1) Times are tough for Auger Biotech. Having increased $85 million in the initial public offering of its stock early in year, company is poised to launch its product. If Auger involves in the promotional campaign costing= $60 million this year, its annual after-tax cash flow over next 5 years will be only= $700,000. If it doesn’t undertake campaign, it expects its after-tax cash flow to be minus $18 million annually for same period. Suppose the company has decided to stay in its selected business, is this campaign valuable when discount rate is 10%? Describe why or why not?
2) Assume Bank East has $100 million of demand deposits. Required reserve ratio is 15%. Bank is fully loaned up initially.
a) Create balance sheet of Bank East based on above information.
b) Assume Fed lowers needed reserve ratio from 15% to 10%. Describe how much reserve can Bank East free up?
c) Update Bank East's balance sheet supposing that bank leases freed up reserve in reserve deposit account it has with Fed.
d)(i) Update Bank East's balance sheet supposing bank decides to be fully loaned up again; (ii) contrast the updated demand deposit balance to initial balance in a) and describe the difference if any; (iii) contrast updated loan balance to the initial balance in a) and describe the difference if any?