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

Answer rating: 100% (QA)

Requirement a 200 millions 5 Return on Loans Total Assets Return on Assets ROA Retu... View the full answer