Question
4. Consider an investment bank called Stear Bearns. It has loans = 600, investments = 500,...
4. Consider an investment bank called Stear Bearns. It has loans = 600, investments = 500, and cash = 400 on the asset side, and it has short-run debt = 700 and long-run debt = 500 on the liability side (all the figures are in billions of dollars). (a) Calculate the equity capital of Stear Bearns. (b) Draw their balance sheet. (c) Calculate their leverage ratio. (d) By how much must the value of their investments fall for Stear Bearns to become bankrupt? (e) Draw their balance sheet once it has become bankrupt. (f) What would your advice to Stear Bearns be if the goal was to decrease the prob- ability of defaulting? Why might Stear Bearns not have followed this path? g) Suppose the government imposes a capital requirement, i.e., a maximum value for the leverage ratio. Take the Stear Bearns example above (with the initial balance sheet) and suppose the government imposes a maximum leverage ratio of 4. Suppose Stear Bearns is not able to adjust its long-run debt adjust short-run debt to meet this requirement. Suppose moreover that it wishes to have 10% cash as a fraction of total assets but otherwise is happy to use cash to pay back debt and that it prefers to reduce investments rather than loans for any further asset deductions. What will its new balance sheet look like? Suppose that, in the new situation with a 4 maximum leverage ratio, asset prices fall so that the value of its investments goes down by 10% (so that they are worth 0.9 times what they were worth before). Short- and long-run debt are not affected directly by the fall in asset prices, so equity falls. However, the balance sheet of Stear Bearns now must somehow adjust in order to not violate the 4 leverage rule. Supposing that Stear Bearns can only adjust on the asset side by adjusting their investments (and on the liability side only by adjusting their short-term debt), what would have to happen to their balance sheet? What final contraction of total assets (in percent) was induced by the fall in asset values of 10%?
Answers
a) Loans =600billion Dollars
Investments =500billion Dollars
Cash =400billion Dollars
Total Assests =Loans + Investments+Cash
=1500billion Dollars
Short run debt =700billion dollars
Long run debt =500billion dollars
Total Liabilities =short run debt + Long run debt
=1200billion Dollars
Equity Capital = Total Assets - Total Liabilities
=1500-1200
=300 Billion Dollars
c)
The leverage ratio is the proportion of debts that a bank has compared to its equity/capital.
- Equity to Debt = Shareholders Equity/Debt = 300/1200=.25=25%
Similar Solved Questions
1 answers
A friend tells you that a refrigerator door, beneath its layer of white-painted plastic, is made of aluminum
A friend tells you that a refrigerator door, beneath its layer of white-painted plastic, is made of aluminum. How could you check to see if this is true (without any scraping)?...
1 answers
A very popular drug in the treatment of the herpes simplex virus (HSV-1) is called acyclovir....
A very popular drug in the treatment of the herpes simplex virus (HSV-1) is called acyclovir. When it comes to the treatment of HIV, the virus that causes AIDS, the most popular drug of choice is AZT (Retrovir). Explain why these drugs are called nucleoside analogues and which nucleotides these are...
1 answers
The Mulvey Company derived the following cost relationship from a regression analysis of its monthly manufacturing...
The Mulvey Company derived the following cost relationship from a regression analysis of its monthly manufacturing overhead cost. C = $90,000 + $10M If: C = monthly manufacturing overhead cost M = machine hours The standard error of the estimate of the regression is $4,500. The standard time require...
1 answers
23 Me bo t e questions (22) Numerose 512 22) You are given the data for...
23 Me bo t e questions (22) Numerose 512 22) You are given the data for four companies (A, B, C, and D). If you wish to construct a value weighted portfolio using all four companies, what is company C's weight? a) 17.3696 b) 336 c) 33.6096 d) 25% e) None of the above is correct 23) What is compa...
1 answers
Edited*** Change the location of the center of mass to 7cm from the eraser and change...
Edited*** Change the location of the center of mass to 7cm from the eraser and change the distance of the center of mass from the pencils lead tip to be 13.2cm. Finally, assume that the coefficient of friction 0.7. Solve for the minimum angle such that the pencil wont slip. Enter answer in degrees. ...
1 answers
Complete the analysis for the following prioritization grid information by finding the final ranking. Decision Alternatives...
