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Case study: Woods Landscaping Service James Woods, CEO of Woods Landscaping Service, needs to increase the firm's operating loan, because the firm was a successful bidder for landscaping a new subdivision. Using a projected cash flow statement, Mr. Woods knows the amount of capital needed, when it can be repaid, and, after consultation with the board of directors, that these funds would need to come from external sources. Mr. Woods determined the firm's additional capital requirements will total $500,000. The money will be borrowed for one year, which is the amount of time needed to complete the landscaping project. Mr. Woods is evaluating various loan terms as he considers his borrowing options. Assume the tax rate for Woods Landscaping is 25 percent and the simple rate of interest is 5 percent. Case question Given this information, please answer the following questions. Show the formula used to arrive at your answer. Note: the first four questions ask for two answers, one in dollars and the other in percent. 1. Calculate the amount of interest paid and the effective interest rate for a simple interest loan. (4 pts) 2. Calculate the amount of interest paid and the effective interest rate if this loan also requires a compensating balance of $10,000. (4 pts) 3. Calculate the amount of interest paid and the effective interest rate if this loan is a discounted loan. (4 pts) 4. If this is a one-year installment loan with twelve equal, monthly payments, show the APR and the amount of interest paid on the loan. (4 pts) 1 5. What is the after-tax cost of borrowing for Woods Landscaping? How would this change if the firm was in the 30 percent income tax bracket rather than the 25 percent income tax bracket? What does this say about debt versus equity financing? (4 pts) Case study: Woods Landscaping Service James Woods, CEO of Woods Landscaping Service, needs to increase the firm's operating loan, because the firm was a successful bidder for landscaping a new subdivision. Using a projected cash flow statement, Mr. Woods knows the amount of capital needed, when it can be repaid, and, after consultation with the board of directors, that these funds would need to come from external sources. Mr. Woods determined the firm's additional capital requirements will total $500,000. The money will be borrowed for one year, which is the amount of time needed to complete the landscaping project. Mr. Woods is evaluating various loan terms as he considers his borrowing options. Assume the tax rate for Woods Landscaping is 25 percent and the simple rate of interest is 5 percent. Case question Given this information, please answer the following questions. Show the formula used to arrive at your answer. Note: the first four questions ask for two answers, one in dollars and the other in percent. 1. Calculate the amount of interest paid and the effective interest rate for a simple interest loan. (4 pts) 2. Calculate the amount of interest paid and the effective interest rate if this loan also requires a compensating balance of $10,000. (4 pts) 3. Calculate the amount of interest paid and the effective interest rate if this loan is a discounted loan. (4 pts) 4. If this is a one-year installment loan with twelve equal, monthly payments, show the APR and the amount of interest paid on the loan. (4 pts) 1 5. What is the after-tax cost of borrowing for Woods Landscaping? How would this change if the firm was in the 30 percent income tax bracket rather than the 25 percent income tax bracket? What does this say about debt versus equity financing? (4 pts)

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