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a. What is Levered Bank's expected ROE with 2.0% equity? b. Assuming perfect capital markets, what will Levered Bank's expected ROE be after it increases
a. What is Levered Bank's expected ROE with 2.0% equity? b. Assuming perfect capital markets, what will Levered Bank's expected ROE be after it increases its equity to 4.0% ? c. Consider the difference between Levered Bank's ROE and its cost of debt. How does this "premium" compare before and after the Bank's increase in leverage? d. Suppose the return on Levered Bank's assets has a volatility of 0.25%. What is the volatility of Levered Bank's ROE before and after the increase in equity? e. Does the reduction in Levered Bank's ROE after the increase in equity reduce its attractiveness to shareholders? Explain. a. What is Levered Bank's expected ROE with 2.0% equity? The ROE is 6. (Round to two decimal places.) b. Assuming perfect capital markets, what will Levered Bank's expected ROE be after it increases its equity to 4.0% ? The new ROE is %. (Round to two decimal places.) c. Consider the difference between Levered Bank's ROE and its cost of debt. How does this "premium" compare before and after the Bank's increase in leverage? The premium before the increase is %. (Round to two decimal places.) The premium after the increase is 6 . (Round to two decimal places.) d. Suppose the return on Levered Bank's assets has a volatility of 0.25%. What is the volatility of Levered Bank's ROE before and after the increase in equity? The volatility before the increase is %. (Round to two decimal places.) The volatility after the increase is 6 . (Round to two decimal places.) e. Does the reduction in Levered Bank's ROE after the increase in equity reduce its attractiveness to shareholders? Explain. , premium and risk both fall by (Select from the drop-down menus.)
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