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.
Chapter 18 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Ch. 18 - Prob. 1QTDCh. 18 - Prob. 2QTDCh. 18 - Prob. 3QTDCh. 18 - Prob. 4QTDCh. 18 - Prob. 5QTDCh. 18 - Prob. 6QTDCh. 18 - Prob. 7QTDCh. 18 - Prob. 8QTDCh. 18 - Prob. 9QTDCh. 18 - Prob. 10QTD
Ch. 18 - Prob. 11QTDCh. 18 - Prob. 12QTDCh. 18 - Prob. 13QTDCh. 18 - Prob. 14QTDCh. 18 - Prob. 15QTDCh. 18 - Prob. 16QTDCh. 18 - Prob. 17QTDCh. 18 - Prob. 18QTDCh. 18 - Prob. 19QTDCh. 18 - Prob. 20QTDCh. 18 - Prob. 21QTDCh. 18 - Prob. 22QTDCh. 18 - Prob. 1PCh. 18 - Prob. 2PCh. 18 - Prob. 3PCh. 18 - Prob. 4PCh. 18 - Prob. 5PCh. 18 - Prob. 6PCh. 18 - Prob. 7PCh. 18 - Prob. 8PCh. 18 - Prob. 10PCh. 18 - Prob. 11PCh. 18 - Prob. 12PCh. 18 - Prob. 13PCh. 18 - Prob. 14PCh. 18 - Prob. 15PCh. 18 - Prob. 16PCh. 18 - Prob. 17PCh. 18 - Prob. 18PCh. 18 - Prob. 19PCh. 18 - Prob. 20PCh. 18 - Prob. 21P
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