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
3
Deposits
35
Liquid assets
30
Interbank loan
5
Loans
55
Equity
48
Total assets
88
Total liabilities and equity
88
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%) 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? (3 marks)
b. What is the impact on the balance sheet after the necessary adjustments are made according to market value accounting? (3 marks)
c. What is the new market to book value ratio if UniBank has $1 million shares outstanding? (1 mark)
