1. Given the following balance sheet at end of 2012 and income statement for 2012

for commercial bank ABC:

a.) Determine if the equity capital is enough to cover the pre-tax operating income?

b.) What is the maximum loan loss that would exactly use up all equity capital

given the corporate tax rate is 40%.

Balance Sheet for Bank ABC 2012-12-31

Asset Liab & Equity

Cash 4% Deposit 88%

Marketable securities 21% Sub long-term-debt 7%

Loan 65%

Fixed assets 10% Equity capital 5%

Total assets 100% Total liab & equity 100%

Income Statement 2012

Net interest income 5.0%

Loan losses (4.2)%

Non-interest income 1.2%

Non-interest expenses (0.7%)

Pre-tax income 1.3%