The following entries (in millions of dollars) are from the balance sheet of Riv
ID: 2764717 • Letter: T
Question
The following entries (in millions of dollars) are from the balance sheet of Rivendell National Nank (RNB) in 2014: a. Use the entries to construct a balance sheet of this commercial bank, with assets on the left side of the balance sheet and liabilities and bank capital on the right side. b. The bank's capital is what percentage of its assets? c. Suppose that the after-tax profit in 2014 was $5 million. Calculate the return on assets (ROA) and the return on equity (ROE). d. Witch indicators in part will you choose if you are in the bank's management team? Why?Explanation / Answer
a.
Prepare the balance sheet of this commercial bank:
Assets in billion dollars
Amount
Liabilities in billion dollars
Amount
Reverse deposits with federal reserve
$ 8
Demand deposits
$ 40
cash items in the process of collection
$ 5
Mortgage backed securities
$ 30
Municipal bonds
$ 5
Loans from other banks
$ 5
Bank building
$ 4
Negotiable order of withdrawal
$ 40
Real estate loans
$ 15
Savings accounts
$ 10
Long term bonds
$ 13
Commercial & industrial loans
$ 50
Discount loans
$ 5
US Treasury bills
$ 20
Total assets
$ 125
Total liabilities
$ 125
b.
Calculate the bank’s capital is what percentage of its assets:
= Capital / Total assts
= $40/$125
= 32%
c.
Calculate the return on assets:
= Net income / Total assets
= $5 / $125
= 4%
Return on equity:
= Net income / Shareholders equity
= $5 / ($125-$40)
= 5.88%
d.
Return on assets is 4% and return on equity is 5.88% it good performance compared industrial average retuns.
Assets in billion dollars
Amount
Liabilities in billion dollars
Amount
Reverse deposits with federal reserve
$ 8
Demand deposits
$ 40
cash items in the process of collection
$ 5
Mortgage backed securities
$ 30
Municipal bonds
$ 5
Loans from other banks
$ 5
Bank building
$ 4
Negotiable order of withdrawal
$ 40
Real estate loans
$ 15
Savings accounts
$ 10
Long term bonds
$ 13
Commercial & industrial loans
$ 50
Discount loans
$ 5
US Treasury bills
$ 20
Total assets
$ 125
Total liabilities
$ 125
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