Reference no: EM13885423
Suppose a bank has 100 million dollars of assets to invest. It can either invest in risky or safe loans. Safe loans will be worth $105 M in one year with certainty. Risky loans will be worth either $70 M or $130 M in one year, each with equal probability.
a. Suppose the bank has $80 million in one-year time deposits. For simplicity, assume that they pay no interest, so that the bank's liability will still be $80 M in one year. Assume that the deposits are insured by the government, and for simplicity assume that the bank does not have to pay a premium for this insurance. If the bank's assets are worth less than $80 M in one year, the government will shut the bank down and pay the difference between $80 million and the value of assets. [HINT: SET UP THE BANK’S BALANCE SHEET]
b. Compute the probability that the bank will fail, the expected value of the bank's net worth and the expected size of the government's bailout in one year if the bank invests its assets in safe loans.
d. Do the same assuming the bank invests in risky loans.
e. Which investment strategy would the government prefer the bank to undertake? Which strategy will the bank choose, assuming that the bank's primary objective is to ensure its survival, and its secondary objective is to maximize its expected net worth.
|
Significantly speed up production time on the assembly line
: Your company, Diamond Dynamics, is researching whether or not it would be a good decision to invest in new manufacturing equipment that will significantly speed up production time on the assembly line.
|
|
Companys repayment be if you issue the coupon bonds
: uppose your company needs to raise $36.8 million and you want to issue 23-year bonds for this purpose. Assume the required return on your bond issue will be 9.3 percent, and you’re evaluating two issue alternatives: In 23 years, what will your compan..
|
|
Uses straight-line depreciation to a zero book value
: Kurt's Kabinets is looking at a project that will require $80,000 in fixed assets and another $20,000 in net working capital. The project is expected to produce sales of $110,000 with associated costs of $70,000. The project has a 4-year life. The co..
|
|
Project to improve its production efficiency
: Warmack Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $490,000 is estimated to result in $200,000 in annual pretax cost savings
|
|
Compute the probability that the bank will fail
: Suppose a bank has 100 million dollars of assets to invest. It can either invest in risky or safe loans. Safe loans will be worth $105 M in one year with certainty. Risky loans will be worth either $70 M or $130 M in one year, each with equal probabi..
|
|
About the payment liability
: Which of the following is a payment liability?
|
|
Five-year project has an initial fixed asset investment
: A five-year project has an initial fixed asset investment of $335,000, an initial NWC investment of $35,000, and an annual OCF of −$34,000. The fixed asset is fully depreciated over the life of the project and has no salvage value.
|
|
What is juniors weighted average cost of capital
: Junior Interiors market value capital structure of 62% Common Equity, 3% Preferred Stock (PS) and 35% Debt. The company does not pay dividends, and evaluates its operations as approximately 30% more risky than an “average” company in the industry. Wh..
|
|
What is your recommendation to town council of cedar falls
: The town of Cedar Falls has decided to lease their parking meters for 10 years to a private company in order to raise revenue for some much needed road repairs. Cedar Falls' mayor informs you that she wants the deal with greatest Net Present Value (N..
|