Federal Bank Solution Essay Sample
Model Use For consistence. we developed a spreadsheet theoretical account for the instance. However. in category we emphasize ?nancial reckoner solutions for larning the rudimentss of the theoretical account and utilize the spreadsheet application for sensitiveness analysis to find how alterations in the variables affect the consequences. There is some danger that get downing pupils will non truly understand the basic logic underlying the theoretical account if they are non required to make some computations by manus. The pupil versions of the theoretical accounts have some of the expression cells erased ; therefore the pupils get an thought about the model’s construction while they complete it. The spreadsheet besides allows sensitiveness analysis to find how alterations in the variables affect the consequences.
1. Using information contained in Table 1. Federal Finance’s balance sheet at the terminal of 2000. calculate Federal Finance’s capital plus ratio. hazard based capital ratio. figure of portions of stock outstanding. and book value per portion of common stock. Based on the ratios. explicate the bank’s capital adequateness. Capital Asset Ratio = Book value of nucleus capital/assets = common stockholders’ equity/total assets = $ 26. 490 / $ 525. 826 = 0. 05038 = 5. 04 % .
Case: 75 Federal Finance Bank – Instructor’s Solution
The Current Capital Asset or Leverage ratio of 5. 04 per centum is merely above the minimal demands set by federal ordinances for well-capitalized establishments ( 5. 0 per centum. see Table 2 ) . Hazard Based Capital Ratio = Total capital/risk adjusted value of assets Total capital = nucleus capital + allowance for loan losingss = ( $ 26. 490 + 2. 680 ) = $ 29. 170 Risk adjusted value of assets = 0 % ( hard currency + U. S. Treasuries ) + 20 % ( mortgage-backed securities + general duty municipal bonds + authorities bureau securities ) + 50 % ( residential mortgage loans ) + 100 % ( consumer loans + concern loans + ?xed assets ) Hazard adjusted value of assets = 0 ( $ 7. 387+12. 477 ) + . 2 ( $ 110. 684+25. 970+34. 740 ) + . 5 ( $ 189. 164 ) + 1. 00 ( $ 36. 583 + 77. 693 + 31. 128 ) = . 2 ( $ 171. 394 ) + . 5 ( $ 189. 164 ) + 1 ( $ 145. 404 ) = $ 34. 279 + 94. 582 + 145. 404 = $ 274. 265 Hazard Based Capital Ratio = $ 29. 170 / $ 274. 265 = . 10636 = 10. 64 %
The Hazard Based Capital Ratio is 10. 64 per centum. and is above the lower limit set by federal ordinances. Entire Number of Shares Outstanding = capital stock/par value per portion = $ 12. 155. 000/ $ 100 = 121. 550 Book Value per Share = entire equity/number of portions outstanding = $ 26. 490. 000/121. 550 = $ 217. 94 2. Using the information in Table 3. calculate Federal Finance’s 2000 ROA and mean one-year growing rate in assets from 1995 to 2000. ( Hint: In your computations. usage merely the information for 1995 and 2000. ) ROA = Net Pro?t/ Total Assets = $ 7. 863/ $ 525. 826 = 1. 50 % The compounded one-year growing rate in assets can be found as follows: Assets1995 ( 1+g ) 5 = Assets2000 $ 273. 617 ( 1+g ) 5 = $ 525. 826 ( 1+g ) 5 = $ 525. 826/273. 617 = 1. 92 ( 1+g ) = 1. 921/5 = 1. 1396 g = 0. 1396 = 13. 96 % . 