The last request from the head of the division to you is based on the following year-end
Question:
The last request from the head of the division to you is based on the following year-end balance sheet of Unibank (in millions of dollars):
Assets | $ | Liabilities and equity | $ |
Cash | 10 | Deposits | 335 |
Liquid assets | 50 | Interbank loan | 5 |
Loans | 320 | Equity | 40 |
Total assets | 380 | Total liabilities and equity | 380 |
The loans are primarily fixed-rate, medium-term loans, while the deposits are either short-term or variable-rate deposits. Rising interest rates have caused increases in loan defaults and, as a result, 4 per cent of the loans are considered to be uncollectable and thus have no economic value. Half (50 per cent) of these uncollectable loans will be charged off. Further, the increase in interest rates has caused a 3 per cent decrease in the market value of the remaining loans.
a. What is the impact on the balance sheet after the necessary adjustments are made according to book value accounting?
b. What is the impact on the balance sheet after the necessary adjustments are made according to market value accounting?
c. What is the new market to book value ratio if UniBank has $1 million shares outstanding?
Expert Answer:
