CHAPTER 6
PROBLEMS
Problem 1
The latest report of condition and income and expense statement for Smiling Merchants
National Bank are as shown in the following tables. Fill in the missing items on the
income and expense statement.
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5-2
Problem 1
Income and Expense Statement (Report of
Income)
Interest and fees on loans
$50
Interest and dividends on securities
6
Total interest income
56
Interest paid on deposits
Interest on nondeposit borrowings
Total interest expense
Net interest income
Provision for loan losses
Noninterest income and fees
Noninterest expenses:
Salaries and employee benefits
Overhead expenses
Other noninterest expenses
Total noninterest expenses
Net noninterest income
Pretax operating income
Securities gains (or losses)
Pretax net operating income
Taxes
Net operating income
Net extraordinary income
Net income
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40
6
46
10
5
20
10*
5
2
17
3
8
2
10
2
8
-1
7
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5-3
Problem 2
The following information is for Rainbow National Bank:
Please calculate:
Net income
$405
=
= 0.058or 5.8 percent
Total equity capital
$45,000 - $38,000
Net income
$405
ROA =
=
= 0.009 or 0.90 percent
Total assets
$45,000
Net interest income
$750
Net interest margin =
=
= 0.01667 or1.67 percent
Total assets
$45,000
Net income
$405
Earnings per share =
=
= $0.081per share
Common equity shares outstanding
5,000
ROE =
After PLL
Net noninterest income
-$350
=
= -0.0078or -0.78 percent
Total assets
$45,000
After PLL
Total operating revenues-Total operating expenses
$400
Net operating margin =
=
Total assets
© 2008 The McGraw-Hill Companies,
Inc., All Rights Reserved.$45,000
Net noninterest margin =
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= 0.00889 or 0.89 percent
5-4
Problem 2
Alternative Scenarios:
a. Suppose interest income, interest expenses, noninterest income, and noninterest
expenses each increase by 3 percent while all other revenue and expense items shown in
the preceding table remain unchanged. What will happen to Rainbow ROE, ROA, and
earnings per share?
Interest income
Interest expense
Total assets
Securities losses or gains
Earning assets
Total liabilities
Taxes paid
Shares of Common Stock outstanding
Noninterest income
Noninterest expense
Provision for loan losses
ROE =
Net income
$425
=
= 0.06064 or 6.06 percent
Total equity capital
$45,000 - $38,000
ROA =
Net income
$425
=
= 0.00943or 0.943percent
Total assets
$45,000
Earnings per share =
$2,317.50
$1,545.00
$45,000.00
$21.00
$40,000.00
$38,000.00
$16.00
5,000
$824.00
$927.00
$250.00
Net income
$425
=
= $0.0849 per share
Common equity shares outstanding
5,000
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Problem 3
Suppose a stockholder-owned thrift institution is projected to achieve a 0.90
percent ROA during the coming year. What must its ratio of total assets to
equity capital be if it is to achieve its target ROE of 12 percent? If ROA
unexpectedly falls to 0.80 percent, what assets-to-capital ratio must it then
have to reach a 12 percent ROE?
Total assets
ROE  ROA 
Total equity capital
Total assets
ROE
12 percent
=
=
= 13.33x
Total equity capital
ROA
0.90 percent
If ROA unexpectedly falls to 0.80 percent and target ROE remains 12 percent:
12 percent  0.8 percent 
Total assets
Total equity capital
Total assets
12 percent
=
= 15x
Total
equity
capital
0.80
percent
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5-6
Problem 4
Conway County National Bank presents us with these figures for the year just
concluded. Please determine the net profit margin, equity multiplier, asset
utilization ratio, and ROE.
Net income
Total operating revenues
Total assets
Total equity capital accounts
$
30.00
135.00
1,750.00
170.00
Net income
$30 million
=
= 0.2222 or 22.22 percent
Total operating revenue
$135 million
Total operating revenue
$135 million
Asset utilization =
=
= 0.0771 or 7.71 percent
Total assets
$1, 750 million
Net profit margin =
Equity multiplier =
Total assets
$1,750 million
=
= 10.29x
Total equity capital
$170 million
ROE = 22.22% x 7.71% x 10.29 = 17.65%
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