Question

A bank has $500 in checking deposits. Interest and noninterest costs on these accounts are 6%. This bank has $250 in savings and time deposits with interest and noninterest costs of 14%. This bank has $250 in equity capital with a cost of 25%. This bank has estimated that reserve requirements, deposit insurance fees and uncollected balances reduce the amount of money available on checking deposits by 15% and on savings and time deposits by 4%. What is the bank's before-tax cost of funds

Answer 1

Answer:

13.29%

Explanation:

Answer :- Amount in checking deposit= $500 million-15%= $425 million

Amount in saving and time deposit= $250 million-4%= $240 million

Amount in equity capital = $ 250 million

banks before tax cost of funds=

checking deposit = $425*6/100= $25.5 million

Saving and time deposit= $ 240*14/100= $ 33.6 million

equity capital=$250 *25/100= $ 62.5 million

Weighted average cost of funds (WACC)= $25.5+33.6+62.5/($425+240+250)

=$121.6/915= 0.1329 or 13.29%