As a senior loan officer at MC Bancorp, you have the following loan applications waiting for review. Thebank uses Altmans Z score, default probabilities, and RAROC to assess loan acceptability. The bankscost of equity (the RAROC benchmark) is 9.00 percent.The banks loan policy states that the maximumprobability of default for loans by type is as follows:_______________________________________________________________________Maximum Allowable Default ProbabilityAAA-rated0.50%A-rated1.25%Which loans should be given and which should be rejected?

1. An AAA-rated, one-year C&I (commercial & industrial) loan from a firm with a liquidity ratio of2.15, a debt-to-asset ratio of 45 percent, volatility in earnings of 0.13 and a profit margin of 12percent. MC Bancorp uses a linear probability model to evaluate AAA-rated loans as follows:PD = -.08X1 + .15X2 + 1.25X3 -.45X4WhereX1 =Liquidity ratioX2 =Debt-to-asset ratioX3 =Volatility in earningsX4 =Profit margin2.An AA-rated, one-year C&I loan from a firm with the following financial statement information(in millions of dollars):AssetsLiabilities and EquityCash$40Accounts payable$55Accounts receivable120Notes payable60Inventory210Accruals70Long-term debt5501,100Equity (ret. earnings = $200)735Total assets$1,470$1,470Assume sales = $1,250, cost of goods sold = $930, taxes = $70, interest payments = $100, and net income= $150; the dividend payout ratio is 50 percent, and the market value of equity is equal to 2.2 times thebook value. MC Bancorp uses the Altmans Z score model to evaluate AA-rated loans.3.An A-rated corporate loan with a maturity of three years. A-rated corporate loans are evaluatedusing the mortality rate approach.A schedule of historical defaults (yearly and cumulative) experiencedby the bank on its A-rated corporate loans is as follows:Years after IssuanceLoan Type1 year2 years3 years4 yearsA-rated corporate loansAnnual default0.10%0.25%0.40%0.65%Cumulative default0.100.350.751.454.A $2 million, five-year loan to a BBB-rated corporation in the computer parts industry. MB charges