Midterm Practice Problems Solutions
Chapter 4
4-2. Project Return: 17.01%. NPV= $507,465.18. Norfolk is likely to proceed with this
project because the net present value is positive and the project expected return is greater than
the 15% rate they need to earn.
4-3. E (R) = 10.4%, σ = 4.73% Thus the branch will slightly increase the bank's expected
return but slightly decrease its overall risk. The bank should proceed with this project.
4-4.
E (R) =10.80%, σ2 = .00244 and σ = .049395 or 4.94% The proposed project raises the
savings banks expected return slightly and slightly decreases its overall risk. The bank should
proceed with this project.
4-5.
Lily location- E (R) = 12.15%, σ2 = .00242, and σ = .0492 or 4.92%
Daisy location- E (R) =12.175%, σ2 = 0.00238, and σ = 0.04876 or 4.87%
Based on the statistics and forecasts, the expected return of Daisy location is slightly higher and
the risk is slightly lower compared to Lily location, and thus Daisy location should be used as a
test case.
4-6. NPV=-$11,831.49. The net present value of this project is negative. First National Bank
of Conway should not add the ATM machines to the Westside.
Chapter 5
5-1.
Report of Condition
Total assets
Cash and due from depository institutions
Securities
Federal funds sold and reverse repurchase agreements
Gross loans and leases
Loan loss allowance
Net loans and leases
Trading account assets
Bank premises and fixed assets
Other real estate owned
Goodwill and other intangibles
All other assets
Total liabilities and capital
Total liabilities
Total deposits
Federal funds purchased and repurchase agreements.
Trading liabilities
Other borrowed funds
Subordinated debt
All other liabilities
Total equity capital
Perpetual preferred stock
Common stock
Surplus
Undivided profits
a.
b.
c.
d.
e.
f.
$4,000.00
90.00
535.00
45.00
$2,900.00a
200.00
2,700.00
20.00
220.00b
15.00
200.00
175.00
4,000.00c
3,580.00d
2,920.00e
80.00
10.00
50.00
480.00
40.00
420.00f
5.00
25.00
320.00
70.00
Gross loans and leases = Net loans and leases + Loan loss allowance
($200.00 + $2,700.00)
This is the only asset missing and so it is total assets less all of the rest of the assets listed
above. ($4,000.00 − $90.00 − $535.00 − $45.00 − $2,700.00 − $20.00 − $15.00 −
$200.00 − $175.00)
Total liabilities and capital = Total assets ($4,000.00)
Total liabilities = Total liabilities and capital − Total equity capital ($4,000.00 − $420.00)
Total deposits = Total liabilities − All of the other liabilities ($3,580.00 − $80.00 −
$10.00 − $50.00 − $480.00 − $40.00)
Total equity capital = Perpetual preferred stock + Common stock + Surplus + Undivided
profit ($5.00 + $25.00 + $320.00 + $70.00)
5-2.
Report of Income
Total interest income
Total interest expense
Net interest income
Provision for loan and lease losses
Total noninterest income
Fiduciary activities
Service charges on deposit accounts
Trading account gains and fees
Additional noninterest income
Total noninterest expense
Salaries and employee benefits
Premises and equipment expense
Additional noninterest expense
Pretax net operating income
Securities gains (losses)
Applicable income taxes
Income before extraordinary items
Extraordinary gains—net
Net income
a.
b.
c.
d.
e.
f.
$200
140a
60
20b
100
20
25
25c
30
125
95d
10
20
15
5
3
17e
2
19f
Total interest expense = Total interest income − Net interest income ($200 − $60)
Provision for loan and lease losses = Net interest income + Total noninterest income −
Total noninterest expense − Pretax net operating income (60 + $100 – $125 – $15)
There are four areas of Total noninterest income and only one is missing and the total is
given. ($100 − $20 − $25 − $30)
There are three areas of Total noninterest expense and only one is missing and the total is
given ($125 – $10 – $20)
Income before extraordinary items = Pretax income + Security gains – Taxes ($15 + $5 –
$3)
Net income = Income before extraordinary items + Extraordinary gains—net ($17 + $2)
5-3.
Net interest income
Net noninterest income
Pretax net operating income
Net income after taxes
Total operating revenues
Total operating expenses
Dividends paid to common stockholders
a.
b.
c.
$40a
−15b
20c
16d
215e
195f
10g
Total interest income − Total interest expense ($140 − $100)
Total noninterest income − Total noninterest expense ($75 − $90)
Net interest income + Net noninterest income − PLL ($40 – $15 − $5)
d.
e.
f.
g.
Pretax net operating income − Taxes ($20 − $4)
Interest income + Noninterest income ($140 + $75)
Interest expenses + noninterest expenses + Provision for loan losses ($100 + $90 + $5)
Net income after taxes − increases in bank’s undivided profits ($16 − $6)
5-4.
Total assets
Net loans
Undivided profit
Fed funds sold
Depreciation
Total deposits
a.
b.
c.
d.
e.
f.
5-5.
a.
b.
c.
5-6.
