2. Consider the following income statement for WatchoverU Savings Inc. (in millions): (LG 19-1)
ssets liabilities
floating rate NOW account (6% annually) 70
mortgages(currently10%annually) $50 Time deposit (6% annually) 20
30-year fixed rate loans(7%annually) 50 Equity 10
Total 100 Total 100
a.What is WatchoverU s expected net interest income at year-end?
b.What will be the net interest income at year-end if interest rates rise by 2 percent?
The following is ABC, Inc. s, balance sheet (in thousands): (LG 20-5)
Assets Liabilities
Cash 20 Accounts payable 30
Accounts receivable 90 notes payable 90
inventory 90 accruals 30
plant and equip 500 long term debt 150
total 700 equity 400
total 700
Also, sales equal $500, cost of goods sold equals $360, interest payments equal $62, taxes equal $56, and net income equals $22. The beginning retained earnings is $0, the market value of equity is equal to its book value, and the company pays no dividends.
a.Calculate Altman s Z-score for ABC, Inc., if ABC has a 50 percent dividend payout ratio and the market value of equity is equal to its book value. Recall the following: Net working capital = Current assets Current liabilities Current assets = Cash+ Accounts receivable+ Inventories Current liabilities = Accounts payable+Accruals+Notes payable EBIT = Revenues Cost of goods sold Depreciation Taxes = (EBIT Interest)(Tax rate) Net income = EBIT Interest Taxes Retained earnings = Net income(1 Dividend payout ratio)
b.Should you approve ABC Inc. s application to your bank for $500,000 for a capital expansion loan?
c.If ABC s sales were $450,000, taxes were $16,000, and the market value of equity fell to one-quarter of its book value (assume cost of goods sold and interest are unchanged), how would that change ABC s income statement? If ABC s tax liability could be used to offset tax liabilities incurred by the other divisions of the firm, would your credit decision change?
d.What are some of the shortcomings of using a discriminant function model to evaluate credit risk?
6.
A DI has the following assets in its portfolio: $20 million in cash reserves with the Fed, $20 million in T-bills, and $50 million in mortgage loans. If it needs to dispose of its assets at short notice, it will receive only 99 percent of the fair market value of the T-bills and 90 percent of the fair market value of its mortgage loans. If the DI waits one month to liquidate these assets, it would receive the full fair market value for each security. Calculate the one-month liquidity index using the above information.