2. The effects of changes in the expected cash flow and the requiredrate of return on a commercial banks value

Use the following table to identify the factors directly affecting expected cash flows and the factors directly affecting the rate of return required by investors.

Determinant	Expected Cash Flows	Required Rate of Return by Investors
Change in economic growth
Change in the risk premium
Change in industry conditions
Management abilities
Change in the risk-free interest rate

Suppose that regulators eliminated certain geographic constraints on banks operations. Which of the following is an accurate description of the effect of relaxed geographic constraints on banks operations on commercial banks expected cash flows?

Commercial banks face more regional competition; expected cash flows decrease.

The cost of banks operations in the regions declines; expected cash flows increase.

Commercial banks expand across new regions; expected cash flows increase.

The cost of banks operations in the regions increases; expected cash flows decrease.

Suppose that the banking industry sees an improvement in management skills. Which of the following is an accurate description of the effect of an improvement in management skills on the rate of return required by investors?

Funds are invested in assets associated with less risk, the risk premium decreases, and the risk-free rate decreases.

Funds are invested in assets associated with less risk, the risk premium increases, and the risk-free rate increases.

Funds are invested in riskier assets, the risk premium increases, and the risk-free rate increases.

Funds are invested in riskier assets, the risk premium decreases, and the risk-free rate decreases.