Question

15. (All values represent percentage of assets). USA Bank has gross interest expense of 3%, noninterest expense of 0.5%, loan loss provision of 1%, gross interest income of 8.5%, capital ratio (capital / assets) of 20%, tax rate of 40%, and noninterest income of 2%. What is USA Bank's ROE?

Answer 1

Here, we have to find the ROE of USA Bank which is calculated by dividing the net income which is available for the equity share holder of the bank by the total equity capital outstanding to the company. For this purpose we have to find out the value of EARNINGS AVAILABLE FOR EQUITY SHAREHOLDERS and the EQUITY SHARE CAPITAL of the company.

Since everything here is given in terms of percent to the total assets then we can compaire the above values in terms of net assets as well.

given that, Capital Ratio =20%

which means,

therefore, Capital = 0.20*Assets

Also, for computing total Earnings available for Equity Shareholders, we have to prepair an income statement in which values are defined in terms of assets.

Expenditures	Amount	Income	Amount
Non Interest Expenses	0.005 of assets	Gross Interest Income	0.085 of assets
Interest Expenses	0.03 of assets	Non Interest Income	0.02 of assets
Loan loss Provisions	0.01 of assets
Net profit	0.06 of assets
	0.105		0.105
Tax (@40%)	0.024of assets	Net profit	0.06 of assets
Earnings Available for Equity Share holders	0.036of assets
	0.06		0.06

hence we get both the values of earnings for equity share holders which is 0.036 of assets and the total capital which is 0.20 of assets.

Now, Return on Equity = Earnings Available for Equity Shareholders / total capital

=

hence ROE of USA Bank is 18%