Chapter 19
• Problem 2 (page 603)
Consider the following income statement for WatchoverU Savings Inc. (in millions): (LG 19-1)
a. What is WatchoverU’s expected net interest income at year-end?
b. What will be the net interest income at year-end if interest rates rise by 2 percent?

Chapter 20
• Problem 6 (page 629)
Consider the following company’s balance sheet and income statement. (LG 20-4)

Income Statement
Sales (all on credit) $200,000
Cost of goods sold 130,000
Gross margin 70,000
Selling and administrative expenses 20,000
Depreciation 8,000
EBIT 42,000
Interest expense 4,800
Earnings before tax 37,200
Taxes 11,160
Net income $ 26,040
For this company, calculate the following:
a. Current ratio.
b. Number of days’ sales in receivables.
c. Sales to total assets.
d. Number of days in inventory.
e. Debt-to-asset ratio.
f. Cash-flow-to-debt ratio.
g. Return on assets.
h. Return on equity.

• Problem 10 (page 630)
The following is ABC Inc.’s balance sheet (in thousands): (LG 20-5)

Also, sales equal $500, cost of goods sold equals $360, interest payments equal $62, taxes equal $56, and net income equals $22. The beginning retained earnings is $0, the market value of equity is equal to its book value, and the company pays no dividends.
a. Calculate Altman’s Z score for ABC, Inc. if ABC has a 50 percent dividend payout ratio and the market value of equity is equal to its book value. Recall the following:
Net working capital = Current assets − Current liabilities
Current assets = Cash + Accounts receivable + Inve ntories
Current liabilities = Accounts payable + Accruals + Notes payable
EBIT = Revenues − Cost of goods sold − Depreciation
Taxes = (EBIT − Interest)(Tax rate)
Net income = EBIT − Interest − Taxes
Retained earnings = Net income(1 − Dividend payout ratio)

b. Should you approve ABC Inc.’s application to your bank for $500,000 for a capital expansion loan?
c. If ABC’s sales were $450,000, taxes were $16,000, and the market value of equity fell to one-quarter of its book value (assume cost of goods sold and interest are unchanged), how would that change ABC’s income statement? With the new data, does your credit decision change?
d. What are some of the shortcomings of using a discriminant function model to evaluate credit risk?

Chapter 21
• Problem 7 (page 652)
7) A DI has the following assets in its portfolio: $20 million in cash reserves with the Fed, $20 million in T-bills, and $50 million in mortgage loans. If it needs to dispose of its assets at short notice, it will receive only 99 percent of the fair market value of the T-bills and 90 percent of the fair market value of its mortgage loans. If the DI waits one month to liquidate these assets, it would receive the full fair market value for each security. Calculate the one-month liquidity index using the previous information.

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