Question
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 |
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Cash Reserves $ 60 million | Demand Deposits $ 300 million |
Loans $ 200 million | Other Liabilities $ 140 million |
Short-Term Securities $ 150 million |
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Long-Term Bonds $ 90 million | Bank Capital $ 60 million |
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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 |
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(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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