10. Fred creates a loan agency. They will finance elite vehicles to UBER drivers. Fredexplains his business as follows:We have signed leases and tomorrow will lend $50 million.We lend each driver $50,000 for 1 year, and they each buy a vehicle for $50,000.We recognize some will default-we believe 70 drivers will fail to repay us.We estimate that vehicles in default can be sold in the secondary market at 78%of their purchase price.We also will incur an average loss of $1,375 per defaulted vehicle, to pay anindividual-a repo man—to repossess the vehicle.We believe we will be paid a 3% premium, relative to the 3% 1-year treasuryrate.What interest rate will Fred charge his UBER drivers? (Show work)

In a world where transportation needs are rapidly evolving, Fred saw an opportunity to bridge the…

Answered: 10. Fred creates a loan agency. They…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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9.Ahmad wants to buy a machine for his factory. He cannot make the cash payment to buy the machine. Let us say that the purchase price for the machine is PKR 50,000 and the profit rate the bank wants to charge is 12%. The period of financing is 9 months. Akram is willing to make a lump sum payment upon expiry of 9 months
Sam can afford to spend $500 per month on a car. He figures he needs half of it for gas, parking, and insurance. He has been to the bank, and they will loan him 100% of the car’s purchase price. (Note: If he had a down payment saved, then he could borrow at a lower rate.) (a) If his loan is at a nominal 12% annual rate over 36 months, what is the most expensive car he can purchase? (b) The car he likes costs $14,000 and the dealer will finance it over 60 months at 12%. Can he afford it? If not, for how many months will he need to save his $500 per month? (c) What is the highest interest rate he can pay over 60 months and stay within his budget if he buys the $14,000 car now?
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Best Trim, a manufacturer of lawn mowers, predicts that it will purchase 204,000 spark plugs next year. Best Trim estimates that 17,000 spark plugs will be required each month. A supplier quotes a price of $9 per spark plug. The supplier also offers a special discount option: If all 204,000 spark plugs are purchased at the start of the year, a discount of 2% off the $9 price will be given. Best Trim can invest its cash at 10% per year. It costs Best Trim $260 to place each purchase order. Q. What is the opportunity cost of interest forgone from purchasing all 204,000 units at the start of the year instead of in 12 monthly purchases of 17,000 units per order?

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