Question

In: Economics

Consider a bank with $500 million in loans and $375$375 in deposits. Calculate the bank's net worth.

net worth: $

millionmillion

Calculate the bank's leverage ratio.

leverage ratio:

Suppose that $50 million of the bank's loans fail and become worthless. What is the bank's net worth now?

net worth: $

millionmillion

What is its rate of return on equity?

rate of return:

Imagine that the bank still has $500 million in loans, but now has deposits worth $275.$275. What is the bank's new leverage ratio?

leverage ratio:

Suppose $50 million of the bank's loans fail. Calculate the bank's new rate of return on equity.

rate of return:

Solutions

Expert Solution

Q(1)

So, in this case, we have been provided with two data sets one is bank with $500 million in loans accounts and $375 in deposits and now to calculate the bank's net worth we have to subtract the total liabilities from the asset that a bank has, as we now for a bank amount deposited is the liabilities for it and amount that he has given for the loan is an asset for him because on that loan the bank will earn profit

Bank's net worth = Total assets (Loan Amount) - Total liabilities (Deposited Amount)

on putting values in the above formula

Bank's net worth = $500 - $375

Bank's net worth = $125

Answer: $125

Q(2)

To calculate the leverage ratio. we take the total liabilities divided by the bank assets which are distributed in the form of loans

leverage ratio = Liabilities/Total assets

on putting a value on the above formula

leverage ratio = $375/$500

leverage ratio = 0.75

Answer : leverage ratio = 0.75

Q(3)

So now in the case when the $50 million of the bank's loans fail and become worthless than in that case bank's net worth would change and will be adjusted for the change

Bank's net worth = Total assets (Loan Amount) - Total liabilities (Deposited Amount)

on putting values in the above formula

Bank's net worth = $450 - $375

Bank's net worth = $75

Answer: $75

Q(4)

Since $50 has been lost due to non-performing assets that the bank has given in the form of loans thus we can say, definitely the rate of return would have decreased and it is calculated by a comparative method by using simple mathematics

initial investment = $500

final investment = $450

thus there is a decrease in the assets by $50 and it has to be replaced by using the deposit we have, thus $50 will be around 13.5% of the deposit we have thus s we can say we have a negative (-13.5%) rate of return

Answer = -- 13.5%

Q(5)

So it is given that now bank has $500 million in loans, and deposits worth $275 then to calculate the leverage ratio, we take the total liabilities divided by the bank assets which are distributed in the form of loans.

leverage ratio = Liabilities/Total assets

on putting a value on the above formula

leverage ratio = $275/$500

leverage ratio = 0.55

Answer : leverage ratio = 0.55

Q(6)

initial investment = $500

final investment = $450

thus there is a decrease in the assets by $50 and it has to be replaced by using the deposit we have, thus $50 will be around 18% of the deposit we have thus s we can say we have a negative (-18%) rate of return

Answer = -- 18%

Rahul Sunny answered 1 year ago

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