Suppose that a bank has $10 billion of one-year loans and $30 billion of five-year loans. These are financed by $35 billion of one-year deposits and $5 billion of five-year deposits. The bank has equity totaling $2 billion and its return on equity is currently 12%. Estimate what change in interest rates next year would lead to the bank's return on equity being reduced to zero. Assume that the bank is subject to a tax rate of 30%. ABC have a debt equity ratio of 0.80 and a Return on Assets of 8.9%. Also, if their Total Equity is valued at $590m then: i) What is their Equity Multiplier? ii) Return on Equity? iii) Using the abbreviated Dupont identity, what is their Net Income?
Suppose that a bank has $10 billion of one-year loans and $30 billion of five-year loans. These are financed by $35 billion of one-year deposits and $5 billion of five-year deposits. The bank has equity totaling $2 billion and its return on equity is currently 12%. Estimate what change in interest rates next year would lead to the bank's return on equity being reduced to zero. Assume that the bank is subject to a tax rate of 30%. ABC have a debt equity ratio of 0.80 and a Return on Assets of 8.9%. Also, if their Total Equity is valued at $590m then: i) What is their Equity Multiplier? ii) Return on Equity? iii) Using the abbreviated Dupont identity, what is their Net Income?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Suppose that a bank has $10 billion of one-year loans and
$30 billion of five-year loans. These are financed by $35
billion of one-year deposits and $5 billion of five-year
deposits. The bank has equity totaling $2 billion and its
return on equity is currently 12%. Estimate what change in
interest rates next year would lead to the bank's return on
equity being reduced to zero. Assume that the bank is
subject to a tax rate of 30%.
ABC have a debt equity ratio of 0.80 and a Return
on Assets of 8.9%. Also, if their Total Equity is
valued at $590m then:
i) What is their Equity Multiplier?
ii) Return on Equity?
iii) Using the abbreviated Dupont identity, what is
their Net Income?
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