State Bank has the following year-end balance sheet (in millions of dollars):

Assets

Liabilities and equity

Cash

$ 15

Deposits

$ 85

Loans

85

Equity

15

Total assets

$100

Total liabilities and equity

$100

The loans primarily are fixed-rate, medium-term loans, while the deposits are either short-term or variable-rate deposits. Rising interest rates have caused the failure of a key industrial company and, as a result, 5 percent of the loans are considered to be uncollectable and thus have no economic value. One-third of these uncollectable loans will be charged off. Further, the increase in interest rates has caused a 5 percent decrease in the market value of the remaining loans.

• What is the impact on the balance sheet after the necessary adjustments are made according to book value accounting? According to market value accounting?

(2.5 marks)

• What is the new market to book value ratio if State Bank has $1 million shares outstanding?

(2.5 marks)