Suppose that the First National Bank has the following balance sheet position an

Question

Suppose that the First National Bank has the following balance sheet position and that the required reserve ratio is 15 percent Assets Liabilities eserves Loans Securities $40 million $160 million $20 million Deposits $200 million Bank Capital $20 million First National bank has a net profit after tax of $1,700,000 Calculate First National Bank's Return on Assets (ROA) Calculate First National Bank's Equity Multiplier (EM) Using the info in a and b, calculate First National Bank's Return on Equity (ROE)

Explanation / Answer

First National Bank's Return on assets (ROA) = Net Profit after tax / Total assets = $17,00,000 / $220,000,000 = 0.77% First National Bank's Equity Multiplier (EM) = Total assets / Total Equity = $220,000,000 / $20,000,000 = 11 First National Bank's Return on equity (ROE) = ROA * EM = 0.77% * 11 = 8.50%

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