Assume a basic bank as illustrated in the table, with bank equity of $100 RL = interest rate charged on a loan RD = interest rate charged on a deposit RG = interest rate on government bonds, which is fixed at 3 percent Assets Liabilities Loans Deposits Gov't Bonds Equity Your bank is choosing between two alternatives (decision sets A and B), with the following marketing estimates: Decision Set A Choosing RL = 7 percent, then customers will demand $320 of loans. Choosing RD = 5 percent, then customers will supply $300 of deposits. Decision Set B Choosing RL = 10 percent, then customers will demand $240 of loans. Choosing RD = 7 percent, then customers will supply $300 of deposits. Answer the following questions:

1) What is the ROA of set A? Set B? (Round to 2 decimal places)

2) What is the ROE of set A? Set B?

3) If operating costs and transaction costs were introduced to all the accounts in the decisions sets A & B, describe what would be the impact on ROA and ROE?

4) If you were a stockholder in this bank, which decision set would you prefer be selected and why?