a) Define "compensating balances" in the context of bank lending. Give anumericalexample to illustrate how compensating balances can be used by banks to change the effective rate of return earned on loans.

b)The Altman's Z-score model is a linear discriminant model used to predict manufacturing firms' default risk.

(i)Calculate the Z-score for Lancaster Manufacturing Ltd., with the following information (in $ million).Working Capital = 250, Total Assets = 4560, Earnings before Interest and Taxes (EBIT) = 750, Net Income = 370, Market Value of Equity = 2340, Book Value of Long-Term Debt = 1100, Sales = 1550, Dividend Payout Ratio = 45%.

(ii)Interpret the Z-score calculated in part (i). If you are a bank manager, will you lend to Lancanster Manufacturing Ltd.? Explain your answer.