The Cost of Capital: Loan Fee Income for a Financial Institution
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?
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
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Solution Summary
The solution calculates the total fees earned, but also explains how the cost of capital is important to the computations.
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