Question

Cajun Bank currently has the following 4 balance sheet accounts:

     $US-denominated mortgages                                $125,000,000 at a 9% annual rate
     $US-denominated commercial loans                    $100,000,000 at an 8% annual rate
     $US-denominated savings accounts                      $90,000,000 at a 6% annual rate
     $US-denominated certificates of deposit             $110,000,000 at a 7% annual rate

These accounts, plus Shareholders’ Equity, comprise the entire Balance Sheet. All of Cajun Bank’s Revenue and Expenses are associated with these 4 accounts. Cajun Bank’s tax rate is 35%.

Based on the above, please calculate Cajun Bank’s Return on Assets (ROA), Return on Equity (ROE) and Equity Multiplier (EM) for the current year?                                       

Answer 1

Liabilities	Amount	Assets	Amount
9% $US-Denominated Savings Accounts	$    90,000,000.00	9% $US-Denominated Mortgages	$ 125,000,000.00
7% $US-Denominated Certificate of Deposit	$ 110,000,000.00	8% $US-Denominated Commercial Loans	$ 100,000,000.00
Shareholder's Equity (Balancing Figures)	$    25,000,000.00
Total	$ 225,000,000.00	Total	$ 225,000,000.00

Income Statement
Particulars	Amount	Amount
Revenue:
Income from Mortgages	$ 11,250,000.00
Income from Commercial Loans	$    8,000,000.00	$ 19,250,000.00
Less: Expenses
Interest Expenses on Savings Accounts	$    5,400,000.00
Interest Expenses on Certificate of Deposit	$    7,700,000.00	$ 13,100,000.00
Income before Tax		$    6,150,000.00
Less: Tax @ 35%		$    2,152,500.00
Income after Tax		$    3,997,500.00

1. Return on Assets = Net Income after tax / Total Assets

ROA = $3,997,500 / $225,000,000 * 100

ROA = 1.78%

2. Return on Equity = Net Income after tax / Equity Shareholder Fund

Return on Equity = $3,997,500 / $25,000,000

Return on Equity = 15.99%

3. Equity Multiplier = Total Assets / Shareholder's Equity

Equity Multiplier = $225,000,000 / $ 25,000,000

Equity Multiplier = 9 times