Purchase of a Finance Company, Analysis of Balance Sheet, Risk Difference Relative to a Bank, Leasing Function

Your bank is considering the purchase of a finance company. The financial information you have been given is as follows:

Assets ($ millions)
Consumer loans		60.0
Business loans		140.0
Real estate loans		50.0
Less reserve for loan losses		20.0
Other assets		50.0
Total assets		280.0
Liabilities ($ millions)
Bank loans		35.0
Commercial paper		130.0
Owed to parent		22.0
Debt not elsewhere		44.0
Other liabilities		19.0
Total liabilities		250.0
Equity		30.0
Total liabilities and equity		280.0

Given the typical finance company balance sheet:

1. What would be the typical amount held as reserve for loan losses?
2. What would be the typical amount held as business loans?
3. How much commercial paper would be expected for this company?
4. How much in bank loans would be expected for this company?
5. How does the firm compare to the average capital-to-total-asset ratio of 11%?
6. After reviewing the firm's position relative to Figure 4, what recommendation would you make to your management regarding the purchase of this finance company?
7. What economies of scale would you expect if your larger bank purchased this finance company?
8. What economies of scope would you expect if your larger bank purchased this finance company?
9. What is the difference between the risk of the finance company and the bank in terms of government regulations?
10. What advantages (if any) could the bank gain by purchasing the finance company and using it to own and lease productive assets (such as computers) to the parent company (bank)?

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