Question

In: Accounting

Assets Liabilities Reserves 250 Deposits   Required __     Transaction (checking) deposits 1000   Excess __      Savings deposits 3000...

Assets Liabilities
Reserves 250 Deposits
  Required __     Transaction (checking) deposits 1000
  Excess __      Savings deposits 3000
Loans    Money Market deposits 500
    Variable rate loans 750 Time deposits (CDs)
    Short-term loans 1600     Fixed rate 500
   Long-term fixed rate loans    2000     Variable rate 100
Securities Borrowing
   Short-term securities 500     Fed funds borrowed 0
   Long-term securities 600


a) Refer to the bank balance sheet above. Suppose values are in millions of dollars. Suppose return on assets (ROA) is 1.2%. Suppose bank owners convince bank managers to borrow 1000 million from other banks and make more loans. What is the new leverage ratio?

b) Refer to the bank balance sheet above. Suppose values are in millions of dollars. Suppose return on assets (ROA) is 1.2%. Suppose bank owners convince bank managers to borrow 1000 million from other banks and make more loans. Assuming no change in ROA, What is the new value for ROE?

Solutions

Expert Solution


(a) New Leverage Ratio:-

Formula = Total Debts / Total Assets

            =$6100/$5450 = 1.12 times

Total Debts includes long term as well as short term debts.

Since loans are given on assets side which means company hade given loans to someone else.

Time deposits are given in liabilities side. we assume it short term deposits with company payable within 12 months or less.

Total Debts Amount(in Million $)
Deposits
(1) transactions Checking Deposits 1000
(2) Saving deposits 3000
(3) Money Market Deposits 500
Time Deposits
(1) Fixed Rate 500
(2) variable Rate 100
borrowings from Banks 1000
Total Debts 6100
Total Assets
Loans
(1) Fixed Rate Loans 750
(2) Short term loans 1600
(3) long term fixed finance 2000
Securities;-
Short Term Securities 500
Long term Securities 600
Total Assets 5450

(b)Return on equit (ROE)

Return on Assets = Return/ Total Assets

            12% = return / $5450

           Return = $5450*12%

           return = $654 Million

Return on Equity = Return / Equity

                         = $654 / $250

         ROE         = 2.62%

Since there is no change in ROA, the return will be same.

ekkarill92 answered 1 year ago
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