Question

In: Finance

A bank is considering some investment portfolio shifting. In doing so, the bank is considering selling...

  1. 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.

  1. Calculate the TOTAL net effect on the bank’s earnings in the current full year resulting from the shift. (12 points)
  1. 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.

The obtained result is provided below.


Related Solutions

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 $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...
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...
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,...
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...
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,...
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...
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...
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?  ...
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...
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...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT