A DI has assets of $30 million consisting of $7 million in cash and $23 million...

A DI has assets of $30 million consisting of $7 million in cash and $23 million in loans. It has core deposits of $20 million. It also has $5 million in subordinated debt and $5 million in equity. Increases in interest rates are expected to result in a net drain of $1 million in core deposits over the year. a-1. The average cost of deposits is 5 percent and the average yield on loans is 8 percent. The DI decides to reduce its loan portfolio to offset this expected decline in deposits. What is the cost of the firm from this strategy after the drain? (Enter your answer in dollars not in millions.) Cost of the drain $ a-2. What will be the total asset size of the firm from this strategy after the drain? (Enter your answer in millions.) Total asset size $ million b-1. If the cost of issuing new short-term debt is 6.2 percent, what is the cost of offsetting the expected drain if the DI increases its liabilities? (Enter your answer in dollars not in millions.) Cost of the drain $ b-2. What will be the total asset size of the DI from this strategy after the drain? (Enter your answer in millions.) Total asset size $ million

Expert Solution

DI

a-1. The average cost of deposits is 5 percent and the average yield on loans is 8 percent.
The DI decides to reduce its loan portfolio to offset this expected decline in deposits.
What is the cost of the firm from this strategy after the drain?

Assuming that the decrease in loans is offset by an equal decrease in deposits, the cost of
the drain = (0.08 – 0.05) x $1 million = $30,000.


a-2. What will be the total asset size of the firm from this strategy after the drain?

The average size of the firm will be $29 million after the drain.

b-1. If the cost of issuing new short-term debt is 6.2 percent,what is the cost of offsetting
the expected drain if the DI increases its liabilities?

Cost of the drain = (0.062 – 0.05) x $1 million = $12,000

b-2. What will be the total asset size of the DI from this strategy after the drain?

The average size of the firm will be $30 million after the drain.

Purchasing interest-bearing liabilities may cost significantly more than the cost rate on
deposits that are leaving the bank. However, using interest-bearing deposits protects the
bank from decreasing asset size or changing the composition of the asset side of the
balance sheet.

jeff jeffy answered 2 years ago

A DI has assets of $17 million consisting of $7 million in cash and $10 million...

A DI has assets of $17 million consisting of $7 million in cash and $10 million in loans. It has core deposits of $13 million. It also has $2 million in subordinated debt and $2 million in equity. Increases in interest rates are expected to result in a net drain of $1 million in core deposits over the year. a-1. The average cost of deposits is 2 percent and the average yield on loans is 5 percent. The DI decides...

7. Consider a F/I with the following balance sheet: Assets consisting of Cash of $150M; Loans...

7. Consider a F/I with the following balance sheet: Assets consisting of Cash of $150M; Loans of $1,500M at 12% with a duration of 1.75 years; and, Treasuries of $350M at 9% with a 7.00 year duration. Liabilities consisting of time deposits of $700M at 7% with a 1.75 year duration; CDs of $1,150M at 8% with a duration of 2.50 years; and, equity of $150M. Calculate the duration gap and state the F/I's interest rate risk exposure. +1.03 years;...

ABC has accumulated $23 million in assets, operating income of $1.75 million. The tax rate is...

ABC has accumulated $23 million in assets, operating income of $1.75 million. The tax rate is 35%. It finances 25%, 50% and 75% of its assets with debt at costs of 9%,10& and 12% respectively. Discuss your results. a. Determine the ROE under three models. b. Which capital structure is best and why? c. What if EBIT increases by 10%, which capital structure is best?

7) Assume the following: Cash Flow From Assets = $30; Interest Expense = $7; Dividends =...

7) Assume the following: Cash Flow From Assets = $30; Interest Expense = $7; Dividends = $5 and the firm paid off $12 in long-term debt. According to the Cash Flow Identity _____ its common stock in the amount of ___? A) repurchased; 6$ B) Issued 6$ C) issued $54 D) repurchased; $24

Alright Insurance has total assets of $140 million consisting of $50 million in 2-year, 6 percent...

Alright Insurance has total assets of $140 million consisting of $50 million in 2-year, 6 percent Treasury notes, and $90 million in 10-year, 7.2 percent fixed-rate Baa bonds. These assets are funded by $100 million 5-year, 5 percent fixed-rate GICs, and equity. Market interest rates are expected to increase by 1 percent to 11 percent in the next year. If this occurs, what will be the effect on the market value of equity of Alright?

A DI has $14 million in T-bills, a $9 million line of credit to borrow in...

A DI has $14 million in T-bills, a $9 million line of credit to borrow in the repo market, and $9 million in excess cash reserves with the Fed. The DI currently has borrowed $7 million in fed funds and $3 million from the Fed discount window to meet seasonal demands. a. What is the DI’s total available (sources of) liquidity? b. What is the DI’s current total uses of liquidity? c. What is the net liquidity of the DI?...

A DI has $18 million in T-bills, a $12 million line of credit to borrow in...

A DI has $18 million in T-bills, a $12 million line of credit to borrow in the repo market, and $12 million in excess cash reserves with the Fed. The DI currently has borrowed $14 million in fed funds and $10 million from the Fed discount window to meet seasonal demands. a. What is the DI’s total available (sources of) liquidity? b. What is the DI’s current total uses of liquidity? c. What is the net liquidity of the DI?...

The Singer Division of Patio Enterprises currently earns $3.22 million and has divisional assets of $23...

The Singer Division of Patio Enterprises currently earns $3.22 million and has divisional assets of $23 million. The division manager is considering the acquisition of a new asset that will add to profit. The investment has a cost of $3,459,000 and will have a yearly cash flow of $861,000. The asset will be depreciated using the straight-line method over a six-year life and is expected to have no salvage value. Divisional performance is measured using ROI with beginning-of-year net book...

12. Plainbank has $10 million in cash and equivalents, $30 million in loans, and $15 million...

12. Plainbank has $10 million in cash and equivalents, $30 million in loans, and $15 million in core deposits. a. Calculate the financing gap. b. What is the financing requirement? c. How can the financing gap be used in the day-to-day liquidity management of the bank?

Sand Key Development Company has a capital structure consisting of $20 million of 10% debt and $30 million of common equity.

Sand Key Development Company has a capital structure consisting of $20 million of 10% debt and $30 million of common equity. The firm has 500,000 shares of common stock outstanding. Sand Key is planning a major expansion and will need to raise $15 million. The firm must decide whether to finance the expansion with debt or equity. If equity financing is selected, common stock will be sold at $75 per share. If debt financing is chosen, 6% coupon bonds will...

Question