Premium Bank is considering granting a $1.5 million line of credit for six months at 12% per annum to Environ Ltd., an energy generating company. It is assumed that Environ will use the full line of credit but must maintain a 20% compensating deposit with Premium Bank. The Bank is required to maintain a 10% statutory reserve requirement with the central bank. The following table provides information on the bank's revenues and expenses that should result from dealing with this customer: Premium Bank's Revenue and Expense Statement Sources of Revenue Expected to Be supplied by This Customer Interest income from loan (12% for six months) ? Loan commitment fees (1%) ? Fee for managing customer's deposits 45,000 Fund transfers charges 5,000 Fees for trust services and recordkeeping 61,000 Total revenues expected $216,000 Costs Expected to Be Incurred in Serving This Customer Deposit interest owed the customer account pays 10% per year) ? Cost of funds raised to lend to this customer ? Activity costs for this customer's account 25,000 Cost of funds transfers for this customer 1,000 Cost of processing the loan 3,000 Recordkeeping costs 1,000 Total expenses expected $143,400 Net Amount of the Bank's Reserves Expected to be Drawn Upon by This Customer Average amount of credit committed to customer $1,500,000 Less: Average customer deposit balances (net of required reserves) ? Net amount of loanable reserves committed to customer ? You are required to: (a) Calculate the missing numbers in the above table. (6 marks) (b) Compute the before-tax rate of return from the entire lender-customer relationship. (5 marks) (C) What decision would you make on the granting of the loan? (4 marks) [Total 15 marks] Premium Bank is considering granting a $1.5 million line of credit for six months at 12% per annum to Environ Ltd., an energy generating company. It is assumed that Environ will use the full line of credit but must maintain a 20% compensating deposit with Premium Bank. The Bank is required to maintain a 10% statutory reserve requirement with the central bank. The following table provides information on the bank's revenues and expenses that should result from dealing with this customer: Premium Bank's Revenue and Expense Statement Sources of Revenue Expected to Be supplied by This Customer Interest income from loan (12% for six months) ? Loan commitment fees (1%) ? Fee for managing customer's deposits 45,000 Fund transfers charges 5,000 Fees for trust services and recordkeeping 61,000 Total revenues expected $216,000 Costs Expected to Be Incurred in Serving This Customer Deposit interest owed the customer account pays 10% per year) ? Cost of funds raised to lend to this customer ? Activity costs for this customer's account 25,000 Cost of funds transfers for this customer 1,000 Cost of processing the loan 3,000 Recordkeeping costs 1,000 Total expenses expected $143,400 Net Amount of the Bank's Reserves Expected to be Drawn Upon by This Customer Average amount of credit committed to customer $1,500,000 Less: Average customer deposit balances (net of required reserves) ? Net amount of loanable reserves committed to customer ? You are required to: (a) Calculate the missing numbers in the above table. (6 marks) (b) Compute the before-tax rate of return from the entire lender-customer relationship. (5 marks) (C) What decision would you make on the granting of the loan? (4 marks) [Total 15 marks]
