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Use the following balance sheet to answer the questions below : ASSETS LIABILITIES + BANK CAPITAL Cash Reserves $ 60 million Demand Deposits $ 300

Use the following balance sheet to answer the questions below:

ASSETS

LIABILITIES + BANK CAPITAL

Cash Reserves $ 60 million

Demand Deposits $ 300 million

Loans $ 200 million

Other Liabilities $ 140 million

Short-Term Securities $ 150 million

Long-Term Bonds $ 90 million

Bank Capital $ 60 million

TOTAL: $ 500 MILLION

TOTAL: $ 500 MILLION

(a) Assume a 5% after-tax return on the loan component of your assets. Calculate the ROA, the ROE, and the EM using this assumption before adding the profits to your balance sheet.

(b) Now add these profits to the balance sheet as cash reserves and as additional bank capital. Assume the total value of loans remains unchanged. Construct the new balance sheet.

ASSETS

LIABILITIES + BANK CAPITAL

(c) Assume fifty million dollars worth of your loans become nonperforming (this means they have defaulted and are now worthless.) Construct the new balance sheet.

ASSETS

LIABILITIES + BANK CAPITAL

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