3. For the four Bank’s listed in Table 4. calculate the followers: a. The Capital Asset Ratio for 2000. B. Compound one-year growing rates in assets for the ?ve-year period 1995–2000. c. The ROA ratios in 2000. d. The market value/book value ratios for 2000. e. How does Federal Finance comparison with the Capital Asset Ratios and growing rates of these establishments? a. Capital Asset Ratio = Shareholders’ equity/total assets Maryland Financial = $ 11. 800/ $ 220. 000 = 5. 36 % Great Northern Bank = $ 23. 700/ $ 476. 000 = 4. 98 % First Bank of California = $ 15. 400/ $ 305. 000 = 5. 05 % Omaha Federal = $ 12. 900/ $ 238. 000 = 5. 42 %
Case: 75 Federal Finance Bank – Instructor’s Solution
B. Assetss Growth Rate = Assets1995 ( 1+g ) 5=Assets2000 Maryland Financial = $ 109. 400 ( 1+g ) 5= $ 220. 000 = & gt ; g = 15. 00 % Great Northern Bank = $ 241. 600 ( 1+g ) 5= $ 476. 000 = & gt ; g= 14. 53 % First Bank of California = $ 239. 000 ( 1+g ) 5= $ 305. 000 = & gt ; g= 5. 00 % Omaha Federal = $ 123. 609 ( 1+g ) 5= $ 238. 000 = & gt ; g= 14. 00 % c. ROA Ratios = Net Pro?t/Assets2000 Maryland Financial = $ 3. 322/ $ 220. 000 = . 0151 = 1. 51 % Great Northern Bank = $ 6. 172/ $ 476. 000 = . 0130 = 1. 30 % First Bank of California = $ 2. 745/ $ 305. 000 = . 009 = . 90 % Omaha Federal = $ 3. 546/ $ 238. 000 = . 0156 = 1. 49 % d. Market Value/Book Value Ratios = Price/book value per portion Maryland Financial = $ 34. 68/ $ 31. 35 = 1. 106 Great Northern Bank = $ 20. 84/ $ 21. 08 = 0. 989 First Bank of California = $ 36. 54/ $ 40. 56 = 0. 901 Omaha Federal = $ 30. 36/ $ 25. 75 = 1. 179 These informations are summarized in the tabular array below. Drumhead Statistics for Publicly-Traded Financial Institutions CAPITAL ASSET RATIO 5. 36 % 4. 98 % 5. 05 % 5. 42 % 5. 04 % GROWTH RATE ( G ) 15. 00 % 14. 53 % 5. 00 % 14. 00 % 13. 96 % MARKET /BOOK 1. 106 0. 989 0. 901 1. 179
Maryland Financial Great Northern Bank First Bank of Calif. Omaha Federal Federal Finance
ROA 1. 51 % 1. 30 % 0. 90 % 1. 49 % 1. 50 %
e. Federal Finance’s Capital Asset Ratio is somewhat lower than that of First Bank of California. Omaha Federal and Maryland Financial have much higher capital plus ratios and are less hazardous. Great Northern’s capital plus ratio falls below the threshold for a well-capitalized establishment. Federal Finance’s growing rate is greater than First Bank of California and similar to Omaha Federal. but below Great Northern Bank and Maryland Federal 4. Sing your replies to Questions 1 through 3: a. Develop a scope of values that you think would be sensible for Federal Finance’s market/book ratio if it were a publically held company. Great Northern Bank is the riskiest of the ?nancial establishments studied as its capital plus ratio is below the federal demand. Although net incomes have grown faster than Federal Finance. the ROA is lower. and the market to book ratio is below one. First Bank of California has a minimally equal capital plus ratio but a really weak growing rate over the past ?ve old ages and besides has a market/book ratio below one. Maryland Financial and Omaha Federal appear to be in the best ?nancial status of the listed ?nancial establishments. They have enjoyed rapid growing in net incomes and have a capital plus ratio above federal demands. This information is consistent with its top ranking for price/earnings and a market/book ratio above one.