Complete the analysis for the following prioritization grid information by finding the final ranking. Decision Alternatives Machine 1 Machine 2 Machine 3 Machine 4 Decision Criteria Importance A 3 B 2 с 5 Ranking Final Rankings Criterion A Machine 1 Machine 2 Machine 3 Machine 4 2 3 4 Criterio...
1 answers
2. In a perfectly competitive industry, an individual firm's demand curve will be: a) Perfectly elastic....
2. In a perfectly competitive industry, an individual firm's demand curve will be: a) Perfectly elastic. b) Perfectly inelastic. c) Downward sloping to the right. d) Upward sloping to the right. 3. A firm in a competitive market will seek to... a) Minimize total costs. b) Maximize total revenue....
1 answers
Mrs. A has been taking high doses of glucocorticoids for much of the past 2 years...
Mrs. A has been taking high doses of glucocorticoids for much of the past 2 years to control severe rheumatoid arthritis. She has now developed hypertension and type 2 diabetes and would like to stop taking the cortisone because of the unwanted changes in her appearance. How does Cushing’s sy...
1 answers
The lower the amount of drug needed to produce a therapeutic response, the greater the......
the lower the amount of drug needed to produce a therapeutic response, the greater the.........
1 answers
1. You are working in a lab as a Bio 199 student. Your professor asks you...
1. You are working in a lab as a Bio 199 student. Your professor asks you to use a microscope to observe the interaction between two proteins. Which of the following techniques are appropriate? A. FRAP, Fluorescence recovery after photobleaching B. FRET, Fluorescence resonance energy transfer C. Pro...
1 answers
€ Co wb /Studentment Responsep234664178012 12. - POINTS SERCP115.6.P.040. MY NOTES ASK YOUR TEACHER r n...
€ Co wb /Studentment Responsep234664178012 12. - POINTS SERCP115.6.P.040. MY NOTES ASK YOUR TEACHER r n between Nock and (a) A block with a mamis pulled along a hormonal surface for a distance by a constant force at an angle with respect to the hotel. The conto twists the force d by consulto no...
1 answers
Sanburn Sporting Goods manufactures athletic and recreational equipment. Their unit sales and cost data for the...
Sanburn Sporting Goods manufactures athletic and recreational equipment. Their unit sales and cost data for the year 2020 is shown here: Pool cues Tennis rackets $ 50 40 Baseball bats $ 45 42 Lacrosse sticks $ 65 $ 25 Sales price / unit Variable costs / unit Contribution margin/ unit Sales mix $ 10 ...
1 answers
Don't know if I'm correct in thinking that red gives green, then vice versa... ans blue...
don't know if I'm correct in thinking that red gives green, then vice versa... ans blue gives yellow, then vice versa.... ?? We see images because the rods and cones are generating nerve impulses for transmission to the brain. Occasionally the is one in which the bright parts of the object r...
1 answers
C. This Question: 1 pt 13 of 22 (0 complete) ► This Test: 36 pts possible...
C. This Question: 1 pt 13 of 22 (0 complete) ► This Test: 36 pts possible According to a publication, 12.3% of 18 to 25-year-olds were users of marijuana in 2000. A recent poll of 1381 randomly selected 18 to 25-year-olds revealed that 190 currently use marijuana. At the 20% significance level...
1 answers
A discrete memoryless source has symbols x1,x2,x3,x4 and x5. with probabilities 0.48, 0.12, 0.08, 0,06 and...
A discrete memoryless source has symbols x1,x2,x3,x4 and x5. with probabilities 0.48, 0.12, 0.08, 0,06 and 0.02 respectively. Determine the Shannel fano code of the source. And check it against Huffman code source....
1 answers
A researcher is running an experiment on the effectiveness of three different energy drinks. She randomly...
A researcher is running an experiment on the effectiveness of three different energy drinks. She randomly selects 150 individuals from the population and evenly splits them into three groups, each which consumes a different energy drink (Drink A, Drink B, Drink C). State the Null and the Research / ...
1 answers
Stine Company uses a job order cost system. On May 1, the company has a balance...
Stine Company uses a job order cost system. On May 1, the company has a balance in Work in Process Inventory of $4,240 and two jobs in process: Job No. 429 $2,580, and Job No. 430 $1,660. During May, a summary of source documents reveals the following Job Number 429 Materials Requisition Slips $3,04...