Which bank faces less risk

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Reference no: EM131954148

1. Your boss wants a target net income of $5 million. Your tax rate is 35%, interest expense is $1.5 million, depreciation is $2 million and your other operating costs run 45% of sales. What sales level will be necessary to achieve the net income your boss wants? Round answers to the nearest dollar.

A. $20,349,650 B. $39,523,810 C. $32,337,662 D. $24,871,795

2. Consider two local banks. Bank A has 76 loans outstanding, each for $ 1.0 million, that it expects will be repaid today. Each loan has a 4 % probability of default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of $ 76 million outstanding, which it also expects will be repaid today. It also has a 4 % probability of not being repaid. Which bank faces less risk? Why?

A. The expected payoffs are the same, but Bank A is riskier. I prefer Bank B.

B. In both cases the expected loan payoff is the same: $ 76 million times 0.96 equals $ 73.0 million$76 million×0.96=$73.0 million. Consequently, I don't care which bank I own.

C. The expected payoff is higher for Bank A, but is riskier. I prefer Bank B.

D. The expected payoffs are the same, but Bank A is less risky. I prefer Bank A.

Reference no: EM131954148

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