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Homework answers / question archive / 1) Which of the following are reported as liabilities on a bank’s balance sheet? (a) securities (b) nontransaction deposits (c) loans (d) reserves and cash items 2)Different cash flow
1)
Which of the following are reported as liabilities on a bank’s balance sheet?
(a) securities
(b) nontransaction deposits
(c) loans
(d) reserves and cash items
2)Different cash flow. Given the following cash inflow at the end of each year, what is the future value of this cash flow at 3%, 9%, and 17% interest rates at the end of year 7? What is the future value of this cash flow at 3% interest rate at the end of year 7? $ 231,382.70 (Round to the nearest cent.) What is the future value of this cash flow at 9% interest rate at the end of year 7? (Round to the nearest cent.)
(Click on the following icon in order to copy its contents into a spreadsheet.) Year 1: Year 2: Year 3: Years 4 through 6: Year 7: $14,000 $19,000 $29,000 $0 $160,000
3)Fund A has a front-end load of 4.5% (of the year-beginning amount). Meanwhile, Fund B has a backend load of 6% which decreases by 1% per year. That is, the backend load will be at 5% if the investor sells the fund at the end of year 2, 4% at the end of year 3, and so on, until it becomes zero. In addition, Fund B charges additional 12b-1 fee of 0.5% per year at each year end. Assume Fund A’s net return of the expense ratio per year is 10% and B’s is 11%. Both fund earn the same return. Which fund would an investor choose if he plans to invest for three years (i.e., buy and hold for three years)? Which fund would he choose if he plans to invest for five years? Ten years? Assume there is no income or capital distribution during the holding period and the investor’s choice is based on return only.
4)Your company requires a capital injection of R10 million for equipment replacement and working capital . The investment is required over a period of 4 years. Use the current financial statements of your company to estimate the cash flows. It is expected that your company will grow at 10% for the next 4 years. Beyond 4 years after capital injection, it is expected that the company will grow at constant rate of 4% for the foreseeable future. Therefore, continuing value should also be taken into consideration when performing valuation. Assume the following: ros = 9%; ro = 10%; T =25% TRF = 5.6%; RPM = 6%; b = 1.2 Debt: Price of the bond = R1,153.72; no of bonds = 70,000 bonds Preferred shares: Price = R116.95; no of shares = 200,000 shares Ordinary shares (common): Price = R50.000; no of shares = 3 million shares Required: Perform a valuation analysis taking into consideration for the following: 1. Weighted Average cost of capital (WACC) [20
1)Solution: B. Nontransaction Deposits
For a bank, the assets are the financial instruments that the bank is holding and the liabilities are what the bank owes to others.
Securities are also bank's assets as they earn interest for the banks.
Loans are bank's assets as they can earn through it by the means of interest.
Reserves and Cash items are banks assets as they help the bank to maintain solvency.
Nontransaction deposits are reported as liabilities on bank's balance sheet as the bank has an obligation to pay the depositors once the CD(certificates of deposit) expires.
2)
As per the details given in the question-
Answer -a)
Future value is calculated on excel by formula-
=FV(rate,nper,pmt,[pv],[type])
calculation of fv of 1 year cashflow at 3% interest rate
=FV(3%,6,0,-14000,0) = 16716.73
| Interest rate | 3% | ||
| Future value at end of year | 7 | ||
| year | cashlow | remaining years | Future cashflows |
| 1 | 14000 | 6 | $16,716.73 |
| 2 | 19000 | 5 | $22,026.21 |
| 3 | 29000 | 4 | $32,639.76 |
| 4 | 0 | 3 | $0.00 |
| 5 | 0 | 2 | $0.00 |
| 6 | 0 | 1 | $0.00 |
| 7 | 160000 | 0 | $160,000.00 |
| Future value at end of year 7 | $231,382.70 |
Answer- b)
| Interest rate | 9% | ||
| Future value at end of year | 7 | ||
| year | cashlow | remaining years | Future cashflows |
| 1 | 14000 | 6 | $23,479.40 |
| 2 | 19000 | 5 | $29,233.86 |
| 3 | 29000 | 4 | $40,935.87 |
| 4 | 0 | 3 | $0.00 |
| 5 | 0 | 2 | $0.00 |
| 6 | 0 | 1 | $0.00 |
| 7 | 160000 | 0 | $160,000.00 |
| Future value at end of year 7 | $253,649.12 |
Answer-c)
| Interest rate | 17% | ||
| Future value at end of year | 7 | ||
| year | cashlow | remaining years | Future cashflows |
| 1 | 14000 | 6 | $35,912.30 |
| 2 | 19000 | 5 | $41,656.51 |
| 3 | 29000 | 4 | $54,342.73 |
| 4 | 0 | 3 | $0.00 |
| 5 | 0 | 2 | $0.00 |
| 6 | 0 | 1 | $0.00 |
| 7 | 160000 | 0 | $160,000.00 |
| Future value at end of year 7 | $291,911.54 |
Same Future value formula is applicable while calculation of future value at the end of year 7, only interest rate is change.
I hope this clear your doubt.
Feel free to comment if you still have any query or need something else. I'll help asap.
3)
Best fund to invest for 3 years is as follows
a.) Fund A Front - end load (charge paid at the time of purchase of a fund) is 4.5%. Whereas for Fund B - backend load fee (paid at the time of redumption) at the end of 3 years will be 4%
b.) Additional fees of 0.5% per year at the end of the year.
c.) Expense ratio for fund B is 11% as compared to 10% for fund A. (how much the fund charges in terms of percentage annually to manage your investment portfolio)
Considering the above details Fund B is a costlier fund (4% charge at redeem + 0.5% per year additional fees+ 11% per year for management) when compared to Fund A (4.5% charge at the time of purchase) even though they have the same returns. Hence invest in A.
Best fund to invest for 5 years is as follows
All the conditions are same except
a.) Whereas for Fund B - backend load fee (paid at the time of redumption) at the end of 5 years will be 2%. Still Fund A is a better fund to invest in as Fund B will be charging higher cululatively.
4)
Given,
rPS = cost of preference share = 9%
rd= Pre Tax cost of debt = 10%
T = Tax Rate = 25%
rRF = risk free rate = 5.6%
RPM = risk premium = 6%
b = beta= 1.2
Formula to calculate cost of equity (rE) and post tax cost of debt(rD),
Cost of Equity = rE = rF + b * ( RPM )
rE = 5.6%+1.2*(6%)
rE= 12.8%
Post tax cost of debt = rD = rd *(1-T)
rD = 10% * (1-25%)
rD = 7.5%
Below, table shows the market value and weight of the instruments,
Market value = Price * Shares Outstanding
Weight of Instrument = Market value of Instrument / Total Market Value
| Instrument | Price | Outstanding | Calculation for Market Value | Market Value ( P*N) | Calculation for weightage | Weight of Instrument |
| Debt | 1153.72 | 70,000 | =1153.72*70000 | 80760400 | =80760400/254150400 | 0.32 |
| Preferance shares | 116.95 | 200000 | =116.95*200000 | 23390000 | =23390000/254150400 | 0.09 |
| Common Shares | 50 | 3000000 | =50*3000000 | 150000000 | =150000000/254150400 | 0.59 |
| Total Value | 254150400 | 1 |
Formula to calculate WACC,
WACC = (Weight of debt * Post tax Cost of debt ) + (Weight of Preference Shares * Cost of Preference Shares) + (Weight of Common shares * cost of equity)
WACC = (0.32 * 7.5%) + (0.09*9%) + (0.59*12.8%)
WACC = 10.76%
