EBK FUNDAMENTALS OF CORPORATE FINANCE
9th Edition
ISBN: 9781260049237
Author: BREALEY
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 19, Problem 17QP
Summary Introduction
To create: A re-calculated financial statement of company DM.
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a) A commercial bank is planning to give a loan of $3,000,000 to a firm. The bank expects to charge an up-front fee of 0.15% and a service fee of 0.04%. The loan has a maturity of 10 years. The cost of funds (and the RAROC benchmark) for the commercial bank is 12%. The commercial bank has estimated the risk premium on the loan to be approximately 0.20%, based on three years of historical data. The current market interest rate for loans in this sector is 12.15%. The 99th (extreme case) loss rate for borrowers of this type has historically run at 4%, and the dollar proportion of loans of this type that cannot be recaptured on default has historically been 85%. The 'bank's Return on Equity (ROE) ratio is 13%. Using the risk-adjusted return on capital (RAROC) model, should the commercial bank make the loan? Please show each step of your calculation.
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Chapter 19 Solutions
EBK FUNDAMENTALS OF CORPORATE FINANCE
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