Question
Question 3 (15 marks) Alice Bank has an ROE objective of 12%, is subject to an average tax rate of 35%, and provides the
Question 3 (15 marks) Alice Bank has an ROE objective of 12%, is subject to an average tax rate of 35%, and provides the following information regarding the loans that it extends to its corporate customers: Liquidity requirement of the bank (as a % of total assets) Yield earned on liquid assets 6.0% 1.5% Deposit rate paid by the bank 0.25% Default probability of the loan 4.5% Estimated recovery rate 68.0% Capital adequacy rate 8.0% Capital adequacy weighting of the loan 100.0% Administrative costs 2,000$ A corporate customer of Alice Bank has received an offer for a $25 million for 5 years loan from a competing bank, at a rate of 2.8% p.a. Alice assesses that corporates is that sector usually have a default probability of 4.5% and a recovery rate of 68%. a) Compute Alice Bank's rate and assess whether it could keep its customer? (12 marks) b) Based on your answer in (a), what else could Alice Bank do to attract the loan? (3 marks)
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