You are a finance intern at Chambers and Sons and they have asked you to help estimate the company's cost of common equity. You
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Answer:
a. The monthly payment on loan 1 is $76.03.
b. The monthly payment on loan 2 is $411.69.
Explanation:
a. Calculate the monthly payment on loan 1.
To determine the amount of periodic payments, the present value of annuity formula should be used:
Where:
PV= present value
p=periodic payment
i=rate of interest
n=number of periods
We get the data for this exercise:
PV= 3,600 (loan).
p= unknown (we must find this value)
i= 6.6% or 0.066. However, because we need to know the monthly payment, the interest rate should be divided by 12 (0.066 / 12).
n= 4 years and 7 months, that is 55 months.
And we replace in the formula:
Therefore:
The monthly payment on loan 1 is $76.03.
b. Calculate the monthly payment on loan 2.
We get the data for this exercise:
PV= 11,600 (loan 2).
p= unknown (we must find this value)
i= 7.3% or 0.073. However, because we need to know the monthly payment, the interest rate should be divided by 12 (0.073 / 12).
n= 2 years and 7 months, that is 31 months.
And we replace in the formula:
Therefore:
The monthly payment on loan 2 is $411.69.