Compute the rate whether alice bank could beat

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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?

Reference no: EM133068833

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