Chapter 06

Problem 01

Input Area:
Expected Dividend $4.75
Dividend growth rate 3.00%
Risk-adjusted cost of capital 14.00%

Output Area:
Current stock price per share $43.18
Chapter 06
Problem 02

Input Area:
Years to
receipt
Expected dividend 1 1 $2.50
Expected dividend 2 2 $3.25
Expected dividend 3 3 $4.00
Expected dividend 4 4 $4.00
Expected sale of stock 4 $50.00
Risk-adjusted cost of capital 15.00%

Output Area:
PV of
Cashflows
Expected dividend 1 $2.17
Expected dividend 2 $2.46
Expected dividend 3 $2.63
Expected dividend 4 $2.29
Expected sale of stock $28.59
Value of stock today $38.14
Chapter 06
Problem 03

Input Area:
Oriole Saving Association
Equity capital to total assets 9.00%
Return on assets (ROA) 0.67%
Cardinal Saving Association
Equity capital to total assets 7.00%
Return on assets (ROA) 0.67%

Output Area:
Oriole Saving Association
Equity Mulitplier 11.11
Return on equity (ROE) 7.44%
Cardinal Saving Association
Equity Mulitplier 14.29
Return on equity (ROE) 9.57%
Chapter 06
Problem 04

Input Area:
Income and Expense Statement Items
Interest and Fees on Loans 50 Salaries and Employee Benefits 10
Interest Dividends on Securities 6 Overhead Expenses 5
Interest Paid on Deposits 40 Other Noninterest Expenses 2
Interest Paid on Nondeposit Borrowings 6 Securities Gains (or Losses) 2

Taxes 2
Provision for Loan Losses 1 Net Extraordinary items -1
Noninterest Income and Fees 16

Report of Condition items

Assets Liabilities & Equity Capital
Cash and Deposits due from banks 100 Demand deposits 190
Investment Securities 150 Savings deposits 180
Federal Funds Sold 10 Time deposits 470
Net Loans 670 Federal funds purchased 60
Plant and Equipment 50 Common stock 20
Total earning assets 830 Surplus 25
Retained earnings 35
Interest bearing deposits 650

Output Area:

Income and Expense Statement

Interest and Fees on Loans $50

Interest Dividends on Securities $6
Total Interest Income $56
Interest Paid on Deposits $40
Interest on Nondeposit Borrowings $6
Total Interest Expense $46
Net Interest Income $10
Provision for Loan Losses $5
Noninterest Income and Fees $20
Noninterest Expenses:
Salaries and Employee Benefits $10
Overhead Expenses $5
Other Noninterest Expenses $2
Total Noninterest Expenses $17
Pretax operating income $8
Securities Gains (or Losses) $2
Pretax net operating income $10
Taxes $2
Net Operating Income $8
Net Extraordinary items ($1)
Net Income $7
Report of Condition

Assets Liabilities
Cash and Deposits due from banks $100 Demand deposits $190
Investment Securities $150 Savings deposits $180
Federal Funds Sold $10 Time deposits $470
Net Loans $700 Federal funds purchased $80
(Allowance for loan losses =25) Total liabilities $920
(Unearned income on loans 5) Equity Capital
Net Fixed Assets $50 Common stock $20
Total Assets $1,010 Surplus $35
Retained earnings $35
Total capital $90
*** Total earning assets $860 **** Interest bearing deposits $650

Ratios
ROE 7.78%
ROA 0.69%
Net interest margin 0.99%
Net noninterest margin 0.30%
Net operating margin 0.79%
Earnings spread 0.21%
Net profit margin 9.21%
Asset utilization 7.52%
Equity multiplier 11.22
Tax management efficiency 87.50%
Expense control efficiency 10.53%
Asset management efficiency 7.52%
Funds management efficiency 11.22
Operating efficiency ratio 89.74%
Chapter 06
Problem 05

Input Area:
Original
Interest income 2,250
Interest Expense 1,500
Total assets 45,000
Security losses or gains 21
Earnings assets 40,000
Total liabilities 38,000
Taxes paid 16
Common shares outstanding 5,000
Noninterest income 800
Noninterest expense 900
Provisions for loan losses 250

Aternative 1 %change in income/expense 3.0%

Aternative 2 %change in income/expense -3.0%

Output Area:

Income Statement Original Alt (1) Alt (2)

