Your bank is considering purchasing a finance company. Your supervisor provides you the following financial information:
Tasks:
- What would be the typical amount held as reserve for loan losses?
- What would be the typical amount held as business loans?
- How much commercial paper would be expected for this company?
- How much in bank loans would be expected for this company?
- How does the company compare with the average capital-to-total-asset ratio of 11 percent?
- After reviewing the firm's position relative to Table 1, what would you recommend to your management regarding the purchase of this finance company?
- What economies of scale would you expect if your bank purchased this finance company?
- What economies of scope would you expect if your bank purchased this finance company?
- What is the difference between the risk for the finance company and for the bank?
•What advantages, if any, can the bank gain by purchasing the finance company and using it to own productive assets, such as computers, and leasing such assets to the parent company, the bank?
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Assets ($ millions)
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Consumer loans
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60.0
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Business loans
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140.0
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Real estate loans
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50.0
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Less reserves for loan losses
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20.0
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Other assets
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50.0
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Total assets
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280.0
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Liabilities ($ millions)
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Bank loans
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35.0
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Commercial paper
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130.0
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Owed to parent
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22.0
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Debt not elsewhere
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44.0
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Other liabilities
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19.0
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Total liabilities
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250.0
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Equity
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30.0
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Total liabilities and equity
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280.0
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