COLLEGE OF BUSINESS, HOSPITALITY AND TOURISM STUDIES

DEPARTMENT OF ECONOMICS, BANKING & FINANCE

BNK 603: BANKING OPERATIONS & MANAGEMENT
TRIMESTER 1 2012
TUTORIAL 2 QUESTIONS

1. What are the essential differences among demand deposits, savings deposits, and time
deposits?

2. What are primary reserves, and secondary reserves and what are they supposed to do?

3. Suppose that a bank holds cash in its vault of $4.1 million, short-term government
securities of $10.4 million, privately issued money market instruments of $6.2 million,
deposits at the Federal Reserve banks of $22.1 million, cash items in the process of
collection of $2.8 million, and deposits placed with other banks of $18.4 million. How
much in primary reserves does this bank hold? In secondary reserves?

4. Suppose a bank has an allowance for loan losses of $2.25 million at the beginning of
the year, charges current income for a $350,000 provision for loan losses, charges off
worthless loans of $250,000, and recovers $60,000 on loans previously charged off.
What will be the balance in the allowance for loan losses at year-end?

5. Who are banking’s chief competitors in the financial services?

6. If you know the following figures:

Total Interest Income $150 Provision for Loan Loss $5
Total Interest Expenses 90 Income Taxes 5
Total Noninterest Income 25 Increases in bank’s undivided profits 6
Total Noninterest Expenses 45

Please calculate these items:

A. Net Interest Income

B. Net Interest Income
C. Pretax net operating income
D. Net Income after Taxes
E. Total Operating Revenues
F. Total Operating Expenses
G. Dividends paid to Common Stockholders

7. Why should banks and other corporate financial firms be concerned about their level of
profitability and exposure to risk?
8. What individuals or groups are likely to be interested in these dimensions of
performance for a financial institution?

9. What factors influence the stock price of a financial-services corporation?

10. Suppose that a bank is expected to pay an annual dividend of $5 per share on its stock
in the current period and dividends are expected to grow 6 percent a year every year, and
the minimum required return-to-equity capital based on the bank's perceived level of risk
is 10 percent. Can you estimate the current value of the bank's stock?

11. Suppose a bank reports that its net income for the current year is $61 million, its
assets total $2,144 million, and its liabilities amount to $962 million. What is its return
on equity capital?

12. A bank estimates that its total revenues will amount to $255 million and its total
expenses (including taxes) will equal $207 million this year. Its liabilities total $4,690
million while its equity capital amounts to $62 million. What is its return on assets?

13. Suppose that stockbrokers have projected that Yorktown Savings will pay a dividend
of $3 per share on its common stock at the end of the year; a dividend of $4.50 per share
is expected for the next year, and $ 5.50 per share in the following three year. The risk-
adjusted cost of capital for banks in Yorktown’s risk class is 15 percent. If an investor
holding Yorktown’s stock plans to hold that stock for only four years and hopes to sell it
at a price of $60 per share, what should the value of the bank’s stock be in today’s
market?

14. An investor holds the stock of Foremost Financials and expects to receive a dividend
of $5.75 per share at the end of the year. Stock analysts recently predicted that the bank’s
dividends will grow at approximately 3 percent a year indefinitely into the future. If this
is true, and if the appropriate risk-adjusted cost of capital (discount rate) for the bank is
12.25 percent, what should be the current price per share of Foremost Financials’
stock?

15. The following information is for Blue Sky National Bank:

Interest income $2,200

Interest expense $1,400
$45,00
Total assets 0
Securities losses or gains $21
$40,00
Earning assets 0
$38,00
Total liabilities 0
Taxes paid $16
Shares of Common Stock
outstanding 5,000
Noninterest income $800
Noninterest expense $900
Provision for loan losses $100
Please calculate:

A. ROE
B. ROA
C. Net interest margin
D. Earnings per share
E. Net noninterest margin
F. Net operating margin
The End