CHP Exercises and Answers

6-3 Bluebird Savings Association has a ratio of equity capital to total assets of 9 percent.
In contrast, Cardinal Savings reports an equity-capital-to- asset ratio of 7 percent. What is the
value of the equity multiplier for each of these institutions? Suppose that both institutions
have an ROA of 0.85 percent. What must each institution’s return on equity capital be? What
do your calculations tell you about the benefits of having as little equity capital as regulations
or the marketplace will allow?
Bluebird Savings Association has an equity-to-asset ratio of 9 percent which means its equity
multiplier must be:
1/ (Equity Capital / Assets) = = 1 / 0.09 = 11.11x
In contrast, Cardinal Savings has an equity multiplier of:
1/ (Equity Capital / Assets) = = 14.29x
With an ROA of 0.85 percent Bluebird Savings Association would have an ROE of:
ROE = 0.85 x 11.11x = 9.44 percent.
With an ROA of .85 percent Cardinal Savings would have an ROE of:
ROE = 0.85 x 14.29x = 12.14 percent
In this case Cardinal Savings is making greater use of financial leverage and is generating a
higher return on equity capital.
The latest report of condition and income and expense statement for Happy Merchants
National Bank are as shown in the following tables:
Happy Merchants National Bank
Income and Expense Statement (Report of Income)
Interest and fees on loans $44
Interest and dividends on securities 6
Total interest income 50
Interest paid on deposits 32

Interest on nondeposit borrowings 6
Total interest expense 38
Net interest income 12

Provision for loan losses 1
Noninterest income and fees 16
Noninterest expenses:
Salaries and employee benefits 10*
Overhead expenses 5
Other noninterest expenses 2
Total noninterest expenses 17
Net noninterest income -1
Pretax operating income 10

Securities gains (or losses) 2
Pretax net operating income 12
Taxes 2
Net operating income 10
Net extraordinary income -1
Net income 9
*Note: the bank currently has 40 FTE employees.
Happy Merchants National Bank

Report of Condition
Assets Liabilities
Cash and deposits due from $10 $19
banks 0 Demand deposits 0
Investment securities 150 Savings deposits 180
Federal funds sold 10 Time deposits 470
Net loans 670 Federal funds purchased 60
(Allowance for loan losses = 25) Total liabilities 900
(Unearned income on loans = 5) Equity capital
Plant and equipment 50 Common stock 20
Surplus 25
Total assets 980 Retained earnings 35
Total Capital 80
Total Earnings Assets 830 Interest-bearing deposits 650
Fill in the missing items on the income and expense statement. Using these statements, calculate
the following performance measures:
ROE Asset utilization

ROA Equity multiplier
Net interest margin Tax management efficiency
Net noninterest margin Expense control efficiency
Net operating margin Asset management efficiency
Earnings spread Funds management efficiency
Net profit margin Operating efficiency ratio
What strengths and weaknesses are you able to detect in Happy Merchants’ performance?
Net interest margin= interest income – interest expense/TA
How large is the spread between interest revenues and interest cost (efficiency ratio for
management if successful to decrease expenses) and a profitability ratio.
It is usually negative
efficiency ; how successful is the management in in increasing revenues and cutting operating
expenses
Is the bank successful rising cheap capital and lend them to increase earnings
Net profit margin: measures effectiveness of management in reducing expenses and in service pricing
policies
Tot operating revenues: interest income+noninterest income and fees

6-18. A bank reports that the total amount of its net loans and leases outstanding is $936
million, its assets total $1,324 million, its equity capital amounts to $110 million, and it holds
$1,150 million in deposits, all expressed in book value. The estimated market values of the
bank's total assets and equity capital are $1,443 million and $130 million, respectively. The
bank's stock is currently valued at $60 per share with annual per-share earnings of $2.50.
Uninsured deposits amount to $243 million and money - market borrowings total $132
million, while nonperforming loans currently amount to $43 million and the bank just
charged off $21 million in loans. Calculate as many of the risk measures as you can from the
foregoing data.
Net Loans and Leases = $936 mill. Uninsured Deposits = $243 mill.
Total Assets $1,324 mill. Total Deposits $1,150 mill.
= 0.7069 or 70.69 percent = 0.2113 or 21.13 percent
Capital risk:
Equity Capital = $130 mill. Stock Price = $60
Total Assets $1,443 mill. Earnings Per Share $2.50
= 0.0901 or 9.01 percent = 24 X

Credit risk
Nonperforming Assets = $43 mill. = 0.0459 or 4.59 percent
Net Loans and Leases $936 mill.
Credit risk: Capital risk:
Charge-offs of loans = $21 Purchased Funds = $243 mill. + $132 mill.
Total Loans and Leases $936 Total Liabilities $1,324 mill. - $110 mill.
= 0.0224 or 2.24 percent = 0.3089 or 30.89 percent

Price risk:
Book Value of Assets = $1324 = 0.9175 or 91.75
percent
Market Value of Assets $1443

CHP Exercises and Answers

Uploaded by

Copyright:

Available Formats

CHP Exercises and Answers

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CHP Exercises and Answers

Uploaded by

Copyright:

Available Formats

6-3 Bluebird Savings Association has a ratio of equity capital to total assets of 9 percent.

1/ (Equity Capital / Assets) = = 1 / 0.09 = 11.11x

In contrast, Cardinal Savings has an equity multiplier of:

1/ (Equity Capital / Assets) = = 14.29x

ROE = 0.85 x 11.11x = 9.44 percent.

ROE = 0.85 x 14.29x = 12.14 percent

Interest paid on deposits 32

Net interest income 12

Pretax operating income 10

Happy Merchants National Bank

ROE Asset utilization

Tot operating revenues: interest income+noninterest income and fees

= 0.7069 or 70.69 percent = 0.2113 or 21.13 percent

= 0.0901 or 9.01 percent = 24 X

= 0.0224 or 2.24 percent = 0.3089 or 30.89 percent

You might also like