Cost-Plus loan pricing method and interesting facts about it:
The Debt and Equity along with costs of capital do play a crucial role in fixing short term 1-2 years interest rates.
| Total Debt | 40,00,000 | |||||||
| Kd | 10% | |||||||
| Total Equity | 60,00,000 | |||||||
| Ke | 19% | |||||||
| WACC | 4% | + | 11% | = | 15% | |||
| Servicing costs | 1% | |||||||
| Risk premium | 2% | |||||||
| Loans given out (Assets) | 1,00,00,000 | |||||||
| Profit margin | 11% | (Ke * E/A) | ||||||
| Profit | 11,40,000 | (Ke * E) | ||||||
| Bank Working Capital | 20,000 | |||||||
| Profit margin excluding Working Capital | 14% | (Ke * E/ A-WC) | ||||||
| Cost Plus loan price= | WACC + Service Cost+ Risk Premium + Profit Margin Excluding working capital | |||||||
| Interest | = | 33% | ||||||
Now if we change the debt structure:
| Total Debt | 60,00,000 | |||||||
| Kd | 10% | |||||||
| Total Equity | 40,00,000 | |||||||
| Ke | 19% | |||||||
| WACC | 6% | + | 8% | = | 14% | |||
| Servicing costs | 1% | |||||||
| Risk premium | 2% | |||||||
| Loans given out (Assets) | 1,00,00,000 | |||||||
| Profit margin | 8% | (Ke * E/A) | ||||||
| Profit | 7,60,000 | (Ke * E) | ||||||
| Bank Working Capital | 20,000 | |||||||
| Profit margin excluding Working Capital | 9.50% | (Ke * E/ A-WC) | ||||||
| Cost Plus loan price= | WACC + Service Cost+ Risk Premium + Profit Margin Excluding working capital | |||||||
| Interest charged | = | 26% | ||||||
Note: Consider WACC as Marginal WACC under this current situation.
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