A manager decides not to lend to any firm in sectors that generate losses in excess...
A manager decides not to lend to any firm in sectors that generate losses in excess of 3% of capital.
a) If the average historical losses in the automobile sector total 10 percent, what is the maximum loan a manager can lend to firms in this sector as a percentage of total capital?
b) If the average historical losses in the mining sector total 12 percent, what is the maximum loan a manager can lend to firms in this sector as a percentage of total capital?
Homework Answers
a) Concentration limit can be defined as maximum loan that can be given to a particular sector as a percentage of total capital.
According to question, Maximum loss as percentage of total capital = 3%
Loss rate = Historical losses in automobile sector = Percentage of amount lost of defaulted loans in automobile sector = 10%
We know that
Concentration limit for automobile sector = Maximum loss as percentage of total capital x (1 / Loss rate) = 3% x (1/10%) = 30%
Hence the maximum loan a manager can lend to firms in automobile sector as a percentage of total capital = 30%
b) Concentration limit can be defined as maximum loan that can be given to a particular sector as a percentage of total capital.
According to question, Maximum loss as percentage of total capital = 3%
Loss rate = Historical losses in mining sector = Percentage of amount lost of defaulted loans in mining sector = 12%
Concentration limit for mining sector = Maximum loss as percentage of total capital x (1 / Loss rate) = 3% x (1/12%) = 25%
Hence the maximum loan a manager can lend to firms in mining sector as a percentage of total capital = 25%
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