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    The Cost of Capital: Loan Fee Income for a Financial Institution

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    Question: An FI makes a loan commitment of $2,500,000 with an up-front fee of 50 basis points and a back-end fee of 25 basis points on the unused portion of the loan. The takedown on the loan is 50%.

    What are the total fees earned by the FI at the end of the year, that is, in future value terms? Assume the cost of capital for the FI is 6%

    I don't understand how the cost of capital fits into this problem... is it relevant at all?

    © BrainMass Inc. brainmass.com March 4, 2021, 5:36 pm ad1c9bdddf
    https://brainmass.com/business/finance/cost-capital-loan-fee-income-financial-institution-2082

    Solution Preview

    The cost of capital is important because we have to calculate the future value of fee and 6% is the rate to be used.

    Take two scenarios;
    (1) When 100% loan is taken, and
    ...

    Solution Summary

    The solution calculates the total fees earned, but also explains how the cost of capital is important to the computations.

    $2.49

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