Commerial Banking

Comm’l Banking FIN 4243

HW #4

April 2013

1. A bank currently has equity capital of 8% of total assets and a dividend payout ratio of 55%. Assets are expected to grow at 6%. What is the required ROA to support the growth in assets and an equity capital of 8%?

0.08 = [ROA*(1 - .55) + 0] / .08

0.08* .08 = .45ROA

0.0064 / .45 = ROA

ROA = 0.01422 = 1.422%

2. Refer to question 1 above. If the bank expects its ROA to be 0.8%, what is the maximum dividend payout ratio that would support the 6% increase in assets?

0.08 = [0.008* (1 - DR) + 0] / .08

0.0064 = [0.008 - .008DR]

0.008DR = .008 - .0064

DR = .2 = 20%

3. JK Bank has equity capital of 9.5% of total assets. The bank forecasts a net income of $9 million on total assets of $760 million. The bank wants to maintain its current dividend payout ratio of 40 % and equity capital of 9.5%. How much new equity capital (as a percent of total assets) must the bank issue to support a growth rate of 8% in assets?

4. How much Tier 1 capital does the bank have?

Tier 1 Capital = 22 (common stock) + 27 (surplus) + 41 (retained earnings) = 90

5. What is the amount of risk-adjusted assets for the bank?

Assets $ in million Risk Weight % Risk-Adjusted Assets ($ in millions)

Cash & Treasury securities 73 0 0

Municipal bonds 96 20 19.2

Mortgages 375 50 187.5

Comm’l & Ind. Loans 1,395 100 1,395.0

Allow for Loan Loss (27) 0 0

Bldgs & other assets 68 100 68.0

Total 1,980 1,669.7

6. What is the minimum Tier 1 capital this bank needs to have?

Minimum Tier 1 Capital = 3.18% x 1,669.7 = $5309.65

7. What is the required minimum total capital for this bank?

Minimum total capital = 3.18% x 1,669.7 =