1. Foreign banks operating in the US compete with both US commercial banks and investment banks due to historical restrictions in US banking laws that separated commercial and investment banking and limited branching. 2. Foreign banks were permitted to engage in both commercial and investment activities earlier than US banks. 3. Foreign banks also sought to denominate assets in US dollars during economic slowdowns, increasing their presence and competition in the US market.

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2. Net Present Value
NPV is found by subtracting a projects initial investment from the present value of its cash inflo
ws discounted as a rate equal to the cost of capital of the firm
Net Present Value = ∑
𝒄𝒇𝒕
𝟏+𝒌 ^𝒕
- Cf0
Cf0 = Initial Investment
Cft = Cash Flow
T= time
K = Cost of capital

3. Net Present Value
Net Present Value = ∑
𝒄𝒇𝒕
𝟏+𝒌 ^𝒕
- Cf0
=
𝟏𝟎𝟎
𝟏+.𝟏𝟎 𝟏 +
𝟐𝟎𝟎
𝟏+.𝟏𝟎 𝟐 +
𝟏𝟓𝟎
𝟏+.𝟏𝟎 𝟑 +
𝟕𝟓
𝟏+.𝟏𝟎 𝟒 - 350
= 90.91 + 165.29 + 112.70 + 51.3 - 350
= 70.12
Year Cash flows ($)
0 -350
1 100
2 200
3 150
4 75

4. Internal rate of return (IRR)
Internal rate of return (IRR) is the interest rate at which the net present value of all the cash flo
ws (both positive and negative) from a project or investment equal zero. Internal rate of return
is used to evaluate the attractiveness of a project or investment
IRR = Lower discount rate +
𝑵𝑷𝑽 𝒐𝒇 𝒍𝒐𝒘𝒆𝒓 𝒅𝒊𝒔𝒄𝒐𝒖𝒏𝒕 𝒓𝒂𝒕𝒆
𝑵𝑷𝑽 𝒅𝒊𝒇𝒇𝒆𝒓𝒆𝒏𝒄𝒆
( Discount rate difference)

5. Internal rate of return (IRR)
Suppose,
Higher discount rate = 20%
Lower discount rate = 14%
NPV of 20 %
=
𝟏𝟎𝟎
𝟏+.𝟐𝟎 𝟏 +
𝟐𝟎𝟎
𝟏+.𝟐𝟎 𝟐 +
𝟏𝟓𝟎
𝟏+.𝟐𝟎 𝟑 +
𝟕𝟓
𝟏+.𝟐𝟎 𝟒 - 350
= 83.33 + 138.89 + 86.81 + 36.17 -350
= 345.2-350
= -4.8

6. Internal rate of return (IRR)
NPV of 14%
=
𝟏𝟎𝟎
𝟏+.𝟏𝟒 𝟏 +
𝟐𝟎𝟎
𝟏+.𝟏𝟒 𝟐 +
𝟏𝟓𝟎
𝟏+.𝟏𝟒 𝟑 +
𝟕𝟓
𝟏+.𝟏𝟒 𝟒 - 350
= 87.72 + 153.89 +101.25 +44.41 – 350
= 387.27-350
= 37.27
IRR = 0.14 +
𝟑𝟕.𝟐𝟕
𝟒𝟐.𝟎𝟕
(0.06)
= 19%

7. Payback Period
The amount of time required for the firm to recover its initial investment in a
project, calculated from cash inflows.
Year Cash Inflow Cumulative cash Flow
0 -350 -350
1 100 -250
2 200 -50
3 150 100
4 75 175
Payback Period = 2 years +
𝟓𝟎
𝟏𝟓𝟎
= 2.33 years

8. Discount Payback Period (DPB)
Year Cash Inflow Present value fac
tor
(PVf)
Discount Cash Fl
ow (cf*PVf)
Cumulative cash
Flow
0 -350 1 -350 -350
1 100 0.91 91 -259
2 200 0.83 166 -93
3 150 0.75 112.5 19.5
4 75 0.68 51 70.5
DPB = 2 years +
𝟗𝟑
𝟏𝟏𝟐.𝟓
= 2.83 years

9. Chose for best technique of capital Budgeting
We chose Net Present value for calculating Capital Budgeting because its
better than IRR from the point of intermediate cash flow investment
NPV consider the Intermediate cash flows are invested at cost of capital
but IRR considers the intermediated cash flow will be invested at IRR rat
e which is not always possible

10. How do finance companies signal “solvency and
safety to investors”?
Finance company are heavy borrowers in the capital markets and do not enjoy the “saf
ety net” as banks, they need to signal their safety and solvency to investor. Such signal
s are usually sent to holding much higher equity or capital to assets ratios and theref
ore lower leverage ratios than banks.
They have some significant capitals and access to finance companies. They operate the
nonfinancial, non-regulated companies than any other type of financial institution. In t
his way, the finance companies signal solvency and safety to investors.

11. What have been the trends in the number of mutual funds
since 1980?
Mutual funds refer that continuously stand ready to sell new share to investor and to redeem
outstanding shares on demand at their fair market value.
Trends in the number of mutual funds since 1980
1. The first thing is that there was a strong trend towards investing in stock in mutual fund refle
cting the price of share value during the 1990s.
2. All mutual funds’ assets where long term funds decline in growth rate of short term
3. Rise in the share value during 1990s
4. Money market mutual fund provide an alternative investment to interest bearing deposits at
commercial bank

12. What have been the trends in the number of mutual fund
s since 1980?
5. In 2007, the situation became worst comparing to 2008 as there was a tumbled of t
he market.
6. In 2007, due to risk in market risk, default risk and interest rate fluctuate those fac
tors.
7. The reserve returned back in 2009 for short term financial statement total investm
ent $2772.6 billion 81% of total asset.

13. Why do foreign banks operating in the US compete with both US
commercial banks and investment banks?
I. U.S. banking laws prohibited interstate banking, and they limited branching activity, restricti
ons that favored the existence of many small local banks.
II. Banks in many other developed nations are permitted to engage in securities and insurance
activities that until recently in the U.S. were restricted by Depression-era banking laws
III. The foreign banks operating in the US compete with both US commercial banks and investm
ent banks because of the increase in stock value, dollar value. When there was an economic
slowdown worldwide, the total offerings increased in US. The foreign banks also want to den
ominate the US currency than their country’s currency.
http://www.frbsf.org/education/publications/doctor-econ/2002/april/us-banking-system-foreign
/