a) As a senior loan officer at National Capital Bank, you have the following loan application waiting for review. The bank uses Altmans Z-score to assess loan acceptability. The banks cost of equity is 9 per cent. An AA-rated, one-year business loan from a firm with the following financial statement information (in millions of dollars):

Assets			Liabilities and Equity
Cash	$40		Accounts payable	$55
Accounts receivables	120		Notes payable	60
Inventory	310		Accruals	70
			Long-term debt	650
Plant and equipment	1 000		Equity (ret. earnings = $200)	635
Total assets	$1 470		Total liabilities and equity	$1 470

Also assume sales = $1500m, cost of goods sold = $1100m, and the market value of equity is equal to 2.5 times the book value. National Capital Bank uses the Altmans Z-score model to evaluate AA-rated loans. What is the Altman discriminant function value for the loan applicant? Should you approve the application to your bank for a capital expansion loan? (4+1 marks) (b) A DI has the following assets in its portfolio: $25 million in cash reserves with the Reserve Bank, $30 million in T-notes and $40 million in mortgage loans. If the assets need to be liquidated at short notice, the DI will receive only 98 per cent of the fair market value of the T-notes and 90 per cent of the fair market value of the mortgage loans. Estimate the liquidity index for these securities using the above information. (3 marks)