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
$405a
$285b
$7c
$20d
$5e
$335f
Total liabilities + Total equity capital ($30 + $375)
Gross loans − Allowance for loan losses ($300 – $15)
Total equity capital – Preferred stock – Common stock – Surplus ($30 – $15 – $5 – $3)
This is the only asset missing so subtract all other assets from total assets
Bank premises and equipment, gross – bank premises and equipment, net ($25 – $20)
Total liabilities less nondeposit borrowings ($375 – $40)
Net Loans = Gross Loans –ALL = $800 − $45 = $755 million
Gross Loans = $800 million – ($10 million − $7 million) = $797 million
ALL =$45 million – ($12 million− $2 million − $7 million) = $42 million (The amount
of the loan that is bad)
Net Loans = Gross Loans – ALL = $797 − $42 = $755 million
Gross loans and ALL would not change as the bank would recover all the money invested
earlier.
This would be part of Additional noninterest expense and part of Total noninterest
expense.
This would be part of Salaries and Benefits and part of Total noninterest expenses.
This would be part of Total interest expenses.
This would be part of Provision for loans and losses to go into reserves for future bad
debts.
This would be part of Additional noninterest income and part of Total noninterest
income.
This would be part of Total interest income.
This would be part of Service charges on Deposit accounts and then part of Total
noninterest income.
This would be part of Total interest income.
This would be part of Premises and equipment expenses and part of Total noninterest
expenses.
This would be part of Security gains (losses).
5-7.
Gross loans + $6,000
Total deposits + $6,000
b.
Government securities + $1,000
Total deposits + $1,000
Bank premises & equipment, gross
+$100,000
Common stock/surplus + $100,000
Gross Loans − $2,500
Total Deposits − $2,500
Cash and Due from Bank − $750,000
Gross Loans and Leases + 750,000
Cash and Due from Bank − $5,000,000
Federal Funds Sold +$5,000,000
Gross Loans −$1,000,000
ALL −$1,000,000
c.
d.
e.
f.
g.
5-8.
Off-balance-sheet items for John Wayne Bank (in millions of $)
Total unused commitments
Standby letters of credit and foreign office
guarantees
(Amount conveyed to others)
Commercial letters of credit
Securities lent
Derivatives (total)
Notional amount of credit derivatives
Interest rate contracts
Foreign exchange rate contracts
Contracts on other commodities and
equities
All other off - balance -sheet liabilities
Total off-balance-sheet items
Total assets (on-balance sheet)
Off-balance-sheet assets ÷ on-balance-sheet
assets
a.
b.
$8,000
1,350
−50
60
2,200
100,000
22,000
54,000
22,800a
1,200
49
111,609b
12,000
9.30%
Total derivatives − All other derivatives [100,000 – (22,000 + 54,000 + 1200)]
The sum of all of the off-balance sheet items
The Off-balance-sheet-assets of John Wayne Bank are in proportion with other banks of the
same size.
5-9.
Bluebird State Bank
Report of Income (in millions of dollars)
Total interest income
Interest on loans
Int earned on government bonds and
notes
Total
$90
$9
$99
Total interest expense
Interest paid on federal funds purchased
Interest paid to customers time and
Savings deposits
Total
$40
$45
Net interest income
Provision for loan loss
$54
$5
Total noninterest income
Service charges paid by depositors
Trust department fees
Total
Total noninterest expenses
Employee wages, salaries and benefits
Overhead expenses
Total
$5
$3
$3
$6
$13
$3
$16
Net noninterest income
($10)
Pretax income
Taxes paid (28%)
Securities gains/(losses)
$39
$11
($7)
Net income
Less dividends
Retained earnings from current income
$21
$4
$17
5-10.
The items which would normally appear on a bank's balance sheet are:
Federal funds sold
Credit card loans
Vault cash
Allowance for loan losses
Commercial and Industrial
Loans
Repayments of credit card
loans
Common stock
Federal funds purchased
Deposits due to bank
Leases of business equipment
to customers
Savings deposit
Undivided profits
Mortgage owed on the bank’s
buildings
Other real estate owned
Additions to undivided profits
The items which would normally appear on a bank’s income statement are:
Interest received on credit card
loans
Depreciation on premises and
equipment
Interest paid on money market
deposits
Securities gains or losses
Utility expense
Provision for loan losses
Service charges on
deposits
5-11
Total interest income (TII) and Total interest expense (TIE):
TII = 2 TIE and Net interest income = TII –TIE = $800 so:
2 TIE – TIE = $800
Hence, TIE = $800 and TII = 2 ($800) = $1,600
Total noninterest income (TNI) and Total noninterest expense (TNE):
TNI = 0.75TNE and Net noninterest income = TNI – TNE = – $500 so:
0.75TNE – TNE = – $500 – 0.25 (TNE) = $500.
Hence, TNE = $2,000 and TNI = 0.75 × ($2,000) = $1,500
Provision for loan losses (PLL):
PLL = 0.03×Total interest income = 0.03 × ($1,600) = $48
Income taxes:
Net income before taxes = Net interest income + Net noninterest income – PLL
Net income before taxes = $800 – $500 – $48 = $252
Taxes = 0.3 × Net income before taxes = 0.3 × 252 = $75.60
Dividends paid to common stockholders:
Net income after taxes = Net income before taxes − Taxes
Net income after taxes = $252 − $75.60 = $176.4
Increase in undivided profit = Net income after taxes – Dividends
Dividends = Net income after taxes – Increase in undivided profit
Dividends= $176.4 − $200 = −$23.6
Therefore, no dividends are paid to the common stockholders.