If FNBNA is expecting a $20 million net deposit drain and the bank wishes to fund the drain by borrowing more money,how much will pretax net income change if the borrowing cost is the same as on its existing borrowed funds?

Question

Quizplus · Accepted Answer

If FNBNA borrows more money to fund the $20 million net deposit drain, their interest expense will increase. Since the borrowing cost is the same as on its existing borrowed funds, the increase in interest expense will be equal to the interest rate on their existing borrowed funds.

Interest expense increase = Interest rate on existing borrowed funds
= 3% of $200 million
= $6 million

Thus, their pretax net income will decrease by $6 million, which is the same as the increase in interest expense.

Pretax net income change = −$6 million
= −$6,000,000/10 (since the question is asking for change in pre-tax net income before tax)
= −$600,000

Therefore, the correct answer is D.

If FNBNA Is Expecting a $20 Million Net Deposit Drain