Question

Suppose Melvin’s Bank starts with the balance sheet in Table 9.4A and the income statement in Table 9.2 (chapter 9). Clearly show how the balance sheet and income statement change in each of the following scenarios. Also calculate the new ROA and ROE for each scenarios. [8 points]

a. The bank issues $30 of new stock and uses the proceeds to buy more Treasury bills.
b. The bank issued an additional letter of credit, for which it is paid $10 a year. At the same time, an additional bank manager is hired by the bank and her salary is $7 per year.

Table 9.2: Income Statement for Melvin's Bank (for the year ended December 31, 2021

Interest Income:
Securities: 4%($30) = $1.20
Loans: 8%(80) = $6.40
Total: $7.60

Noninterest Income: $5.00
Total Income: $12.60

Interest Expense (Savings Account): 4%(50) = $2.00

Noninterest Expense (Salaries, etc.): $6.00

Total Expense: $8.00

Profits: (Income-Expense): $4.60

ROA = (profits/assets) = ($4.60/$120) = 3.8%

ROE = (profits/capital) = ($4.60/$20) = 23$

Table 9.4: Liquidity Risk at Melvin's Bank (Initial Balance Sheet)

Assets:
Reserves: 10
Securities: 30
Loans: 80
Total: 120

Liabilities and Net Worth:
Checking Deposits: 50
Nontransaction Deposits: 50
Net Worth: 20
Total: 120

Answer 1