1. Refer to the following figure. Choose the answers which accurately illustrate

Question

1.      Refer to the following figure. Choose the answers which accurately illustrate the decomposition of a commercial bank’s return on equity.

Interest Expense Ratio

Profit Margin

C

Noninterest expense Ratio

ROA

Income Taxes

Interest Income

ROE

B

Net Income

Total Equity Capital

Noninterest income

A

Select one:

a. A is Equity Multiplier

b. B is Asset Optimization

c. C is Net Charge Offs

d. All choices are correct

Interest Expense Ratio

Profit Margin

C

Noninterest expense Ratio

ROA

Income Taxes

Interest Income

ROE

B

Net Income

Total Equity Capital

Noninterest income

A

Explanation / Answer

Ans : ROE is also equal to ROA * Equity multiplier, and as per the figure given A should be Equity Multiplier. Equity Multiplier = Av. Total Assets/Av. Total equity

a) is correct

Now, Asset optimization should contain asset utilization, expense ratio and tax ratio, which can be next stage from ROA, So B should be asset optimization, b is also correct.

c) Net charge off is the amount giving the difference between gross charge offs and recovery of delinquent debt and it should be in between interest expense ratio and non expense ration to deduct from profit margin.

Hence, C should be correct.

Ans. d, all choices are correct should be correct.

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