Question

Nice Horizon Bank has the following measures of bank profitability: EM = 14.3 and ROA = 1.04%.

Gold Coast Bank measures are EM = 13.1 and ROA = 1.12%. Calculate both banks’ net profit

after taxes and equity capital if both banks’ assets are equal to $110 million. NHB GCB Net profit after taxes Equity capital

Answer 1

Return on Assets (ROA) = (Net profit after taxes / Total assets) x 100

We will use ROA to find the net profit after taxes.

Equity Multiplier (EM) = Total assets / Equity Capital

We will use EM to find the Equity Capital.

Nice Horizon Bank (NHB)

ROA = (Net profit after taxes / Total assets) x 100

or, 1.04% = (Net profit after taxes / $110,000,000) x 100

or, 0.0104 = Net profit after taxes / $110,000,000

or, Net profit after taxes = $110,000,000 x 0.0104 = $1,144,000

EM = Total assets / Equity Capital

or, 14.3 = $110,000,000 / Equity Capital

or, Equity Capital = $110,000,000 / 14.3 = $7,692,307.6923077 or $7,692,307.69

Gold Coast Bank (GCB)

ROA = (Net profit after taxes / Total assets) x 100

or, 0.0112 = Net profit after taxes / $110,000,000

or, Net profit after taxes = $110,000,000 x 0.0112 = $1,232,000

EM = Total assets / Equity capital

or, 13.1 = $110,000,000 / Equity capital

or, Equity capital = $110,000,000 / 13.1 = $8,396,946.5648855 or $8,396,946.56