Interest income 2,250 2,318 2,183
Interest expense 1,500 1,545 1,455
Net interest income 750 773 728
Noninterest income 800 824 776
Noninterest expense 900 927 873
Net noninterest income -100 -103 -97
Provision for loan losses 250 250 250
Pretax operating income 400 420 381
Security losses or gains 21 21 21
Taxes paid 16 16 16
Net after tax income 405 425 386
Balance Sheet Original Alt (1) Alt (2)
Total assets 45,000 45,000 45,000
Earning assets 40,000 40,000 40,000
Total liabilities 38,000 38,000 38,000
Total equity 7,000 7,000 7,000
Shares of comon stock outstanding 5,000 5,000 5,000

Ratios Original Alt (1) Alt (2)

ROE 5.79% 6.06% 5.51%
ROA 0.90% 0.94% 0.86%
NIM 1.88% 1.93% 1.82%
EPS $0.08 $0.08 $0.08
NNIM -0.25% -0.26% -0.24%
NOM 0.89% 0.93% 0.85%

% Change in Ratios from original Alt (1) Alt (2)

ROE 4.81% -4.81%
ROA 4.81% -4.81%
NIM 3.00% -3.00%
EPS 4.81% -4.81%
NNIM 3.00% -3.00%
NOM 4.88% -4.88%
Chapter 06
Problem 06

Input Area:

Original Assets 25.00

Original Equity 2.00
Original ROA 0.95%
Alternative 1 % chg in ROA 25.00%
Alternative 2 % chg in ROA -25.00%
Alternative 3 % chg in Assets & Equity 100.00%
Alternative 3 ROA 0.95%
Alternative 4 % chg in Assets & Equity -50.00%
Alternative 3 ROA 0.95%

Intermediate Calcs Area:

Assets Equity ROA
Original 25.00 2.00 0.95%
Alternative 1 25.00 2.00 1.19%
Alternative 2 25.00 2.00 0.71%
Alternative 3 50.00 4.00 0.95%
Alternative 4 12.50 1.00 0.95%

Output Area:
EM ROE %chg ROE
Original 12.50 11.88% na
Alternative 1 12.50 14.84% 25.00%
Alternative 2 12.50 8.91% -25.00%
Alternative 3 12.50 11.88% 0.00%
Alternative 4 12.50 11.88% 0.00%
Chapter 06
Problem 07

Input Area:

Original Revenue ($millions) 150

Original Expense ($millions) 125
Original Tax ($millions) 5
Original Assets ($millions) 1,000
Original Liabilities ($millions) 900
Alternative 1 %Chg in Rev, Exp, Tax 10.00%
Alternative 1 %Chg in Assets, Liabilities 0.00%
Alternative 2 %Chg in Rev, Exp, Tax 0.00%
Alternative 2 %Chg in Assets, Liabilities 10.00%
Alternative 3 %Chg in Rev, Exp, Tax -10.00%
Alternative 3 %Chg in Assets, Liabilities 0.00%
Alternative 4 %Chg in Rev, Exp, Tax 0.00%
Alternative 4 %Chg in Assets, Liabilities -10.00%

Intermdiate Calcs Area:

Revenue Expense Tax
Original 150.00 125.00 5.00
Alternative 1 165.00 137.50 5.50
Alternative 2 150.00 125.00 5.00
Alternative 3 135.00 112.50 4.50
Alternative 4 150.00 125.00 5.00

Assets Liabilities
Original 1,000.00 850.00
Alternative 1 1,000.00 850.00
Alternative 2 1,100.00 935.00
Alternative 3 1,000.00 850.00
Alternative 4 900.00 765.00

Output Area:
Net Op Exp Net Income Equity
Original 25.00 20.00 150.00
Alternative 1 27.50 22.00 150.00
Alternative 2 25.00 20.00 165.00
Alternative 3 22.50 18.00 150.00
Alternative 4 25.00 20.00 135.00

% Change in
ROE ROE
Original 13.33% na
Alternative 1 14.67% 10.00%
Alternative 2 12.12% -9.09%
Alternative 3 12.00% -10.00%
Alternative 4 14.81% 11.11%
Chapter 06
Problem 08

Input Area:

First Part
ROA 90.00%
ROE 12.00%

Second Part
ROA 0.80%
ROE 12.00%

Output Area:

Total assets / Equity

First Part 0.13
Second Part 15.00
Chapter 06
Problem 09

Input Area:

Net Income 30.00

Total Operating Revenues 135.00
Total Assets 1,750.00
Total Equity Capital Accounts 170.00

Output Area:

