A small privately held corporation is trying to raise money for a business expansion. The total...

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Finance

A small privately held corporation is trying to raise money fora business expansion. The total cost of the expansion is$5,000,000. The expected return on assets before taxes (EBIT) forthe business expansion project based upon the expectedprobabilities of returns are .2 of an 8% return, .5 of a 10% returnand .3 of a 12% return. The privately held corporation’s owners areconsidering two options which involve obtaining one of two types ofloans from an area bank. The current individual stock investorswill put in the needed additional equity investment capital for theexpansion project based upon which loan is selected.
Loan option 1: The bank is willing to lend 60% of the costs ofthe project with a 10 year interest only loan at an annual contractrate of 6% with interest payable quarterly and a balloon notepayment at the end of 10 years. The loan closing costs and set upfees will be 4% of the amount borrowed and the owners will be heldpersonally responsible for the loan. The closing costs and feesmust be paid in cash when the loan contract is signed andbegins.
Loan option 2: The bank is also willing to lend 80% of the costsof the project with a 10 year interest only loan at an annualcontract rate of 8.5% with interest payable quarterly and a balloonnote payable at the end of 10 years. The loan closing cost is 5% ofthe amount borrowed and the owners will also be held personallyresponsible for the loan. The closing costs fees must be paid incash when the loan contract is signed and begins.
To assist in this financial decision making situation, calculatethe follow:
What is the APR for each loan?
Option 1 _____
Option 2 _
What is the expected return on equity investment for thisbusiness expansion project for each option of financing thisexpansion project based upon the expected return on total assetsfor the project?
Show all your calculations.
What is the expected EBIT for the expansion project? $____
Total Interest Expense per year for Project Option 1$_ Option 2 $_
Earnings before Taxes per year for Project Option 1$___ Option 2 $_
Total Equity Investment for Option 1 $ Option 2$
ROE before taxes if Option 1 is used? _%
ROE before taxes if Option 2 is used? _______%
Which option do you recommend and why?
Justify your answer with appropriate financial decision makinganalysis and data from your analysis based on the informationavailable.

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What is the APR for each loan Option 1 655 6 payable quarterly hence interest rate per period 64 15 n number of periods number of quarters in 10 years 4 x 10 40 Lets assume loan amount is 100 Quarterly payment PMT Rate period PV FV PMT 15 40 100 100 150 Effective loan Loan amount closing cost 100 4 x 100 96 Hence See Answer

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A small privately held corporation is trying to raise money fora business expansion. The total cost of the expansion is$5,000,000. The expected return on assets before taxes (EBIT) forthe business expansion project based upon the expectedprobabilities of returns are .2 of an 8% return, .5 of a 10% returnand .3 of a 12% return. The privately held corporation’s owners areconsidering two options which involve obtaining one of two types ofloans from an area bank. The current individual stock investorswill put in the needed additional equity investment capital for theexpansion project based upon which loan is selected.Loan option 1: The bank is willing to lend 60% of the costs ofthe project with a 10 year interest only loan at an annual contractrate of 6% with interest payable quarterly and a balloon notepayment at the end of 10 years. The loan closing costs and set upfees will be 4% of the amount borrowed and the owners will be heldpersonally responsible for the loan. The closing costs and feesmust be paid in cash when the loan contract is signed andbegins.Loan option 2: The bank is also willing to lend 80% of the costsof the project with a 10 year interest only loan at an annualcontract rate of 8.5% with interest payable quarterly and a balloonnote payable at the end of 10 years. The loan closing cost is 5% ofthe amount borrowed and the owners will also be held personallyresponsible for the loan. The closing costs fees must be paid incash when the loan contract is signed and begins.To assist in this financial decision making situation, calculatethe follow:What is the APR for each loan?Option 1 _________Option 2 _________What is the expected return on equity investment for thisbusiness expansion project for each option of financing thisexpansion project based upon the expected return on total assetsfor the project?Show all your calculations.What is the expected EBIT for the expansion project? $______________Total Interest Expense per year for Project Option 1$_____________ Option 2 $___________Earnings before Taxes per year for Project Option 1$_____________ Option 2 $___________Total Equity Investment for Option 1 $__________ Option 2$__________ROE before taxes if Option 1 is used? _________________%ROE before taxes if Option 2 is used? ___________________%Which option do you recommend and why?Justify your answer with appropriate financial decision makinganalysis and data from your analysis based on the informationavailable.