Suppose that a bank wants to grow during the next year but does not want to issue any new external capital. Its current financial plan projects a ROA of 1.25 percent, a dividend payout rate of 35 percent, and equity to asset ratio of 8 percent. Calculate the allowable growth in the bank’s assets supported by these projections. What growth rate could be supported if the bank issued additional common stock equal to 1 percent of bank assets, with the same earnings projections?
Answer to relevant QuestionsMany regulators would like to see bank capital requirements raised. Consider a proposal to increase the minimum Tier 1 and total capital ratios to 9 percent and 12 percent, respectively. What impact would this have on bank ...Explain how banks move loans off the balance sheet. What motivates different types of off- balance sheet activities? Discuss the risks these actions involve. Many banks compete aggressively for business in consumer credit cards. What is the particular attraction of this type of lending? How does a bank make a profit on loans? Discuss the importance of loans in attracting a borrower’s other business with a financial institution. Using the example in the text, develop a list of questions that a loan officer should ask Marcus Wade to gain a better understanding of the risks involved in lending to Wade’s Office Furniture.
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