Question

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

Answer 1

Answer:

$460,000 decrease

Explanation:

The computation of TLC's estimated change in revenues next year is shown below:-

TLC's estimated change in revenues next year = ((Consumer loan × Interest rate) + (Home equity loan × Interest rate) + (Corporate securities × Interest rate)) - ((Increased consumer loan × Decrease rate) + (Increase equity loan × Interest rate) + (Corporate securities × (1 - decreased percentage) × average interest rate))

= (($35.0 million × 0.12) + ($30.0 million × 0.O8) + ($5.0 million × 0.06)) - (($40.0 million × 0.10) +($32.0 million × 0.065) + (5 million × (1 - 20%)  × 0.09))

=$6,900,000 - $6,440,000

= $460,000 decrease

Therefore for computing the TLC's estimated change in revenues next year we simply applied the above formula.