A bank is considering some investment portfolio shifting. In
doing so, the bank is considering selling...
A bank is considering some investment portfolio shifting. In
doing so, the bank is considering selling $1,000,000 in 2 year
state government bonds with a coupon interest of 4 percent, and
purchasing $1,000,000 in 2 year county government bonds with a
coupon interest of 5 percent issued at par. The state bonds being
sold are listed at par on the bank’s books but they have a current
market value of $950,000
Assume that the bank’s corporate
income tax rate is 35 percent.
Calculate the TOTAL net effect on the bank’s earnings in the
current full year resulting from the shift. (12 points)
Calculate the dollar income tax impact for the bank in the
current year. Your answer must also indicate whether this is a tax
benefit or a tax liability. (3 points)
Solutions
Expert Solution
Use a spreadsheet for the ease in computations. Enter the values
and the formulas in the spreadsheet as shown in the image
below.
A bank is considering some investment portfolio shifting. In
doing so, the bank is considering selling $10,000,000 in 3 year
state government bonds with a coupon interest of 2 percent, and
purchasing $10,000,000 in 3 year city government bonds with a
coupon interest of 3 percent issued at par. The county bonds being
sold are listed at par on the bank’s books but they have a current
market value of $9,000,000
Assume that the bank’s corporate income tax rate is...
Umatilla Bank and Trust is considering giving Metlock, Inc. a
loan. Before doing so, it decides that further discussions with
Metlock’s accountant may be desirable. One area of particular
concern is the Inventory account, which has a year-end balance of
$290,900. Discussions with the accountant reveal the
following.
1.
Metlock shipped goods costing $31,300 to Hemlock Company FOB
shipping point on December 28. The goods are not expected to reach
Hemlock until January 12. The goods were not included in...
5th Third Street Bank is considering giving Fallen Company a
loan. Before doing so, it decides that further discussions with
Fallen’s accountant may be desirable. One area of particular
concern is the inventory account, which has a year‐end balance of
$375,000. Discussions with the accountant reveal the following.
1. Fallen sold goods costing $55,000 to White Company FOB
shipping point on December 28. The goods are not expected to reach
White until January 12. The goods were not included in...
Exercise 6-1
Umatilla Bank and Trust is considering giving Blossom Company a
loan. Before doing so, it decides that further discussions with
Blossom Company’s accountant may be desirable. One area of
particular concern is the Inventory account, which has a year-end
balance of $250,820. Discussions with the accountant reveal the
following. 1. Blossom Company sold goods costing $54,230 to Hemlock
Company FOB shipping point on December 28. The goods are not
expected to reach Hemlock until January 12. The goods...
Tri-State Bank and Trust is considering giving Novak Corp. a
loan. Before doing so, management decides that further discussions
with Novak’s accountant may be desirable. One area of particular
concern is the inventory account, which has a year-end balance of
$342,900. Discussions with the accountant reveal the following.
1. Novak sold goods costing $37,300 to Sorci Company, FOB
shipping point, on December 28. The goods are not expected to
arrive at Sorci until January 12. The goods were not included...
Exercise 6-1 Tri-State Bank and Trust is considering giving
Josef Company a loan. Before doing so, management decides that
further discussions with Josef’s accountant may be desirable. One
area of particular concern is the inventory account, which has a
year-end balance of $348,500. Discussions with the accountant
reveal the following. 1. Josef shipped goods costing $38,900 to
Sorci Company, FOB shipping point, on December 28. The goods are
not expected to arrive at Sorci until January 12. The goods were...
This is so hard especially the BETA portfolio I cannot
calculate.
Your investment
portfolio consists of the following stocks
Investment Portfolio
Name
Price
Beta
# shares
Dow Chemical
$ 59.72
1.34
15,000
Walmart
$ 69.32
0.19
3,000
Boeing
$ 128.00
1.36
8,000
Verizon
$ 52.61
0.45
6,000
Consolidated Edison
$ 74.00
0.17
3,000
Caterpillar
$ 75.00
1.5
13,000
Deutsche bank
$ 22.55
1.4
9,000
a) What is the portfolio
beta?
b) What is the required return
on the portfolio if the...
List and explain the objectives of the investment
portfolio at a bank. Give examples of specific investments and
explain how each one might help with one or more
objectives.
Why do companies allocate costs? What are some of the advantages
and disadvantages to doing so?
What are the similarities and differences among the direct
method, the step method and the reciprocal method of allocating
costs?
Accounting is objective and precise. Therefore, performance
measures based on accounting numbers must be objective and precise.
Do you agree? Why or why not?
Suppose the Indian central bank (RBI) increases its target
overnight interest rate. In doing so it is clearly trying to
increase interest rates in the money market (and throughout the
economy).
(c) Suppose we could treat the Indian economy as a closed one.
What effect will the results of the policy have on investment, on
aggregate expenditure? Include diagrams in your answer.
(d) Although not as open to capital flows as Canada, we can
think of India is an open...