Finance Course Project: Part 1

In: Business and Management

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Task 1: Assessing loan options for Coca Cola.
The company needs to finance $8,000,000 for a new factory in Mexico. The funds will be obtained through a commercial loan and by issuing corporate bonds. Here is some of the information regarding the APRs offered by two well-known commercial banks.
Bank APR Number of Times Compounded
National First Prime Rate: 3.25% + 7.75%= 11% Monthly
Regions Best 12.57% Semiannually

1. Assuming that Coca Cola is considering loans from National First and Regions Best, what are the EARs for these two banks? (15 pts)
Bank EAR
National First 11.57%
Regions Best 12.97%
See Excel attachment for calculations
2. Based on your calculations above, which of the two banks would you recommend and why? Explain your rationale. (15 pts)

Based on the calculations above I recommend Coca Cola obtain a loan from National First Bank. Although the decision can be based on the APR, the EAR is the most accurate interest rate because it takes into account compounding and expresses the true interest paid on the loan. The EAR for Regions Best Bank is 12.97% while National First Bank has an EAR of 11.57%, because National First Bank has the lower interest rate of the two it is the more logical choice since their loan option will charge less interest for the life of the loan.

3. Coca Cola has decided to take a $6,980,000 loan being offered by Regions Best at 8.4% APR for 7 years. What is the annual payment amount on this loan? Show your calculations. Do you agree with this decision when compared to the options listed under Question 1 of this task? Explain your rationale. (20 pts)

Coca Cola’s loan payment to Regions Best Bank for a loan of $6,980,000 at 8.4% interest for 7 years would be $1,359,061.08 annually. I agree with Coca Cola’s loan decision because in comparison to the other loan options offered by Regions Best Bank at…...

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