Consider a bank with $500 million in assets and $30 million in total capital. Its minimum total capital-to-asset ratio must equal 6 percent. At the beginning of the year, senior management and the board of directors project that the bank will likely earn 0.86 percent on assets, will pay a 30 percent dividend, and will not obtain any external capital. In this environment, how large can the bank grow by the end of the year?
1. Assume that the bank would like to grow its assets by 15 percent during the year. If the dividend rate is 30 percent and no external capital is obtained, what must the bank's ROA equal?
2. Assume that the bank wants to grow assets by 15 percent with an ROA of 0.85 percent and will not obtain external capital. What dividend payout rate will support 15 percent growth? What are the costs and benefits of changing dividends in this direction?
3. What increase in external capital is necessary to support 15 percent asset growth with ROA equal to 0.85 percent and a dividend payout rate of 30 percent?