• What is convergence? Product-line diversification? Economies of scale and scope? Why might they be of considerable importance for banks and other financial-service firms? (2 marks)
• Suppose that a bank has a return on equity capital of 12 percent and that its retention ratio is 35 percent. How fast can this bank’s assets grow without reducing its current ratio of capital to assets? Suppose that the bank’s earnings (measured by ROE) drop unexpectedly to only two-thirds of the expected 12 percent figure. What would happen to the bank’s ICGR? (3 marks)
• What do you mean by CAMELS rating and how is it used? (2 marks)
• Suppose a business borrower projects that it will experience net profits of $2.1 million, compared to $2.7 million the previous year, and will record depreciation and other noncash expenses of $0.7 million this year versus $0.6 million last year. What is this firm’s projected cash flow for this year? Is the firm’s cash flow rising or falling? What are the implications for a lending institution thinking of loaning money to this firm? Suppose sales revenue rises by $0.5 million, cost of goods sold decreases by $0.3 million, while cash tax payments increase by $0.1 million and noncash expenses decrease by $0.2 million. What happens to the firm’s cash flow? What would be the lender’s likely reaction to these events? (3 marks)

The relevant formula is:

(Note: Assume the noncash expense is already included in the cost of goods sold.)