Calculate the impact of this approach on bank earnings

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Q1. Assume a bank to receive €60,000 over the next month. The average % change in € is 1.5% with a standard deviation of 1.3%. Each euro is worth $1.15 today. With a confidence level of 95%,

a) Calculate maximum potential loss (in $) on this cash inflow for the bank over the next month (note that Z(95%)=1.65).

b) Interpret it.

Q2. AUF Bank has been told by examiners that it needs to raise an additional $8 million in long-term capital. Its outstanding common equity shares total 5.4 million, each bearing a par value of $1. This bank currently holds assets of nearly $2 billion, with $135 million in equity. During the coming year, the bank's economist has forecast operating revenues of $180 million, of which operating expenses are $25 million plus 70% of operating revenues.

Among the options for raising capital considered by management is selling $8 million in preferred stock bearing a 9 percent annual dividend yield at $12 per share. Calculate the impact of this approach on bank earnings per share. (Assume a 34% tax rate.).

Reference no: EM133076957

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