North South University - School of Business and Economics

Financial Management- FIN464 – Assignment

Total Marks: 70

PART A - PROBLEM SOLVING QUESTIONS

1. The cost of establishing a new ATM booth is $100,000 which has a cost of capital of 8%.
The bank estimates that this will lead to a cost reduction of $1.8 per cash transaction
and is expected to be in use for the next 5 years with number of cash transactions
processed each year from year one to year five to be 8,000, 12,000, 16,000, 22,000 and
28,000 respectively. Should the ATM booth set up this new ATM? Justify your answer.
(6 Marks)

2. Eastern Bank Limited (EBL) is considering setting up a new branch either in Dhanmondi
or in Khilgaon. At present, the existing facilities and assets of EBL are earning a return of
10% at a standard deviation of 5%. Based on the information provided in the table
below, in which location should the new branch be set up? Justify your answer.
(18 Marks)

Dhanmond Khilgaon
i
Percentage of total assets invested in the new branch 15% 12%
Expected return on proposed new branch 20% 18%
Standard deviation of the proposed new branch's expected return 14% 10%
Correlation coefficient between the expected return from the -0.60 -0.75
proposed new branch and the returns of the other assets of the
bank

3. Sunshine State Bank has the following financial information for the years 2018 and 2019.

Balance Sheet 2018 2019 Income Statement 2018 2019

Cash $130 $100 Interest Revenue $600 $400
Securities Investments $670 $600 Interest Expenses ($100 ($150)
)
Net Loans $130 $1200 Non-Interest Revenue $70 $50
0
Net Premises and Equip. $300 $300 Operating Expenses ($80) ($100)
Total Assets $240 $2200 Provision for Loan Losses ($70) ($60)
0
Deposits $125 $1100 Pre Tax Net Operating $420 $140
0 Income
Non-Deposit Borrowings * $650 $800
Equity Capital $500 $300 Taxes ($160 ($85)
 )
Total Liabilities and $240 $2200 Net Income $260 $55
Equity 0
* All Purchased Funds

You are working as a financial analyst at Sunshine State Bank. The board of directors is very concerned
about the sharp decline in net income. Using the information provided above, find the change in the
ROE of the bank from 2018 to 2019. Break down the ROE into different components in terms of
finding: (a) Tax management efficiency (b) Expense control efficiency (c) Asset management efficiency
(d) Fund management efficiency. Write a report addressed to the board of directors identifying the
possible causes of declining profitability and possible remedies that can be taken to improve the
situation.

(22 Marks)

PART B - THEORITICAL QUESTIONS (6 Marks each)

1. Compare and contrast between: (i) Mutual funds and Credit unions (ii) Community bank and
Cooperative bank

2. The economy is currently going through a phase of recession. How can monetary policy be
implemented to resolve this problem.

3. What type of account is the ALL account? Explain how, why and when it is built up.

4. Briefly explain the components of the uses of funds side of a bank’s balance sheet. What are
the benefits and drawbacks of non deposit borrowings over deposit borrowings?