FINE 442 Chapter Notes - Chapter 12: Asset Turnover, Repurchase Agreement, Demand Deposit

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14 Apr 2015

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Questions: the report of condition refers to the bank"s balance sheet which presents information about the accumulation of assets, liabilities, and equity as of a specific point in time. They represent a more permanent source of funds. Purchased funds, such as brokered deposits, wholesale cds, repos, notes and debentures, are more interest rate sensitive and more likely to be withdrawn at short notice. They are not considered a permanent source of funding: the four categories are: If the activity position at the end of the year is not representative of activity during the year, then the ratios may not properly represent the financial position of the bank. In this sense, the asset utilization ratios are much smaller and the equity multiplier ratios are much larger for banks compared to a retail company: both are measures of profitability and, to some extent, efficiency.

Related Questions

8. Which of the following would require a higher return under a risk-adjusted return on capital (RAROC) approach to capital allocation?

a)traditional commercial lending activities

b)government securities

c) home mortgages

d) 2 and 3.

9. Trend analysis often involves

a) comparison of past firm performance to current industry performance

b)averaging past years' performance to remove the effects of accounting changes

c) graphically portraying performance measures over time

d) all of the above

e) 1 and 3

10. Transaction risk is the risk of a loss _______ and translation risk is the risk of a loss _______

a) in the value of a firmâs equity with assets denominated in one currency and liabilities in another; with changes in exchange rates for foreign transactions

b) with changes in exchange rates for foreign transactions; in the value of a firmâs equity with assets denominated in one currency and liabilities in another

c) in the value of a firmâs assets with equity denominated in one currency and liabilities in another; with changes in exchange rates for foreign transactions

d) none of the above

11. The special-purpose vehicle (SPV)

a) allows sales accounting treatment of under generally accepted accounting principles (GAAP)

b) usually reduces the credit rating of the structured securitization

c) monitors reports by the loan servicer on the pool performance

d) all of the above

12. The major financing source for a bank comes from

a) loans

b) deposits

c) equity

d) none of the above

13. The provision for loan losses would likely be

a) increased during economic downturns

b) decreased during economic downturns

c) increased during an economic expansion

d) none of the above

e) 2 and 3

14. The Internet

a) may allow banks to cross-sell products, reduce transaction costs, and improve market presence, service, and quality provided to customers

b) may make customers more loyal to the bank by increasing the convenience and access to a broad variety of services, thereby reducing the probability of customersâ switching institutions

c) has increased costs for financial institutions due to lack of economies of scale

d) 1 and 2

15. Pillar 2 of Basel II

a) includes capital charges for credit risk on a case-by-case basis

b) is mutually enforced by Pillars 1 and 3

c) provides for supervisory review of banks internal assessments of capital allocation and adequacy

d) all of the above

e) 2 and 3

16. Types of loan sales include

a) the novation, which transfers all rights and obligations of the selling bank to the buyer

b) the assignment, which gives the buyer the right to take action against the borrower if payments are not made

c) the participation, in which the bank continues to service the loan

d) all of the above

17. The difference between the book value of capital and the market value of capital for the same institution is influenced by

a) changes in interest rates

b) changes in reserve requirements

c) changes in historic asset costs

d) none of the above

e) all of the above

18. Financial institutions are required to maintain liquid assets for the purpose(s) of

a) meeting repayment obligations to customers holding maturing liabilities

b) meeting repayment obligations to customers holding maturing liabilities. meeting regulatory requirements for reserves

c) meeting the dividend payment requirements of outstanding common stock

d) all of the above

e) 1 and 2

19. The process of securitization typically involves

a) removing loans from a bank's balance sheet and selling them to investors

b) bank origination of loans.

c) an insurance company surety bond or a bank letter of credit

d) all of the above

20. Generally, as the maturity of an asset or liability rises it has a higher risk premium due to greater maturity risk and greater

a) default risk

b) default risk

c) liquidity risk

d) all of the above

e) 2 and 3

Which statement is TRUE?

A. The relation between a company's return on common equity (ROCE) and return on net operating assets (RNOA) reveals information about the company's financial leverage.

B. Return on equity is the percentage increase in stock prices.

C. The accounting-based stock valuation formula calculates the value of a stock as the book value plus the present value of future expected dividends discounted at the cost of equity.

