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1. City Bank offers your firm a line of credit at 5% annually up to $50 million. In addition, the bank requires you to maintain a 2% compensating balance against the amount you borrowed. What is the effective interest rate on this line of credit? A. 2.041% B. 5.102% C. 5% D. 4.902% E. 5.263% 2. Suppose there were two factors influencing the past default behavior of borrowers: the leverage or debt-assets ratio (D/A) and the profit margin ratio (PM). Based on past default (repayment) experience, the linear probability model is estimated as: PDi = 0.2(D/Ai) - 0.8(PMI) + error i Prospective borrower A has a D/A = 0.5 and a PM = 6%, and prospective borrower B has a D/A = 0.7 and a PM = 2%. Calculate the prospective borrowers' expected probabilities of default E(PDI). Which borrower is the better loan candidate? A. Borrower A is the better loan candidate with E(PD) = 0.052 B. Borrower B is the better loan candidate with E(PD) = 0.124 C. Borrower A is the better loan candidate with E(PD) = 0.148 D. Borrower B is the better loan candidate with E(PD) = 0.092 E. Borrower A is the better loan candidate with lower D/A ratio 3. Suppose that the financial ratios of a potential borrowing firm take the following values: Working capital/Total assets ratio (x1) = 0.7 Retained earnings/Total assets ratio (X2) = 0.2 Earnings before interest and taxes/Total assets ratio (X3) = 0.1 Market value of equity/Book value of total liabilities (X4) = 0.05 Sales/Total assets ratio (X5) = 0.5 Which of the following is correct? A. Altman's Z score for the borrower is 1.915 B. The probability of default for the borrower is 1.98% C. Altman's Z score for the borrower is 1.98 D. The borrower is considered a high default risk borrower E. The borrower is considered a low default risk borrower

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