# Pierce Control Essay

1124 Words5 Pages
Pierce Control Systems Issue 1 What is the Term Structure of Interest Rates? Fenton’s Financing Decision Brief Background Solveig Geesey, Alex Havernaas, James Jachette Financial Management Cleveland Solution Issue 2 Solution Issue 3 Solution Based on the 10 percent compensating balance requirement, how much would Pierce Control Systems have to borrow to acquire \$10 million in need funds Amount to be borrowed= Amount needed/(1-C) 11,111,111= \$10,000,000/(1-.1) Result: Pierce Control Systems would need to borrow \$11,111,111 Would the cost of the bank loan with the 10 percent compensating balance requirement and a 5.5 % rate applied to the total loan out stand be more or less than the 6 percent prime rate loan on \$10 million? Work this in term of total dollar interest payment and compare the two answers \$11,111,111 (Balance requirement from previous problem) X 0.055 = \$611,111 \$10,000,000 (New bank requirement) X 0.06 = \$600,000 Result: The 6 percent prime rate loan on \$10 million dollars will be less expensive then the 5 and a half percent rate long on the previous bank requirement What if 4 percent interest could be earned on all funds kept in excess of the \$10 million under the compensating balance loan arrangement? What would be the net dollar interest cost of the compensating balance loan arrangement? How does this compare to the 6 percent prime interest rate loan total dollar cost? \$11,111,111 (Amount of money you have)-10,000,000 (Money you owe through the compensating balance loan agreement) =\$1,111,111 (Compensating balances) X 4% (Interest Rates) =\$44,444 (Return on Compensating Balances) \$611,111 (Interest cost on loan with compensating balance requirement)-44,444 (Return on Compensating Balances) =\$566,667 (Net dollar interest cost of the compensating loan requirement) Result: The compensating balance loan would be less expensive than the 6% prime interest