Question

Q1: You are to prepare a presentation for an upcoming strategic planning meeting at the bank. You have been asked to determine which of two products the bank should invest $5B, Product X or Product Y. The bank will hold either product on its balance sheet as whole loans that carry a 50% risk weight and the binding regulatory constraint is 8% leverage ratio. Net income for Product X is .5% and 1.5% for Product Y. Losses on Product X and Y are expected to be 1.5% and 3%, respectively. Your risk team determines that the 99th percent worst loss for Product X and Y are 4.5% and 14%, respectively. The target hurdle rate for the company is 15%. Which investment do you recommend to the Executive Committee and why – full credit requires all work to be shown.

Q.2 How would you characterize the previous question in terms of SVA?

Answer 1

Answer A)

F all data in question are correct , the answer will be as below

The target hurdle rate( the minimum rate that a company expects to earn) for the company is 15%.

Net income for Product X is .5% and 1.5% for Product Y.

None of the product justify to be invested by the bank to meet the required hurdle rate.

Answer B)

SVA,(Shareholder value added) is a total measure of the net operating incomes that a company has generated in excess of cost of capital or sometime funding cost. It is calculated as difference between the net operating profit after tax (NOPAT) and cost of capital. NOPAT , excludes all types of extraordinary items, a more precise measure than the net profit of a company's ability to earn income from regular operations andactivity. Extraordinary items can include restructuring costs and any other one-time expenses.The activity is above question , investment is consider as part of core business in the banking . The benefit or loss from activity will have direct impact on SVA