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A bank is planning to make a loan of sh.5,000,000 to a firm in the steel industry. It expects to charge a servicing fee of 50 basis points. The loan has a maturity of 8 years with a duration of 7.5 years. The cost of funds (the RAROC benchmark) for the bank is 10 percent. Assume the bank has estimated the maximum change in the risk premium on the steel manufacturing sector to be approximately 4.2 percent, based on two years of historical data. The current market interest rate for loans in this sector is 12 percent.
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Using the RAROC model, determine whether the bank should make the loan.
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- A bank is planning to make a loan of $25,000,000 to a firm in the steel industry. It expects to charge a servicing fee of 50 basis points. The loan has a maturity of 8 years and a duration of 7.5 years. The cost of funds (the RAROC benchmark) for the bank is 10 percent. Assume the bank has estimated the maximum change in the risk premium on the steel manufacturing sector to be approximately 4.2 percent, based on two years of historical data. The current market interest rate for loans in this sector is 12 percent. A. Given the proposed income stream and the negotiated duration, what adjustment in the risk premium would be necessary to make the loan acceptable?A bank is planning to make a loan of $25,000,000 to a firm in the steel industry. It expects to charge a servicing fee of 50 basis points. The loan has a maturity of 8 years and a duration of 7.5 years. The cost of funds (the RAROC benchmark) for the bank is 10 percent. Assume the bank has estimated the maximum change in the risk premium on the steel manufacturing sector to be approximately 4.2 percent, based on two years of historical data. The current market interest rate for loans in this sector is 12 percent. a. What should be the duration in order for this loan to be approved? b. Assuming that duration cannot be changed, how much additional interest and fee income would be necessary to make the loan acceptable? c. Given the proposed income stream and the negotiated duration, what adjustment in the risk premium would be necessary to make the loan acceptable?A commercial bank is planning to give a loan of $3,000,000 to a firm. The bank expects to charge an up-front fee of 0.15% and a service fee of 0.04%. The loan has a maturity of 10 years. The cost of funds (and the RAROC benchmark) for the commercial bank is 12%. The commercial bank has estimated the risk premium on the loan to be approximately 0.20%, based on three years of historical data. The current market interest rate for loans in this sector is 12.15%. The 99th (extreme case) loss rate for borrowers of this type has historically run at 4%, and the dollar proportion of loans of this type that cannot be recaptured on default has historically been 85%. The 'bank's Return on Equity (ROE) ratio is 13%. Using the risk-adjusted return on capital (RAROC) model, should the commercial bank make the loan?
- A financial manager is considering two possible sources of funds necessary to finance a $10,000,000 investment that will yield $1,500,000 before interest and taxes. Alternative one is a short-term commercial bank loan with an interest rate of 8 percent for one year. The alternative is a five-year term loan with an interest rate of 10 percent. The firm's income tax rate is 30 percent. The financial manager expects short-term rates to rise to 11 percent in the second year. At that time long-term rates will have risen to 12%. What will be the firm's projected earnings under each alternative in the second year?D3) Finance Calculate the loan risk associated with a $4 million, five-year loan to a BBB-rated corporation in the computer parts industry that has a duration of 5.8 years. The cost of funds for the bank is 8 per cent. Based on four years of historical data, the bank has estimated the maximum change in the risk premium on the computer parts industry to be approximately 4.0 per cent. The current market rate for loans in this industry is 11 per cent.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?
- A financial manager is considering two possible sources of funds necessary to finance a $10,000,000 investment that will yield $1,500,000 before interest and taxes. Alternative one is a short-term commercial bank loan with an interest rate of 8 percent for one year. The alternative is a five-year term loan with an interest rate of 10 percent. The firm's income tax rate is 30 percent. What will be the firm’s projected earnings under each alternative for the first year? The financial manager expects short-term rates to rise to 11 percent in the second year. At that time long-term rates will have risen to 12%. What will be the firm’s projected earnings under each alternative in the second year? What are the crucial considerations when selecting between short- and long-term sources of finance?A financial manager is considering two possible sources of funds necessary to finance a $10,000,000 investment that will yield $1,500,000 before interest and taxes. Alternative one is a short-term commercial bank loan with an interest rate of 8 percent for one year. The alternative is a five-year term loan with an interest rate of 10 percent. The firm's income tax rate is 30 percent. What will be the firm's projected earnings under each alternative for the first year?A financial manager is considering two possible sources of funds necessary to finance a $10,000,000 investment that will yield $1,500,000 before interest and taxes. Alternative one is a short-term commercial bank loan with an interest rate of 8 percent for one year. The alternative is a five-year term loan with an interest rate of 10 percent. The firm's income tax rate is 30 percent. What are the crucial considerations when selecting between short- and long-term sources of finance?
- AB Borda shall establish a risk-adjusted required rate of return as part of their investment analysis. The company has produced the following information: • The investment will be financed to 40% with bank loans and 60% with equity • The company's tax rate is 22% • The government bond for the intended investment period has an interest rate corresponding to 2% • The company has negotiated with the bank for a loan for the investment with an interest rate of 5%. • For the investment period, the company has an expectation that the index for the market portfolio will increase from the current 110 to 119.9 at the end of the investment period. • The company's intended investment has a covariance with a market portfolio of 120 and that the standard deviation for the market portfolio is 7.56. a) Calculate the company's nationally adjusted return requirement for the investment.On the London Metals Exchange, the price for copper to be delivered in one year is $5,820 a ton. (Note: Payment is made when the copper is delivered.) The risk-free interest rate is 2.00% and the expected market return is 8%. a. Suppose that you expect to produce and sell 10,000 tons of copper next year. What is the PV of this output? Assume that the sale occurs at the end of the year. (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) b-1. If copper has a beta of 1.28, what is the expected price of copper at the end of the year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b-2. Assume copper has a beta of 1.28. What is the certainty-equivalent end-of-year price?A Multinational Enterprise firm is considering to borrow $50 million loan for five-year maturity. It will be an amortized loan, where interest and principal payments will be paid as constant amount of annual instalment till the maturity of loan. However, company has serious concerns over cost of capital investment, structure and appropriateness of interest rate. Based on the credit standing, the borrowing firm assumes 12% interest as an appropriate rate in current financial market. However, local and international banks/financial services providers are negotiating at different interest rate. Based on the above scenario, you are the required to:a- Calculate the amortized interest, principal and total payments schedules for 5 Years @ 12% benchmark rate and compare the same with two different assumed interest rates (minimum & Maximum) offered by banks respectively.b- Evaluate the effect of these different interest rates on the potential annual payments and risks involved for a…