atre primary reserves and secondary reserves, and what are they supposed to do?
ID: 2819705 • Letter: A
Question
atre primary reserves and secondary reserves, and what are they supposed to do? 5. S uppose a bank is expected to pay a dividend of $5 per share in period 1, dividends are expected to grow 6% a year for all future years, and the appropriate discount rate to reflect shareholder risk is 10%. What is the value of the bank's stock? 6. Suppose investors expect a bank to pay a $5 dividend at the end of period 1, $10 at the end of period 2, and then plan to sell the stock for a price of $150 per share. If the relevant discount rate to capture risk is 10%, what is the current value of the bank's stock?Explanation / Answer
4.
Primary reserves : Minimum cash required for operating a bank-inlcuding legal reserves parked with Federal Reserve/ other correspondent bank. cash required to operate a bank-legal/mandatory reserve requirements, & uncollected checks. Consist of cash in bank & deposits owed by other banks. More liquid assets than secondary reserves.
First line of defense: Kept to cover unexpected major withdrawals/ bank runs. Serve as defense against substantial liquidity reduction.
Secondary reserves: Assets invested in low risk category: short-term marketable securities-generally Tbills & short-term GSecs. Earn interest as well as supplemental liquidity source.
Second Line of Defense
5.
=Next Dividend/(return-growth rate)
=5/(10%-6%)
=125
6.
=5/1.1+10/1.1^2+150/1.1^2
=136.7768595
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