A bank’s assets consist of Cash: $1.5 million Loans: $10 million Securities: $4.

Question

A bank’s assets consist of    Cash: $1.5 million
Loans: $10 million
Securities: $4.5 million
Fixed assets: $2 million
In addition, the bank’s owners’ capital is $1.5 million.

a. Calculate the equity capital ratio.
b. If $2 million in bad loans were removed from the bank’s assets, show how the equity capital ratio would change.      

EXPLAIN THE CHANGE

Problem 3-6

A bank’s assets consist of    Cash: $1.5 million
Loans: $10 million
Securities: $4.5 million
Fixed assets: $2 million
In addition, the bank’s owners’ capital is $1.5 million.

a. Calculate the equity capital ratio.
b. If $2 million in bad loans were removed from the bank’s assets, show how the equity capital ratio would change.      

Answer: Enter the answers in blue shaded cells Category Amount a. Equity Capital Capital Assets Liabilities Ratio Category Amount b. Recalculated Capital Assets Liabilities (from a.) Ratio

EXPLAIN THE CHANGE

Explain the change

Explanation / Answer

Answer:

c)

The change is due to the reduced denominator resulting from reduced Total asset.

Category Amount Equity Capital Capital 1500000 Assets 18000000 (1500000+10000000+4500000+2000000) Liabilities 16500000 (18000000-1500000) a) Equity Ratio Equity Capital/Asset 0.083333 b) Revised Equity Ratio Capital 1500000 Assets 16000000 (1500000+10000000+4500000+2000000-2000000) Liabilities 14500000 (16000000-1500000) Equity Capital/Asset 0.09375

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