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A customer is buying an advanced washer & dryer combo at a price of $3,500....

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Finance

A customer is buying an advanced washer & dryer combo at a price of $3,500. A bank offers the customer a loan, if the customer pays a 25% down payment. No monthly payments are required and the full amount of borrowing is due in 12 months. What interest rate should the bank charge if you know the following: Banks required return on equity is 14% Equity allocation for consumer lending division is 10% Banks tax rate is 25% The bank can borrow at the current fed funds rate. Processing cost is $55 per loan. The bank expects to collect an average of $20 in fees per year from customers who are late with their payments. Customers credit score is 625. It is expected that if the customer defaults, the combo could be sold at 75% of its original value, if no new models of the combo are introduced in the market. If a new model is introduced, the combo could be sold at 40% of its original value. The risk department estimates that the probability of new model being introduced is 30%. The bank pays $300 in expenses to repossess (take away from the customer) and sell the combo. Clearly mark your answer.

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