Calculations / explanations on how to get the given answers 8. Given the followi

Question

Calculations / explanations on how to get the given answers 8. Given the following information, what is return on equity? Answer 523% Net Income/TA Net Int Inc/TA Non-Int Inc/TA Equity/Total Assets 0.7s63% 2.2684% 0.8490% 14.4578% Shares (1000s)47.83 656 1323 1199 1048 Price Per Share Net Income (1000s) 1961 5980 4089 5093 P/E Bank A Bank B Bank C Bank D 79.1 44.68 Given the information above, what is the: a. Lowest price you would expect to pay for a share of stock in Bank D? b. Highest price you would expect to pay for a share of stock in Bank D? Answer 63.67 Answer 85.04 10. P/E Ratio Bank A Bank B Bank C Bank D Shares (1000s) 749 626 938 881 Price Per Share 49.80 29.90 64.41 Net Income (1000s) 3693 1534 3949 1885 Given the information above, what is the: a. Lowest price you would expect for a share of stock in Bank D? b. Highest price you would expect for a share of stock in Bank D? Answer 63.67 Answer 85.04

Explanation / Answer

Question 8:

Given that Equity/TA = 14.4578%

Thus, Equity = 14.4578% x TA

Given that Net income / TA = 0.7563%

Thus, Net income = 0.7563% x TA

Return on Equity = Net income / Equity

= (0.7563% X TA) / (14.4578% x TA)

= 0.7563 / 14.4578

= 0.05231 = 5.23%

Question 9:

Question 10:

Applying similar logic as Q9

P/E ratio = Market value per share / Earnings per share Earnings per share = Net income / shares Shares in 000's Price Per share Net income in 000s Earnings per share P/E ratio Column 1 Column 2 Column 3 Column 3/ Column 1 Column 2/ Column 4 Bank A 656 47.83 1961 2.9893 16.0002 Bank B 1323 79.1 5980 4.5200 17.4999 Bank C 1199 44.68 4089 3.4103 13.1013 Bank D 1048 5093 4.8597 Thus, lowest price to be paid for Bank D should be such that it gives P/E ratio of atleast 13.1013 Lowest price / EPS = P/E ratio Lowest price / 4.8597 = 13.1013 Lowest Price = 13.1013 X 4.8597 = 63.67 Thus, highest price to be paid for Bank D should be such that it gives P/E ratio of 17.4999 Lowest price / EPS = P/E ratio Lowest price / 4.8597 = 17.4999 Lowest Price = 17.4999 X 4.8597 = 85.04

Question 10:

Applying similar logic as Q9

P/E ratio = Market value per share / Earnings per share Earnings per share = Net income / shares Shares in 000's Price Per share Net income in 000s Earnings per share P/E ratio Column 1 Column 2 Column 3 Column 3/ Column 1 Column 2/ Column 4 Bank A 749 49.8 3693 4.9306 10.1002 Bank B 626 29.9 1534 2.4505 12.2017 Bank C 938 64.41 3949 4.2100 15.2992 Bank D 881 1885 2.1396 Thus, lowest price to be paid for Bank D should be such that it gives P/E ratio of atleast 10.1002 Lowest price / EPS = P/E ratio Lowest price / 2.1396 = 10.1002 Lowest Price = 10.1002 X 2.1396 = 21.61 Thus, highest price to be paid for Bank D should be such that it gives P/E ratio of 15.2992 Lowest price / EPS = P/E ratio Lowest price / 2.1396 = 15.2992 Lowest Price = 15.2992 X 2.1396 = 32.73

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