Suppose Levered Bank is funded with 1.8% equity and 98.2% debt. Its current market capitalization is $9.47 billion, and itsmarket-to-book ratio is 0.9. Levered Bank earns a 4.23% expected return on its assets(the loans itmakes), and pays 3.7% on its debt.

New capital requirements will necessitate that Levered Bank increase its equity to 3.6% of its capital structure. It will issue new equity and use the funds to retire existing debt. The interest rate on its debt is expected to remain at 3.7%.

a. What is LeveredBank's expected ROE with 1.8% equity?

b. Assuming perfect capitalmarkets, what will LeveredBank's expected ROE be after it increases its equity to 3.6%?

c. Consider the difference between LeveredBank's ROE and its cost of debt. How does this"premium" compare before and after theBank's increase inleverage?

d. Suppose the return on LeveredBank's assets has a volatility of 0.21%. What is the volatility of LeveredBank's ROE before and after the increase inequity?

e. Does the reduction in LeveredBank's ROE after the increase in equity reduce its attractiveness toshareholders? Explain.

a. What is LeveredBank's expected ROE with 1.8% equity?

The ROE is

nothing

%. (Round to two decimalplaces.)