EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 18, Problem 3P
Summary Introduction

To determine: The pretax profit of expanding credit for the customers in the credit risk Group 5.

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K-Life financial services Limited uses risk-adjusted return on capital (RAROC) to measure performance on several aspects. In this regard, imagine that an investment officer wants to execute a transaction with the following characteristics: Probability of default (PD) = 30 basis points Loss given default (LGD) = 55% Exposure at default (EAD) = K 1.45 million Expected loss (EL) = K 2,750 This is a loan to a company in the Agro industrial. The firm’s economic capital (EC) model is based on the 99% confidence level, with an average standard deviation of 2.15%. The risk-free rate of return is 6%. Assume that the bank has set a RAROC hurdle rate of 15% and this transaction has a net profit of K10, 500. REQUIRED: Compute the K-life’s risk-adjusted rate of return on this transaction. Now assume that K-life could also have made a loan for the same amount to a firm in the service industry, and that the standard deviation for economic capital purposes in this case is 1.29%. Compute the bank’s…
Upon further investigation, you have found that the amount of account payables for Companies A and X at the start of the lyear is 20,000 and 30,000, respectively. Apart from that, the amount of credit purchase for Companies A and B is 250,000 and 280,000, respectively. Based on all this information, recommend on which company that gire lower risk to your company. The recommendation must be ustified by the following analysis: a) hiquidity analysis. b) Solvency analysis. c) Any other financial analysis that you think can help in making your decision. Table: Balance Sheet for Company A and Company B Assets Fixed Assets Other Non-Current Assets Account Receivables Inventory Cash 250,000 80,000 120,000 80,000 120,000 650,000 280,000 110,000 140,000 100,000 100,000 ТОTAL 730,000 Liabilities Саpital Long Term Debt Account Payables Other Current Liabilities ТОTAL 250,000 120,000 160,000 120,000 650,000 280,000 140,000 180,000 130,000 730,000
Calculate the following ratios for 2021. Express answers to two decimal places. 4.1.1 Gross margin 4.1.2 Inventory turnover 4.1.3 Acid test ratio 4.1.4 Debt to equity 4.1.5 Earnings per share 4.2 Are the collections from credit sales satisfactory? Motivate your answer by using the relevant ratio. 4.3 Would the shareholders of Harmony Limited be satisfied with the return on their investments? Motivate your answer with the use of a relevant ratio. 4.4 Suggest THREE (3) ways in which Harmony Limited can improve its gross margin ratio, without increasing the selling price of the inventories.
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