500
TOTAL EQUITY
755,500
551,500
TOTAL PROFIT / LOSS
204,000
201,500
TOTAL LIABILITIES + EQUITY
920,500
696,500
For the purpose of this exercise the historical data (2015) are taken as the base for calculations (Average outstanding portfolio, administrative expenses, loan losses) and a projected market rate for saving deposits of 7%, 20% on commercial loans and 5% as inflation rate are forecasted for 2016. The target capitalization rate, i.e. the real net profit as a ratio of outstanding loans, is 14%. These assumptions are considered to be good estimates.
You are required to
Calculate thesustainable interest
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