A bank has $500 million in checking deposits with interest and non-interest costs of 6%,$250 million in savings and time deposits with interest and non-interest costs of 14%,and $250 million in equity capital with a cost of 25%.The bank has estimated that reserve requirements,deposit insurance fees and uncollected balances reduce the amount of money available on checking deposits by 15% and on savings and time deposits by 4%.What is the bank's before-tax cost of funds?
A)15.00%
B)12.75%
C)13.29%
D)15.74%
E)None of the options is correct

Question

Quizplus · Accepted Answer

To calculate before-tax cost of funds, we need to compute weighted average cost of funds (WACF).

WACF = (Interest cost of checking deposits * (1 - reduction by reserve, insurance and uncollected balances) * Checking deposit amount + Interest cost of savings and time deposits * (1 - reduction by reserve, insurance and uncollected balances) * Savings and time deposit amount + Cost of equity capital * Equity capital amount) / (Checking deposit amount + Savings and time deposit amount + Equity capital amount)

Plugging in the values we get WACF = (0.06 * (1 - 0.15) * 500 + 0.14 * (1 - 0.04) * 250 + 0.25 * 250) / (500 + 250 + 250) = 0.1329 or 13.29%.

Therefore, the correct answer is C: 13.29%.

A Bank Has $500 Million in Checking Deposits with Interest