) You are asked to estimate the RAROC of a bank's $100 million loan business, 7.5% of which is the economic capital. The average interest rate is 8%. All the loans have the same default probability of 1.5% with a loss given default of 60%. Operating costs are $15 million, and the funding cost of the business is $30 million. The economic capital is invested and earns 6%.

) You are asked to estimate the RAROC of a bank's $100 million loan business, 7.5% of which is the economic capital. The average interest rate is 8%. All the loans have the same default probability of 1.5% with a loss given default of 60%. Operating costs are $15 million, and the funding cost of the business is $30 million. The economic capital is invested and earns 6%.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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ok Gladys Bank and Trust has $440 million in consumer loans with an average interest rate of 8.05 percent. The bank also has $320 million in home equity loans with an average interest rate of 5 percent. Finally, the company owns $140 million in government securities with an average rate of 3 percent. Managers at Gladys Bank and Trust estimate that next year its consumer loan portfolio will fall to $400 million and the interest rate will increase to 9.55 percent. They also estimate that its home equity loans will increase to $360 million with an average interest rate of 7 percent, and its government securities portfolio will increase to $155 million with an average rate of 14.50 percent. Required: Estimate the revenues for the coming year for Gladys Bank and Trust. Note: Enter your answer in thousands of dollars. Interest revenue CARRER
Average account receivables-60 days, Inventories-85 days, Average account payable-55 days Company spends Rs.21, 00,000 annually and can earn 10% on its investments. (i) Find out cash cycle and cash turnover assuming 360 days in a year, (ii) Minimum amount of cash required to meet the payment. Also calculate the above, if inventory age is reduced to 75 days. What will be the savings for the company?
1. AXN Sdn Bhd needs to raise RM1, 000,000 in short-term loan for five months. loan from OCBC bank at discounted interest rate of 12% per annum and a 20% compensating balance. The present account balance in the company is RM 100,000. Compute the effective cost of financing.
ABC Co needs to purchase equipment for $2 million. It is estimated that the after- tax cash inflows from the project will be $210,000 annually in perpetuity. ABC Co has a market value debt-to-assets ratio of 60%. The firm's cost of equity is 13%, its pre-tax cost of debt is 8%, and the flotation costs of debt and equity are 2% and 8%, respectively. The tax rate is 34%. Assume the project is of similar risk to the firm's existing operations. What is the dollar flotation cost for the proposed financing? $83,333 $88,000 $92,050 $79,840 $80,000
) Prince Edward Bank considers increasing a type of loans in the credit portfolio by $3,500,000,which will generate a gross income of 2.5%p.a. The bank assumes PD is 10% and estimates LGDis 20% and EAD as 80%. The net income, which is gross income minus Expected Loss (i.e. EL),will be used in the RAROC analysis. When doing so, the Bank refers to the net income andunexpected loss (i.e. UL) as the capital-as-risk estimation.Required:If the ROE of Prince Edward Bank is targeted at 25%, analyze whether the loans could be addedto the portfolio by RARoC analysis
A sum of £15,000 is to be invested in a Long-Term Savings Account and growth is projected at 3.25% gross per annum over the next 10 years, subject to tax at the standard rate of 20%. a) Draw the curve to illustrate growth of this investment. b) If no money is withdrawn, calculate how much is in the account after 10 years, after tax. c) There is an opportunity to transfer the investment into an Instant Cash Individual Savings Account, which attracts 1.95% per annum, tax free. Again, if no money is withdrawn, calculate how much theinvestment would be worth after 10 years. d) Comment on your findings above and decide which of the accounts is a better investment and likely togive a better rate of return, bearing in mind that the interest rate of the Individual Savings Account willfluctuate with the bank lending rate.
A company has annual credit sales of €10 million, and a cost of capital of 7%. At present the company's debtors take on average 45 days to pay for goods bought on credit. The company is considering a discount scheme which it estimates would reduce the period taken by customers to 25 days. Based on the limited information above, what would be the net effect of the proposed discount scheme on the company's profit and loss in a given year? Assume 360 days in a year. Saving of €555,556 Saving of €48,611 Saving of €38,889 Saving of €1,000
A Start up data analytics company needs P500,000 for its operations. One bank is willing to lend it money for one year at 12.5% interest per annum (discounted). Another lender is charging 14% with principal and interest payable at the end of the year. A third financier will lend it the amount payable in 12 equal monthly installments of Php 46,00 each. Which offer is best for the business?
Holiday Tree Farm has a cash balance of $34 and a short-term loan balance of $180 at the beginning of Qt. The net cash inflow for the first quarter is $36 and for the second quarter there is a net cash outflow of $48. All cash shortfalls are funded with short-term debt. The firm pays 2 percent of its prior quarter's ending loan balance as interest each quarter. The minimum cash balance is $20. What is the short-term loan balance at the end of Q2? Multiple Choice $184.3 $179.2 $138.6 $128.4 $1931
A new delivery van costs $20,000 and can be financed for 60 months with a $4,000 down payment. I.M.’s bank will finance the van at 5.5 percent compounded monthly, and you calculated his weighted average cost of capital at 8 percent. How do you figure out the monthly payment for the van?
The company has two bank loans in place. Loan A had an average outstanding balance of £1.2m and the interest on this was a flat rate 7% per annum. Loan B had an average outstanding balance of £250,000 and the interest on this was a flat rate 5% per annum. During the year £217,500 of capital on both these loans was repaid in proportion to the respective loan sizes. The Fixed Assets in the business originally cost £820,000 in total. These are still being depreciated on a Straight Line basis over 8 years. (Assume the all assets were purchased at the same time and have not yet been fully depreciated). The company spent £290,000 marketing to online consumers and £180,000 marketing to retailers during the Payments to the Bank Depreciation Sales & Marketing year. A further £160,000 of various other operating costs were incurred during the year. In addition, a further £20,000 of invoices had been received in March 2021 for supplies to be delivered in April and May 2021. Other Expenditure…
A bank offers a corporate client a choice between borrowing cash at 9% per annum and borrowing Bitcoin at -5% per annum. The risk-free interest rate is 3% per annum, and storage costs are 7% per annum. The interest rates on the two loans are expressed with annual compounding. The risk-free interest rate and storage costs are expressed with continuous compounding. Suppose that the price of Bitcoin is $58,000 and the corporate client wants to borrow $1,160,000. Discuss whether the rate of interest on the Bitcoin loan is too high or too low in relation to the rate of interest on the cash loan. What is the correct rate of interest for Bitcoin loan?

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