Question

Chapter 6: Measuring and Evaluating we Name: 1. a) Mathematically, WOE (Net Income/Pre-tax net operating income) x (Pre-tax net operating income/lotal operating revenue) X (Total Operating Revenue/Total Assets) X (Total Assets/Total Equity Capital) ---- equation and Suppose Detroit community bank ICB) has the following ratio 0.090 = 0.520 X 0.033 X 0.316 X 16.6; where the ratio correspond to equation are in order. And, International Bank of Commerce(IBC) has the following ratios; 0.090 = 0.650 X 0.023 X 0.402 X 15.1 where the number correspond to equation --- and are in order. Who is managing sales better? What ratio tells us this write down the ratio. II. Who is managing expense better? What ratio tells us this write down the ratio ill. Which bank is more risky? What ratio tells us this write down the ratio. iv. Who is managing tax better? What ratio tells us this --- write down the ratio.

Answer 1

Dupoint Analysis R.OE- Net income on Total Equity Also ROE = Net income x tret sales Netsales x Average total Assets Average Total cassets Total Equity (Net income & a Pre-tore met operating income Pre-tox net operating e Total operating Revenue (Net sales) I. Detroit community bank. - Bonk - 1 Griven = o.ogo x = 0.520 x 0033 Xo 316 X 16.6 I International Bank of commerce (IBC) - Bank-2. Oogo: 0650 x0'023 x 0.402 X 15.1

Q. Who is managing sales better? What ratio tells us this Solution: Bank 1 is managing its sales better. The ratio of Meet Net Butter operating income is better Net sales Care > 0.023 generates better income through its sales. je. Bank of

(1) Who in managing expense better ?? Solution. Net income is obtained after deducting the net expenses Crreater Net income wort net sales depicts better management of expenses. Ratio of Net income gives the picture about Wet sales management of expenses. - - - - - - - - - - - - - hito Contining from our observation of the aforementioned ratio, Bonk- 1 -> Net income – 0.01716- 0.520X 0.033 Net sales Bank-2 -11 = 0.01495 - 0.650 x 0.023 Bank 1 manages. its expenses better

(ii) Which Bork is more risky? - Which ratio rells us this Solution Point to keep is in mind is that a Bank has no sales. It always has a loan book which are its Assets. Leverage Ratio Average Total assets } - gives the 1 Total Equity picture about the risk faced by the bank. Bonka has lesser reverage ratie worrit Bonk 1 and is non riskier High leverage ratio of Bank- I mako the earnings more volatile and hence riskier

Tax Burdem ir who is managing taxes better ?? Net income - is known as Pre- tos net operating income (1 Tax Burden) → Tax rate Bonk 1 = -0.520 = 0480 Bank-a = 10ob5o = 0.350 Bonk 2 has lower lax rate & beller taxe nonto