Case: 75 Federal Finance Bank – Instructor’s Solution
From the information developed therefore far. it seems that the ?nancial public presentation of Federal Finance has non been every bit strong as Maryland Financial. With the exclusion of the capital plus ratio ( which will be strengthened by the new stock issue ) . Federal Finance is stronger than Omaha Federal. Thus. a market value/book value ratio in the scope of 1. 1 to 1. 2 would likely be appropriate for Federal Finance. B. Discourse the rating difference between a in private held and publically traded ?rm. Public trading would add a premium value to the stock. This premium consequences from easier entree to information that is required by the SEC and a more liquid market for the stock. 5. Regardless of your reply to Question 4. assume that 1. 15 is an appropriate market value/book value ratio for Federal Finance. What would be the market value per portion of the company? Market value per portion = 1. 15 ? Book value = 1. 15 ? $ 217. 94 = $ 250. 63. 6. Investing bankers by and large like to offer the initial stock of companies that are traveling public at a monetary value runing from $ 10 to $ 30 per portion.
If Federal Finance stock were to be offered to the populace at a monetary value of $ 20 per portion. how big a stock split would be required prior to the sale? How many portions of stock would be outstanding following the split but before new portions are issued? To find the size of the stock split required that would convey the stock monetary value down to $ 20 per portion. split the computed market monetary value for the in private held stock by $ 20: Split size = $ 250. 63/ $ 20 = 12. 53 ? 13 for 1 # of portions outstanding before new portions are issued = ( old # portions ) ? ( 13 ) . Therefore. the station split figure of portions of stock outstanding before the new issue = 121. 550 ? 13 = 1. 580. 150 7. Assume that Federal Finance chooses to raise $ 8 million through the sale of stock to the populace at $ 20 per portion. a. Approximately how big would the per centum ?otation cost be for such an issue? Base your reply on available published statistics. The latest SEC ?gures on ?otation costs are comparatively old. but they are still about right for ?rms publishing stock today.
Entire ?otation costs ( subventioning committees. other disbursals. and under-pricing costs ) for new issues between $ 2 and $ 10 million norm about 13. 28 per centum. ( See Brigham. Gapenski. and Daves. Intermediate Financial Management: Theory and Practice. 6th erectile dysfunction. ( Fort Worth. Texas: The Dryden Press. 1999 ) . Table 15-4. ) B. How many portions of stock would hold to be sold in order for Federal Finance to pay the ?otation cost and have $ 8 million net returns from the offering? First. find the net returns per portion to Federal Finance. Internet per portion = $ 20 ( 1 – 0. 1328 ) = $ 17. 34. The figure of portions the ?rm must sell is the net sum of financess needed divided by the net monetary value the company will have from the sale of the stock. $ 8. 000. 000/ $ 17. 34 = 461. 255 portions. 8. Assume that Zudlum decided to sell half of his stock. a. How many portions of stock and what entire sum of money ( presuming that the stock split occurred and that these portions were sold at a monetary value of $ 20 per portion ) would be involved in this secondary offering? ( A secondary offering is de?ned as the sale of stock that is already issued and outstanding.
The returns of such offerings accrue to the single proprietors of the stock. non to the company. ) There are 1. 580. 150 portions of Federal Finance stock outstanding following the 13:1 split from inquiry 6. Zudlum owns 31 per centum of the ?rm’s stock. or 489. 847 portions. If he sold one-half of his retentions in a secondary offering. the entire sale would amount to 489. 847/2 = 244. 924 portions at $ 20 per portion or $ 4. 898. 480. ( Note rounding difference in Excel ) . Zudlum would necessitate to pay some of the ?otation costs ensuing from the sale. Therefore. his existent reception of financess would be less. B. What is the impact on per centum ?otation cost if the investing bankers were to unite the major stockholders’ secondary offering with the sale by the company of suf?cient stock to supply it with $ 8 million? If the major shareholders join the company in the underwriting. the gross returns will be $ 8 million + $ 4. 9 million or about $ 13 million. Larger offerings would necessitate a smaller per centum ?otation cost.
