Question

1. Linda Lender at Farmers State Bank is currently determining the loan price for a $200,000 operating loan to Julie and Bill Wallstreet. Linda has compiled the following items as of March 31, 1995:

Cost of all debt and equity funds currently in balance sheet                  4.7%

Cost to acquire debt and equity funds in the market                             5.1%

Administrative cost                                                                              2.2%

Risks cost                                                                                            1.5%

Non-loan cost                                                                                      0.5%

Competitor cost                                                                                   0.1%

What interest rate should Linda charge to Julie and Bill using average cost pricing?

1. 8.7%
2. 9.0%
3. 9.05%
4. 9.75%

What interest rate should Linda charge to Julie and Bill using the marginal cost pricing?

1. 8.7%
2. 9.05%
3. 9.35%
4. 9.4%

Answer 1