4) Stack Ford Bank is a mid-tier Bank and has more than 500 branches in Middle East. At the end of CY19, the Bank has total assets of $58Bn and net worth of $7Bn. In CY19, the Bank has expanded with addition of 100 more branches which has resulted in deposits and advances growth of 18% and 12%, respectively. The directors of Stack Ford Bank has established Treasury & Investment Policy framework in which they have planned to keep total investments of the Bank to 35% -45% of total assets at all point in time which will be primarily in Equities depending on economic outlook (currently 30% invested). At the end of CY18, the Bank reported total advances and total deposits of $15Bn and $35Bn. Since last 3 years, the momentum of rising interest rate is continuing which has made favorable conditions for the Bank to achieve growth. Millennium Corporation is one of the oldest and well reputed client of Stack Ford Bank with history of long term relationship and timely payments. Millennium Corporation operates in automobile parts & accessories industry having 25% market share and operates under Just in Time policy (JIT). In CY19, fire incident took place at Millennium Corporation which has significantly damaged the manufacturing unit of the Company. This lead to disruption in Company's operation for almost one quarter which resulted in loss of orders as the Company operates under JIT system. Further, due to the rising interest rates some dip was also witnessed in auto financing sector which ultimately affected demand of automobile parts & accessories. Due to this incident and fall in demand, Millennium was unable to pay off its debt obligations in timely manner (including Stack Ford Bank outstanding). The loss which took place on the manufacturing site due to fire incident was partially borne by insurance company. The Company is currently operating at full capacity of 75% as the existing plant can only operate at maximum 75% capacity due to plant efficiency loss which occurred due to fire incident which is irrecoverable. Capital expenditure of $30Mn is required on existing plant to recover the 25% loss of operating capacity. Recently, the Mr. Jimmy Parker (Finance Manager) of Millennium Corporation has proposed senior management to set up another plant instead of incurring capital expenditure on existing plant. Mr. Parker supported his proposal by presenting capital budget of new project and stated that this investment will enhance our market share to 40% and we will become largest supplier in the industry. He further added that discount rate peak is over and going forward, interest rates are expected to decline which will boost auto financing which will result in demand uptick in automobile parts and accessories industry. In addition, Mr. Jimmy recommended capital structure of 75% debt and 25% equity for funding this project investment of $30Mn. Required: Based on the aforementioned scenario, answer the following questions. (Assume normal situation of Global Economy excluding COVID - 19 impact) Financial Markets & Institutions - Salman Badami Summer 2020 - Final Exam Page 5 of 6 (a) Compute Investment to Deposit Ratio (IDR) & Advance to Deposit Ratio (ADR) of Stack Ford Bank for CY19. (3 marks) (4 marks) (b) Apprise the impact of rising interest rate on ADR & IDR of Stack Ford Bank. (c) Based on the aforementioned scenario, discount rate peak is over and going forward interest rates are expected to fall. In this case, what should be the strategy of Stack Ford Bank? (4 marks) (d) As per the investment proposal presented by Mr. Parker in which interest rates are expected to fall, the Company should opt this expansion decision? Why or Why not? (4 marks) (e) What aspects Stack Ford Bank should consider/evaluate for providing this loan to Millennium Corporation. (4 marks) (f) Based on the aforesaid case, Stack Ford Bank should provide this financing? Why or Why not? Give your view. (4 marks) (g) Suppose Stack Ford Bank agreed to provide this loan of $22.5Mn at a pricing of 3M LIBOR +0.7% for 6 years. Collateral will be charge on Fixed Assets with Security Margin of 20%. What will be the security charge amount for this loan? (2 marks) (h) Based on the above-mentioned scenario, Stack Ford Bank will provide this financing ($22.5Mn at a pricing of 3M LIBOR +0.7% for 6 years) with consortium of Banks. In your opinion, which type of financing this will be and what should be the appropriate pricing for this type of financing? Why? (5 marks)