A company has approached your bank with a request for a $$3$ billion unsecured Line of Credit. The facility will be fully utilized. Your bank's policy on such facilities is to request clients to maintain $12-$

month average balances equivalent to $5\%$ of the Line of Credit with the bank for the duration of the loan and the activity costs on the balance is $4\%.$ The bank charges arrangement fees of $2\%,$ its

funding cost is $8\mathrm{.}25\%$ and it incurs $3\%$ in administering the facility. Loan loss expenses have averaged $1\%$ in the past but are expected to rise by $50\%$ immediately. The bank falls in the $7\%$ equity reserve requirement bracket and its profits are taxable at $35\%.$

Required

i$.$ Calculate the Yield, Return on Assets $($ROA$)$ and Return on Equity $($ROE$)$ given that a

hurdle interest rate of $12\%$ has been suggested for the facility. State formulae and show all

workings.

ii$.$ Is the hurdle rate in i$)$ above appropriate given that the required ROE is $10\%?$ Explain

iii. Identify and explain any three stub categories of expenses that have to be considered in calculating the cost of funds