As a senior loan officer at MC Bancorp, you have the following loan applications waiting for review. The bank uses Altmans Z score, default probabilities, mortality rates, and RAROC to assess loan acceptability. The banks cost of equity (the RAROC benchmark) is 8 percent. The banks loan policy states that the maximum probability of default for loans by type is as follows

Loan Type and	Maximum Allowable
Maturity	Default Probability
AAA-rated	0.50%
A-rated	1.25%

Which loans should be approved, and which rejected?

An AAA-rated, one-year C&I loan from a firm with a liquidity ratio of 2.15, a debt-to-asset ratio of 45 percent, volatility in earnings of 0.13, and a profit margin of 12 percent. MC Bancorp uses a linear probability model to evaluate AAA-rated loans as follows:

PD = 0.08 X ₁ + 0.15 X ₂ + 1.25 X ₃ 0.45 X ₄

where

X₁ = Liquidity ratio

X₂ = Debt-to-asset ratio

X₃ = Volatility in earnings

X₄ = Profit margin