Q10

In the conglomerate bank below the parent invests $100 million equity into 2 businesses, $40 million to the commercial bank and $60 million to the investment bank. With the debt equity ratios assumed the balance sheet for the group is $2000 million, and the leverage is 20 times the total capital of $100 million. Calculate the ROE for each bank assuming a 1% return on the balance sheet. If a leverage limit of 18 times is imposed on the group, show an alternative balance sheet to achieve this. Do not change the commercial bank debt equity ratio of 16. If the commercial bank continues to earn a net 1% its assets, what is the return on equity the investment bank must earn to maintain its ROE? Use the box below to show your calculations