Suppose Bank A earns 2 percent on assets (ROA), while Bank B earns 2.5 percent (ROA). a) Estimate the return on equity (ROE) and equity multiplier (EM) if Bank A's equity to asset ratio is 5%, and Bank B's equity ratio is 12%. Interpret the estimates for the ratios.

b) How would results vary if both banks have a ROA of 1%. Interpret the new estimates and comment on what the findings suggest about financial leverage (equity vs debt financing) and profits.

Answer rating: 100% (QA)

a To estimate the return on equity ROE and equity multiplier EM for Bank A and Bank B we can use the ... View the full answer