Please show work and how you arrived at your conclusion.
The assignment may be submitted as an Excel spreadsheet or an electronic (Word or PDF) document.
2. A financial institution is planning to give a loan of $5 million to a firm. It expects to charge an up-front fee of 0.20%
and a service fee of 5 basis points. The loan has a maturity of 8 years. The cost of funds for the financial institution is 10%.
The FI has estimated a risk premium of 0.15%. The current market interest rates for this type of loan is 10.1%.
The 99th (extreme case) loss rate for borrowers of this type has historically run at 4%.
The dollar proportion of loans of this type that cannot be recaptured on default has historically been 85%.
Using the RAROC model, would you recommend that the FI make this loan? Why?
Please show work and how you arrived at your conclusion.
The assignment may be submitted as an Excel spreadsheet or an electronic (Word or PDF) document.
2. A financial institution is planning to give a loan of $5 million to a firm. It expects to charge an up-front fee of 0.20%
and a service fee of 5 basis points. The loan has a maturity of 8 years. The cost of funds for the financial institution is 10%.
The FI has estimated a risk premium of 0.15%. The current market interest rates for this type of loan is 10.1%.
The 99th (extreme case) loss rate for borrowers of this type has historically run at 4%.
The dollar proportion of loans of this type that cannot be recaptured on default has historically been 85%.
Using the RAROC model, would you recommend that the FI make this loan? Why?
Related questions
| Please show work and how to arrived at your conclusion. The assignment may be submitted as an Excel spreadsheet or an electronic (Word or PDF) document. | ||||
| 1. Company XYZâs balance sheet is shown below (in thousands). XYZ's income sheet values are as follows (in thousands): | ||||
| Sales = $475, operating costs = $320, Interest expense = $27, and taxes = $56. The beginning retained earnings balance is zero, | ||||
| the market value of equity is equal to its book value, and the company has a dividend payout ratio of 50%. | ||||
| Assets | Liabilities | |||
| Cash | 20 | Accounts payable | 30 | |
| Accounts receivables | 90 | Notes payable | 90 | |
| Inventory | 90 | Accurals | 30 | |
| Long Term debt | 150 | |||
| Plant and Equipments | 500 | Equity | 400 | |
| Totals | 700 | Totals | 700 | |
| a) Calculate the Altman's Z-score for this company. | ||||
| b) Should you approve XYZ's application to your bank for a capital expenditure loan? | ||||
| c) Assume XYZ's sales decreased to 395,000, taxes were 46,000 and the market value of equity fell to one-half of its book value (assume COGS and interest expense are unchanged). What is XYZ's Z-score? Does your credit decision change? | ||||
