You are provided with the following information: a bank has a net income after taxes of $3.5 million; it has assets of $150 million; and bank capital of $12.5 million. What is the bank's return on assets; its return on equity, and its debt-to-equity ratio?
What will be an ideal response?
The bank's return on assets is 2.33%; this is obtained by dividing the $3.5 million in net income after taxes by the asset amount of $150 million and multiplying by 100 to convert the decimal into a percentage. The return on equity is 28.0%. We divide the $3.5 million in this case by the equity of $12.5 million and multiply by 100 to obtain our answer. The debt-to-equity ratio requires we first obtain the amount in liabilities. This is done by realizing that bank capital (equity) and total liabilities must equal total assets. So taking the amount in assets, $150 million, and subtracting the amount in capital, $12.5 million, leaves us with liabilities of $137.5 million. Dividing the $137.5 million by $12.5 million produces a debt-to-equity of 11 to 1.
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