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Alice Bank has an ROE objective of 12%, is subject to an average tax rate of 35%, and provides the following information regarding the loans that it extends to its corporate customers:
Liquidity requirement of the bank (as a % of total assets)
6.0%
Yield earned on liquid assets
1.5%
Deposit rate paid by the bank
0.25%
Default probability of the loan
4.5%
Estimated recovery rate
68.0%
Capital adequacy rate
8.0%
Capital adequacy weighting of the loan
100.0%
Administrative costs
2,000$
A particular corporate, customer of Alice Bank, has received an offer for a $25 million for 5 years loan from a competing bank, at a rate of 2.8%.
Alice assesses that corporates is that sector usually have a default probability of 4.5% and a recovery rate of 68%.
a) Compute the rate whether Alice Bank could beat it to keep its customer?
b) If not, what else could Alice Bank do to attract the loan?
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