D. Practice considers a segment significant if its sales, operating income (or loss), or identifiable assets are 30% or more of the combined amounts of all the company's operating assets.

5. Which statement is TRUE?

A. Once the projected financial statements are prepared, there is no need for sensitivity analysis to examine the assumptions used in the preparation.

B. Prospective analysis should be performed after historical financial statements have been adjusted.

C. Prospective analysis should only be based on the firmâs historical financial statements.

D. Prospective analysis can only be used to project an income statement, a balance sheet, and a statement of cash flows.

6. Which statement is TRUE?

A. As cash is the most liquid of all assets and liquidity is crucial to a company, all companies should hold as much cash as possible.

B. If the company has available cash, they should always pay their bills immediately, even if suppliers give them time to pay before charging penalties.

C. It is possible for a profitable company to go out of business because of severe short-term liquidity problems.

D. Free cash flow in a given year is a better indicator of profitability than earnings.

blackhyena949

Near the end of 2013, the management of Dimsdale Sports Co., a merchandising company, prepared the following estimated balance sheet for December 31, 2013.

DIMSDALE SPORTS COMPANY Estimated Balance Sheet December 31, 2013
Assets
Cash	$	36,000
Accounts receivable		520,000
Inventory		105,000

Total current assets				661,000
Equipment	$	539,000
Less accumulated depreciation		67,375

Equipment, net				471,625

Total assets			$	1,132,625

Liabilities and Equity
Accounts payable	$	370,000
Bank loan payable		15,000
Taxes payable (due 3/15/2014)		89,000

Total liabilities			$	474,000
Common stock		473,000
Retained earnings		185,625

Total stockholdersâ equity				658,625

Total liabilities and equity			$	1,132,625

To prepare a master budget for January, February, and March of 2014, management gathers the following information.

a.	Dimsdale Sportsâ single product is purchased for $20 per unit and resold for $55 per unit. The expected inventory level of 5,250 units on December 31, 2013, is more than managementâs desired level for 2014, which is 20% of the next monthâs expected sales (in units). Expected sales are: January, 6,500 units; February, 9,100 units; March, 11,250 units; and April, 9,500 units.
b.	Cash sales and credit sales represent 20% and 80%, respectively, of total sales. Of the credit sales, 57% is collected in the first month after the month of sale and 43% in the second month after the month of sale. For the December 31, 2013, accounts receivable balance, $125,000 is collected in January and the remaining $395,000 is collected in February.
c.	Merchandise purchases are paid for as follows: 20% in the first month after the month of purchase and 80% in the second month after the month of purchase. For the December 31, 2013, accounts payable balance, $80,000 is paid in January and the remaining $290,000 is paid in February.
d.	Sales commissions equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are $90,000 per year.
e.	General and administrative salaries are $156,000 per year. Maintenance expense equals $2,000 per month and is paid in cash.
f.	Equipment reported in the December 31, 2013, balance sheet was purchased in January 2013. It is being depreciated over eight years under the straight-line method with no salvage value. The following amounts for new equipment purchases are planned in the coming quarter: January, $35,000; February, $97,000; and March, $29,000. This equipment will be depreciated under the straight-line method over eight years with no salvage value. A full monthâs depreciation is taken for the month in which equipment is purchased.
g.	The company plans to acquire land at the end of March at a cost of $150,000, which will be paid with cash on the last day of the month.
h.	Dimsdale Sports has a working arrangement with its bank to obtain additional loans as needed. The interest rate is 12% per year, and interest is paid at each month-end based on the beginning balance. Partial or full payments on these loans can be made on the last day of the month. The company has agreed to maintain a minimum ending cash balance of $8,350 in each month.
i.	The income tax rate for the company is 43%. Income taxes on the first quarterâs income will not be paid until April 15.

Required:

Prepare a master budget for each of the first three months of 2014; include the following component budgets:

(PLEASE INCLUDE ALL PERTINENT INFORMATION FOR INFO LISTED BELOW)

Budgeted balance sheet as of March 31, 2014.

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FINE 442 Chapter Notes - Chapter 12: Asset Turnover, Repurchase Agreement, Demand Deposit

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