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A bank is planning to make a loan of $2,000,000 to a firm in the steel industry. It expects to charge a servicing fee of 75 basis points. The loan has a maturity of 6 years with a duration of 5.25 years. The return on equity (ROE) for the bank is 18 percent. The bank has estimated the maximum change in the risk premium on the steel manufacturing sector to be approximately 5.75 percent, based on two years of historical data. The current market interest rate for this sector less the cost of funds (ROE) is 3.5 percent.
What is the Risk Adjusted Return on Capital (RAROC)? Should the bank make this loan?
What should the duration be in order to accept this loan?
Assuming duration cannot be changed, how much additional fee income will need to be charged?
Duration captures one important aspects of interest rate risk. Namely...
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Project WACC Using Corporate Financing Pearson Electronics manufactures printed circuit boards used in a wide variety of applications ranging from automobiles to washing machines. In fall 2014, it considered whether to invest in two major projects. H..
The 6-month, 1-yr, 1.5-yr, and 2-yr interest rates are 1.75%, 2.00%, 2.25% and 2.50% with continuous compounding. a. Calculate the present value of $100 in 1.5 years (=18 months). Suppose a bank needs to borrow (not lend) $20 million for 3 months sta..
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David owns 75 percent of the stock of Smith Industries, which is operated as an S corporation. Walter owns the remaining 25 percent. - David is the driving force behind the company. It is doubtful the company could survive without David. The company ..
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