The costs for issues between $ 10 and $ 19. 99 million are 8. 72 % . harmonizing to Brigham. Gapenski. and Daves. Intermediate Financial Management: Theory and Practice. 6th erectile dysfunction. ( Fort Worth. Texas: The Dryden Press. 1999 ) . Table 15-4. 9. Assume that the major shareholders decide that Federal Finance should travel public. Outline in item the sequence of events from the first dialogues with an investing banker to Federal Finance’s reception of the returns from the offering. The ?rst measure for the bank is to retain an lawyer who specializes in security issues. The lawyer prepares a study depicting the advantages and disadvantages of traveling public and remarks on the significant economic systems of graduated table in the ?otation costs. Because ?otation costs would drop from 13. 28 per centum to 8. 72 per centum the chief shareholders would likely unite the secondary offering of half of Zudlum’s portions with the initial public offering. Following. informal treatments would be held with several investment-banking ?rms. and one banker would be chosen as the lead investment banker. At this point the investing banker. together with a CPA ?rm. would take over most of the jobs. but the lawyer would go on to play a function in the decision-making procedure. The chief issue at this point involves the monetary value at which the stock would be issued. Actually. the determination to publish the stock at $ 20 per portion was made early.
The issue so becomes: What book value per portion would be used in finding the figure of portions outstanding after the split? The determination was made to sell the stock at 1. 15 times book value in dialogues with the investment-banking ?rm. Once these basic determinations have been made. the lawyer. the CPA ?rm. and the investing bankers would get down readying of the enrollment statement and the prospectus. The investing bankers at the same clip would organize an underwriting mob consisting of the chief investment banker and two other ?rms. and a merchandising group dwelling of 31 securities firm ?rms. After a figure of conferences with the SEC—during which such affairs as rating militias. accounting intervention of assorted points. and others would be discussed—the enrollment would be ?led with the SEC. After a 20 twenty-four hours waiting period. the issue would be sold to the populace. 10. Explain why Brown and Zudlum might hold personal differences of sentiment on the inquiry of public ownership.
Case: 75 Federal Finance Bank – Instructor’s Solution
The basic difference between Brown and Zudlum relates to outside retentions. Brown has diversi?ed involvements. but Zudlum has most of his cyberspace worth tied up in Federal Finance. Therefore. Zudlum is more interested in holding Federal Finance go public so that he can diversify his personal retentions. Besides. since Federal Finance is presently a in private held company. its portions are non really liquid. Therefore. if Zudlum needed big sums of hard currency. he might hold signi?cant dif?culty neutralizing a part of his portions. Finally. if the portions are non publically traded. a market-determined value is non available. If one of the major shareholders were to decease. this could do jobs in valuing his or her estate for revenue enhancement intents. This would be particularly of import for Zudlum since most of his cyberspace worth is represented by his Federal Finance stock. 11. The analysis was based on the comparison of Federal Finance with four other banking establishments. What factors might be given to annul the comparing? There may be a size difference between Federal Finance and the four other ?nancial establishments. Diverse economic forces may play on ?nancial establishments of differing size.
The nature of the loan portfolio besides affects the comparison ; hazard and return are to a great extent intertwined with the loan portfolio. For case. Federal Finance may hold a conservative mortgage portfolio. while Great Northern Bank may hold invested to a great extent in bad existent estate undertakings. Third. the nature of the market in which the ?nancial establishments operate affects the comparison. Maryland Financial may be able to pro?t from the comparatively stable economic state of affairs. Great Northern Bank may endure from a down economic system and investors may fear an economic downswing in California. which would impact First Bank of California. 12. All things considered. make you experience that Federal Finance should travel public? Fully warrant your decision.
On balance. the public offering seems to hold been the right determination. All the points listed by Zudlum in the instance are valid grounds for the company to travel public. and the lone valid ground for non making so had to make with the accessory activities of the principals. What the three major shareholders really did was to organize a keeping company. which owned the stock of Federal Finance and besides the stock of the accessory companies—the insurance bureau. the rubric insurance bureau. and so on. Then. the stock sold to the populace was that of the keeping company. Regulatory limitations on nest eggs Bankss preclude them from prosecuting in a figure of accessory activities. so these are carried on at the keeping company degree instead than at the association degree. Life insurance companies operate likewise. Keep in head. nevertheless. that the limitations on ?nancial establishments are presently in a province of ?ux and the limitations may be eased in the hereafter.