Solve this issue Suppose Levered Bank is funded with 2% equity and 98%debt. Its current market capitalization is $10 billion, andits market-to-book ratio is 1. Levered Bank earns a 4.22%expected return on its assets (the loans it makes) and pays4% on its debt. New capital requirements will necessitatethat Levered Bank increases its equity to 4% of its capitalstructure. It will issue new equity and use the funds toretire existing debt. The interest rate on its debt isexpected to remain at 4%.a. What is Levered Bank's expected ROE with 2% equity?b. Assuming perfect capital markets, what will LeveredBank's expected ROE be after it increases its equity to 4%?

Step 1: Expected ROE with 2% equityEquity CalculationLevered Bank has 2% equity of total assets,…

Answered: Suppose Levered Bank is funded with 2%…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter3: Evaluation Of Financial Performance

Section: Chapter Questions

Problem 7P

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) You are asked to estimate the RAROC of a bank's $100 million loan business, 7.5% of which is the economic capital. The average interest rate is 8%. All the loans have the same default probability of 1.5% with a loss given default of 60%. Operating costs are $15 million, and the funding cost of the business is $30 million. The economic capital is invested and earns 6%.
Assume capital markets are perfect (i.e. the Modigliani- Miller Theorems hold). The Cat Nap Pet Stores capital structure is currently comprised of 13 million dollars of debt and 16 million dollars of equity. If the firm issues 2 million dollars in new debt, what will the value of the company's equity be after the issuance of the new debt?
Suppose that a bank has $10 billion of one-year loans and $30 billion of five-year loans. These are financed by $35 billion of one-year deposits and $5 billion of five-year deposits. The bank has equity totaling $2 billion and its return on equity is currently 12%. Estimate what change in interest rates next year would lead to the bank's return on equity being reduced to zero. Assume that the bank is subject to a tax rate of 30%.
Kohwe Corporation plans to issue equity to raise $50.7 million to finance a new investment. After making the investment, Kohwe expects to earn free cash flows of $10.4 million each year. Kohwe's only asset is this investment opportunity. Suppose the appropriate discount rate for Kohwe's future free cash flows is 7.7%, and the only capital market imperfections are corporate taxes and financial distress costs. a. What is the NPV of Kohwe's investment? b. What is the value of Kohwe if it finances the investment with equity? a. What is the NPV of Kohwe's investment? The NPV of Kohwe's investment is $ million. (Round to two decimal places.) b. What is the value of Kohwe if it finances the investment with equity? The Kohwe finances stment with equity $ million. (Round decimal places.)
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Show the complete solution and explanation. Thank you. 1. A company with cost of capital of 15% plans to finance an investment with debt that bears 10% interest. The rate it should use to discount the cash flows is
a) What is the optimal transaction size? b) What should be Rosal's average cash balance? c) What is the total cost?
Suppose Bank A has $35 million in rate-sensitive assets, $70 million in fixed rate assets, $70 million in rate sensitive liabilities, and $35 million in fixed rate liabilities and equity capital. Calculate the change in Bank A’s profit as a result of an increase in market interest rates of 2 percentage points.
a. Global used $19.8 million of its available cash to repay $19.8 million of its long-term debt. (Select the best choice below.) O A. Long-term liabilities would decrease by $19.8 million, and cash would decrease by the same amount. The book value of equity would change by $19.8. B. Long-term liabilities would decrease by $19.8 million, and cash would increase by the same amount. The book value of equity would be unchanged. C. Long-term liabilities would increase by $19.8 million, and cash would increase by the same amount. The book value of equity would be unchanged. D. Long-term liabilities would decrease by $19.8 million, and cash would decrease by the same amount. The book value of equity would be unchanged.
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Happy Time Inc. is expected to generate the following cash flows for the next year, as shown in the table below. Happy Time now only has one outstanding debt with a face value of $110 million to be repaid in the next year. The current market value for the debt is $67 million. The tax rate is zero. If the firm is financed by common equity and debt, what is the expected value of common equity next year? Cash flow in the next year Probability Amount Economy Boom 0.3 $110 million Normal 0.4 $101 million Recession 0.3 $61 million $26.8 million $24.7 million $0 -$18.3 million

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