Net Profit Margin 22.22%

Equity Multiplier 10.2941
Asset Utilization Ratio 7.71%
ROE 17.65%
Chapter 06
Problem 10

Input Area:
1 2 3 4 5
Net Income (after tax) 2.65 2.75 3.25 3.65 4.00
Total Operating Revenues 26.50 30.10 39.80 47.50 55.90
Total Assets 300.00 315.00 331.00 347.00 365.00
Total Liabilities 273.00 288.00 301.00 314.00 329.00

Output Area:
1 2 3 4 5
Equity 27.00 27.00 30.00 33.00 36.00
Profit Margin 10.00% 9.14% 8.17% 7.68% 7.16%
Asset Utilization 8.83% 9.56% 12.02% 13.69% 15.32%
Equity Multiplier 11.11 11.67 11.03 10.52 10.14
ROA 0.88% 0.87% 0.98% 1.05% 1.10%
ROE 9.81% 10.19% 10.83% 11.06% 11.11%
Chapter 06
Problem 11

Input Area: Percentage Changes

Original Alt (1) Alt (2) Alt (3)
Net income before taxes and securities
transactions 37.00 20.00% 0.00% 0.00%
Taxes 8.00 0.00% 0.00% 0.00%
Total operating revenues 950.00 0.00% 0.00% 0.00%
Total assets 2,700.00 0.00% 20.00% 0.00%
Equity capital 250.00 0.00% 0.00% 20.00%

Intermediate Calcs Area:

Original Alt (1) Alt (2) Alt (3)
Net income before taxes and securities
transactions 37.00 44.40 37.00 37.00
Taxes 8.00 8.00 8.00 8.00
Total operating revenues 950.00 950.00 950.00 950.00
Total assets 2,700.00 2,700.00 3,240.00 2,700.00
Equity capital 250.00 250.00 250.00 300.00

Output Area:
Original Alt (1) Alt (2) Alt (3)

Net income (after taxes) 29.00 36.40 29.00 29.00

Tax management efficiency ratio 78.38% 81.98% 78.38% 78.38%

Expense control efficiency ratio 3.89% 4.67% 3.89% 3.89%
Asset management efficiency ratio 35.19% 35.19% 29.32% 35.19%
Funds management efficiency ratio 10.80 10.80 12.96 9.00
ROE 11.60% 14.56% 11.60% 9.67%

% change Tax management efficiency ratio 4.60% 0.00% 0.00%

% change Expense control efficiency ratio 20.00% 0.00% 0.00%
% change Asset management efficiency ratio 0.00% -16.67% 0.00%
% change Funds management efficiency ratio 0.00% 20.00% -16.67%
% change ROE 25.52% 0.00% -16.67%
Chapter 06
Problem 12

Input Area:
Interest Income 75.00
Interest Expense 61.00
Provision for loan losses 6.00
Security gains (or losses) 2.00
Noninterest Expense 8.00
Noninterest Income 5.00
Extraordinary net gains 1.00
Total Assets 1,000.00

Output Area:

Net interest margin 1.40%

Non-interest margin -0.30%
ROA 0.80%
Chapter 06
Problem 13

Input Area:
One Two Three Four
Current Year Years Years Years
Year Ago Ago Ago Ago
Gross Interest Income 40 41 42 43 44
Interest Expenses 24 25 26 27 28
Noninterest Income 4 4 3 2 1
Noninterest Expense 8 7 7 6 5
Provision for Loan Losses 2 1 1 0 0
Income Taxes owed 1 1 0 1 0
Net Securities Gains (Losses) 2 2 1 0 0
Total Assets 885 880 875 860 850

Output Area:
One Two Three Four
Current Year Years Years Years
Year Ago Ago Ago Ago
Gross Interest Income 40 41 42 43 44
Interest Expenses 24 25 26 27 28
Net Interest Income 16 16 16 16 16
Provision for Loan Losses 2 1 1 0 0
Net Interest Income after 14 15 15 16 16
Loan Loss Provision
Noninterest Income 4 4 3 2 1
Noninterest Expense 8 7 7 6 5
Net Noninterest Income -4 -3 -4 -4 -4
Income before Taxes 10 12 11 12 12
Income Taxes 1 1 0 1 0
Net Income after Taxes 9 11 11 11 12
but Before Gains (Losses)
Net Securities Gains (Losses) 2 2 1 0 0
Net Income 11 13 12 11 12
Total Assets 885 880 875 860 850
ROA 1.24% 1.48% 1.37% 1.28% 1.41%