Question
AllStarBank has the following balance sheet (in millions): Assets Liabilities and Equity Cash $40 Deposits $100 Securities $90 Borrowed Funds $40 Loans $40 Equity $30
AllStarBank has the following balance sheet (in millions):
Assets
Liabilities and Equity
Cash
$40
Deposits
$100
Securities
$90
Borrowed Funds
$40
Loans
$40
Equity
$30
Total Assets
$170
Total liabilities & Equity
$170
AllStarBank's largest customer decides to exercise a $25 million loan commitment.In addition, a net withdrawal of $25 million in deposits occurs.
How will the new balance sheet appear if AllStar uses the following liquidity risk strategies?Fill in the values for each categoryand determine Total Assets and Total Liabilities & Equity. (Assume that the bank will not draw down cash reserves unless it has exhausted supplies of other liquid assets and assume all securities are liquid.)
a)Use Stored Liquidity. (1 Mark)(Copy and paste the table into the answer box)
Assets
Liabilities and Equity
Cash
Deposits
Securities
Borrowed Funds
Loans
Equity
Total Assets
Total liabilities & Equity
b)Use Purchased Liquidity. (1 Mark)(Copy and paste the table into the answer box)
Assets
Liabilities and Equity
Cash
Deposits
Securities
Borrowed Funds
Loans
Equity
Total Assets
Total liabilities & Equity
c)Which of the two options entails greater insolvency risk? Verify this by computing a relevant ratio for the two liquidity sourcing options and comparing.(1 mark)
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Accounting What the Numbers Mean
Authors: David H. Marshall, Wayne W. McManus, Daniel F. Viele,
9th Edition
978-0-07-76261, 0-07-762611-7, 9780078025297, 978-0073527062
