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# 2 Consider the following income statement for WatchoverU Savings Inc. (in millions): Assets Liabilities Floating-rate mortages (currently 10%

2 Consider the fol owing income statement for WatchoverU Savings Inc. (in mil ions): Assets Liabilities \$50 \$70 50 20 Equity 10 Total \$100 \$100 a. What is WatchoverU’s expected net interest income at year-end? b. What wil be the net interest income at year-end if interest rates rise by 2 percent? 10. The fol owing is ABC, Inc.’s, balance sheet (in thousands): Assets Amount Liabilities Amount Cash 20 Accounts payable 30 Acciunts Receivable 90 Notes payable 90 Inventory 90 Accruals 30 Plant and equipment 500 Long term debt 150 Total 700 Equity 400 700 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. Recal the fol owing: Net working capital ; equals ; Current assets − Current liabilities ; Current assets ; equals ; Cash positive Accounts receivable plus Inventories ; Current liabilities ; equals ; Accounts payable positive Accruals plus Notes payable ; EBIT ; equals ; Revenues − Cost of goods sold − Depreciation ; Taxes ; equals ; open parenthesis EBIT − Interest close parenthesis open parenthesis Tax rate close parenthesis ; Net income ; equals ; EBIT − Interest − Taxes ; Retained earnings ; equals ; Net income open parenthesis 1 − Dividend payout ratio close parenthesis ; 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 fel 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 chang d. What are some of the shortcomings of using a discriminant function model to evaluate credit risk? 6 6 A DI has the fol owing assets in its portfolio: \$20 mil ion in cash reserves with the Fed, \$20 mil ion in T-bil s, and \$50 mil ion in mortgage loans. If it needs to dispose of its assets at short notice, it wil receive only 99 percent of the fair market value of the T-bil s 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 ful fair market value for each security. Calculate the one-month liquidity index using the above information Floating-rate mortages (currently 10% annual y) NOW accounts (currently 6% annual y) 30- year fixed rate loans (currently 7% annual y) Time deposits (currently 6% annual y)
2 Consider the following income statement for WatchoverU Savings Inc. (in millions): Assets Liabilities Floating-rate mortages (currently 10% annually) \$50 NOW accounts (currently 6% annually) \$70 30- year fixed rate loans (currently 7% annually) 50 Time deposits (currently 6% annually) 20 Equity 10 Total \$100 \$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? 10. The following is ABC, Inc.’s, balance sheet (in thousands): Assets Amount Liabilities Amount Cash 20 Accounts payable 30 Acciunts Receivable 90 Notes payable 90 Inventory 90 Accruals 30 Plant and equipment 500 Long term debt 150 Total 700 Equity 400 700 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 b. market value of equity is equal to its book value. Recall the following: Net working capital ; equals ; c. Current assets − Current liabilities ; Current assets ; equals ; Cash positive Accounts receivable plus d. Inventories ; Current liabilities ; equals ; Accounts payable positive Accruals plus Notes payable ; EBIT ; e. equals ; Revenues − Cost of goods sold − Depreciation ; Taxes ; equals ; open parenthesis EBIT f. − Interest close parenthesis open parenthesis Tax rate close parenthesis ; Net income ; equals ; g. EBIT − Interest − Taxes ; Retained earnings ; equals ; Net income open parenthesis 1 − Dividend h. payout ratio close parenthesis ; 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 information

2 Consider the following income statement for WatchoverU Savings Inc. (in millions):
Assets Liabilities Floating-rate mortages
(currently 10%
annually) NOW accounts (currently 6%
\$50 annually) 30-...

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