Fin 431 Practice Problem
UNIVERSITY OF ILLINOIS AT CHICAGO
FINANCE 431 – MANAGEMENT IN THE FINANCIAL SERVICES INDUSTRY
PRACTICE SET 1 – BANK CAPITAL PROJECTS AND LEASE FINANCING
Note: Problems 1,3,5,7 are from Chapter 4 in the textbook.
1. A group of businesspeople from Gwynne Island are considering filing an application with the state banking commission to charter a new bank. Due to a lack of current banking facilities within a 10-mile radius of the community, the organizing group estimates that the initial banking facility would cost about $2.7 million to build along with another $500,000 in other organizing expenses and would last for about 20 years. Total revenues are projected to be $410,000 the first year, while total operating expenses are projected to reach $180,000 in year 1. Revenues are expected to increase 5 percent annually after the first year, while expenses will grow an estimated 3 percent annually after year 1. If the organizers require a minimum of a 10 percent annual rate of return on their investment of capital in the proposed new bank, are they likely to proceed with their charter application given the above estimates?
2. Do problem 1 under the following assumptions: a tax rate of 30% and straight line depreciation of physical assets.
3. Hampton Savings Bank is considering the establishment of a new branch office at the corner of Queen Street and Victoria Boulevard. The savings association’s economics department projects annual operating revenues of $1.6 million from fee income generated by service sales and annual branch operating expenses of $795,000. The cost of procuring the property is $1.75 million and branch construction will total an estimated $2.65 million; the facility is expected to last 16 years. If the savings bank has a minimum acceptable rate of return on its invested capital of 12 percent, will Hampton savings likely proceed with this branch office project?
4. Do problem 2 under the assumptions of a tax rate of 34%, straight line
FINANCE 431 – MANAGEMENT IN THE FINANCIAL SERVICES INDUSTRY
PRACTICE SET 1 – BANK CAPITAL PROJECTS AND LEASE FINANCING
Note: Problems 1,3,5,7 are from Chapter 4 in the textbook.
1. A group of businesspeople from Gwynne Island are considering filing an application with the state banking commission to charter a new bank. Due to a lack of current banking facilities within a 10-mile radius of the community, the organizing group estimates that the initial banking facility would cost about $2.7 million to build along with another $500,000 in other organizing expenses and would last for about 20 years. Total revenues are projected to be $410,000 the first year, while total operating expenses are projected to reach $180,000 in year 1. Revenues are expected to increase 5 percent annually after the first year, while expenses will grow an estimated 3 percent annually after year 1. If the organizers require a minimum of a 10 percent annual rate of return on their investment of capital in the proposed new bank, are they likely to proceed with their charter application given the above estimates?
2. Do problem 1 under the following assumptions: a tax rate of 30% and straight line depreciation of physical assets.
3. Hampton Savings Bank is considering the establishment of a new branch office at the corner of Queen Street and Victoria Boulevard. The savings association’s economics department projects annual operating revenues of $1.6 million from fee income generated by service sales and annual branch operating expenses of $795,000. The cost of procuring the property is $1.75 million and branch construction will total an estimated $2.65 million; the facility is expected to last 16 years. If the savings bank has a minimum acceptable rate of return on its invested capital of 12 percent, will Hampton savings likely proceed with this branch office project?
4. Do problem 2 under the assumptions of a tax rate of 34%, straight line