Challenge Problem - Show all formulas Explanation of the results of your work must be included. What does your answer mean in words?

This problem focuses on bank capital management and various capital ratio measures. Following are recent balance sheet accounts for Prime First National Bank.

Cash Assets	$17 million	Demand deposits	$50 million
Loans secured by real estate	40	Time and savings deposits	66
Commercial loans	45	Federal funds purchased	15
Government securities owned	16	Trust-preferred securities	2
Goodwill	5	Common equity	5
Bank fixed assets	15
Total assets	$138 million	Total liabilities and stockholder's equity	$138 million

Note: The bank has loan-loss reserves of $10 million. The real estate and commercial loans shown on the balance sheet are net of the loan-loss reserves

1. Calculate the common equity capital ratio. How could the bank increase its equity capital ratio?
2. Risk-adjusted assets are estimated using the following weightings process: cash and government securities = .00, real estate loans = .50, and commercial and other loans = 1.00. Calculate the risk-adjusted assets amount for the bank.
3. Calculate the tier 1 ratio based on the information provided and the risk-adjusted assets estimate from Part b.
4. Calculate the total capital (tier 1 plus tier 2) ratio based on the information provided and the risk-adjusted assets estimate from Part b.
5. What actions could the bank management team take to improve the banks tier 1 and total capital ratios?