Suppose you are considering lending $2,000,000 to a borrower. The administrative costs are 1% of the loan balance. The expected loss is 1% of the loan balance. Funding sources for the loan are 10% from own equity ($200,000 of equity capital) with a required rate of return of 15% and $1,800,000 of purchased debt funds at an interest rate of 3.5% and a zero reserve requirement.
i. Calculate the weighted average funding cost of this loan
ii. Using the weighted average funding cost from part
iii. calculate the interest rate to be charged on this loan if fees are 2%.