Need help 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%.
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The assets of a bank consist of $300 million of loans to A-rated corporations with the principals being repayable at maturity. The Probability of Default for the corporation is estimated as 0.4% per year. The loan maturities are three years and the LGD is 45%. 1. What is the total risk-weighted assets for credit risk under the Basel II advanced IRB approach? 2. How much Tier 1 and Tier 2 capital is required?
Suppose that the assets of a bank consists of $100 million of loans to A rated corporations. The PD for the corporations is estimated as 0,1% and LGD is 60%. The average maturity is 2.5 years for corporate loans. What is RWA?.
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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%.
Star Bank has estimated that its average VAR over the last 60 days was £35.5 million. The DEAR of the previous day was £30.2 million. Under the latest BIS standards. a) Determine the amount of capital to be held for market risk. b) The bank has £15 million of Tier 1 capital, £37.5 million of Tier 2 capital and £54 million of Tier 3 capital. Is the capital sufficient? If not, what minimum amount and type of new capital should be raised? (Note that capital can be raised from any type subject to Tier 3 capital is limited to 250% of Tier 1 and Tier 2 can be substituted for Tier 3 up to the same 250% limit.) Solution a) £106.5m b) £4.71m
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

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