Assume that you are an NBA team owner who wants to build an arena with a budget of $400 million. You will provide $200 million of your own funds, but must finance the remaining balance. Calculate your total loan payment based on the following information: A bank is willing to lend you 60% of the remaining balance at 5% interest. You have also been offered a corporate bond that will cover the remaining 40% at 6% interest.
To calculate the total loan payment, we need to determine the amounts borrowed from each source and calculate the interest payments for each loan.
Step 1: Determine the amounts borrowed from each source
- Your own funds: $200 million
- Bank loan: 60% of the remaining balance
- Corporate bond: 40% of the remaining balance
Let's calculate the remaining balance first. Subtract your own funds ($200 million) from the total budget ($400 million):
Remaining balance = $400 million - $200 million = $200 million
Now, we can calculate the amounts borrowed from each source:
- Bank loan = 60% of the remaining balance = 60% of $200 million = $120 million
- Corporate bond = 40% of the remaining balance = 40% of $200 million = $80 million
Step 2: Calculate interest payments for each loan
- Bank loan interest rate: 5%
- Corporate bond interest rate: 6%
For the bank loan:
Interest payment = Loan amount * Interest rate
Interest payment = $120 million * (5% / 100) = $6 million
For the corporate bond:
Interest payment = Loan amount * Interest rate
Interest payment = $80 million * (6% / 100) = $4.8 million
Step 3: Calculate the total loan payment
Total loan payment = Bank loan + Corporate bond
Total loan payment = $6 million + $4.8 million = $10.8 million
Therefore, your total loan payment would be $10.8 million.