Adair Credit, Inc. has $35.0 million in consumer loans with an average interest rate of 12.0%. The company has $30.0 million in home equity loans with an average interest rate of 8.0%, and owns $5.0 million in corporate securities with an average interest rate of 6%. Next year, consumer loans are estimated to increase to $40.0 million because of a rate decrease to 10.0%, while home equity loans are estimated to increase to $32.0 million at an average interest rate of 6.5%. Unfortunately, the investment in corporate securities is estimated to decrease by 20% and the average interest rate is estimated to be 9.0%. What is Adair's estimated change in revenues next year?

Question

Quizplus · Accepted Answer

The change in revenue is calculated by finding the difference in interest income from this year to next year. Current revenue: Consumer loans: $35M * 12% = $4.2M; Home equity loans: $30M * 8% = $2.4M; Corporate securities: $5M * 6% = $0.3M. Total current revenue = $6.9M. Next year revenue: Consumer loans: $40M * 10% = $4M; Home equity loans: $32M * 6.5% = $2.08M; Corporate securities: $4M * 9% = $0.36M. Total next year revenue = $6.44M. Change in revenue = $6.44M - $6.9M = -$460,000.