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Define compensating balances

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Reference no: EM132704856

a) Define "compensating balances" in the context of bank lending. Give a numerical example to illustrate how compensating balances can be used by banks to change the effective rate of return earned on loans.

b)The Altman's Z-score model is a linear discriminant model used to predict manufacturing firms' default risk.

(i) Calculate the Z-score for Lancaster Manufacturing Ltd., with the following information (in $ million). Working Capital = 250, Total Assets = 4560, Earnings before Interest and Taxes (EBIT) = 750, Net Income = 370, Market Value of Equity = 2340, Book Value of Long-Term Debt = 1100, Sales = 1550, Dividend Payout Ratio = 45%.

(ii) Interpret the Z-score calculated in part (i). If you are a bank manager, will you lend to Lancanster Manufacturing Ltd.? Explain your answer.

Reference no: EM132704856

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