Q1. A bank is using the RAROC to evaluate large business loans. The benchmark rate of return is 7.55 percent. The one-year loan interest rate is 8.00 percent and the bank must pay 7.40 percent to raise the funds. The cost to service the loan is 0.3 percent. If the loan defaults, 92 percent of the money lent will be lost. Based on historical default rates, the extreme worst-case loss scenario is about 5 percent. Should the bank make the loan? Why or why not? 5 marks

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