TLC Credit, Inc. has $45.0 million in consumer loans with an average interest ra

Question

TLC Credit, Inc. has $45.0 million in consumer loans with an average interest rate of 14.0%. The bank also has $40.0 million in home equity loans with an average interest rate of 10.0%. Finally, the bank owns $15.0 million in corporate securities with an average interest rate of 8%. Next year, consumer loans will increase to $50.0 million because of a rate decrease to 12.0%, while home equity loans will increase to $42.0 million at an average interest rate of 8.5%. Unfortunately, the investment in corporate securities will decrease by 20% and the average interest rate will be only 6.0%. What is TLC's estimated change in revenues next year?

$1,750,000 increase. $1,750,000 decrease. $1,210,000 decrease. $1,210,000 increase.

Explanation / Answer

The estimated change in revenues next year is calculated with the use of following formula:

Estimated Change in Revenue = [(Consumer Loans*Interest Rate) + (Home Equity Loans*Interest Rate) + (Corporate Securities*Interest Rate)] - [(Next Year Consumer Loans*Interest Rate) + (Next Year Home Equity Loans*Interest Rate) + (Next Year Corporate Securities*Interest Rate)]

________

Using the values provided in the formula,

Change in Revenues = [(45*14%) + (40*10%) + (15*8%)] - [(50*12%) + (42*8.5%) + (15*(1-20%)*6%)] = $1,210,000 decrease (answer) [which is Option C]

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