Which of the following statements involving the promised return on a loan is NOT true?
Credit risk may be the most important factor affecting the return on a loan.
Compensating balances reduce the effective cost of loans for the borrower because the deposit interest rate is typically greater than the loan rate.
Compensating balances represents the portion of the loan that must be kept on deposit at the bank.
Compensating balance requirements provide an additional source of return for the lending institution.
Increased collateral is a method of compensating for lending risk.
Submit a detailed summary of how you would advise structuring either one of the following businesses. Explain your rationale, to include advantages/disadvantages of your proposal.
1) Tim is employed by a major pharmaceutical company and received a Form W2 at the end of the year. During summer months, he has a fairly successful landscaping business, and hires 5-7 employees. He manages to show a modest profit of $20k-$30k each year, after all expenses.
2) Joe has a welding business. He grosses approximately $150,000 a year and has one part time employee whom he uses occasionally. His taxable income in generally $90,000 to $100,000. He also has a stock car, which he races occasionally, perhaps 4 or 5 times a year. He does not have a sponsor, so has to fund all expenses himself. He sees this as a good tax write off against the profit from his welding business.