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A bank has $5 million in liquid assets and $95 million in nonliquid assets. Large deposit withdraw $9 million in deposits. To cover the withdrawals the bank sells all of its liquid but must sell $7 million at less than their book value of their nonliquid assets to raise the needs. As a result the bank's equity will Fall $3 million Fall $4 million Fall $7 million

A bank has $5 million in liquid assets and $95 million in nonliquid assets. Large deposit withdraw $9 million in deposits. To cover the withdrawals the bank sells all of its liquid but must sell $7 million at less than their book value of their nonliquid assets to raise the needs. As a result the bank's equity will Fall $3 million Fall $4 million Fall $7 million

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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**Scenario Description:** A bank has $5 million in liquid assets and $95 million in nonliquid assets. Large depositors unexpectedly withdraw $9 million in deposits. To cover the withdrawals, the bank sells all of its liquid assets at book value but must sell $7 million at less than the book value of their nonliquid assets to raise the additional funds needed. As a result, the bank's equity will ____________. **Multiple Choice Options:** - ○ Fall $3 million - ○ Fall $4 million - ○ Fall $7 million - ○ Remain unchanged - ○ Rise $5 million --- **Explanation:** When the bank sells its liquid assets, it can muster only $5 million, leaving a shortfall of $4 million to cover the $9 million withdrawal. To cover this shortfall, the bank must sell $7 million worth of its nonliquid assets at a loss. The impact on equity will depend on the loss taken on the sale of the nonliquid assets. Specifically, if the bank sells $7 million in nonliquid assets at less than book value, there is a reduction in its equity corresponding to the loss incurred from selling below book value.
Transcribed Image Text:**Scenario Description:** A bank has $5 million in liquid assets and $95 million in nonliquid assets. Large depositors unexpectedly withdraw $9 million in deposits. To cover the withdrawals, the bank sells all of its liquid assets at book value but must sell $7 million at less than the book value of their nonliquid assets to raise the additional funds needed. As a result, the bank's equity will ____________. **Multiple Choice Options:** - ○ Fall $3 million - ○ Fall $4 million - ○ Fall $7 million - ○ Remain unchanged - ○ Rise $5 million --- **Explanation:** When the bank sells its liquid assets, it can muster only $5 million, leaving a shortfall of $4 million to cover the $9 million withdrawal. To cover this shortfall, the bank must sell $7 million worth of its nonliquid assets at a loss. The impact on equity will depend on the loss taken on the sale of the nonliquid assets. Specifically, if the bank sells $7 million in nonliquid assets at less than book value, there is a reduction in its equity corresponding to the loss incurred from selling below book value.
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