Question

OK State Bank reports total operating revenues of $150 million, with total operating expenses of $125 million, and owes taxes of $5 million. It has total assets of $1.00 billion and total liabilities of $850 million. What is the bank's ROE? Alternative scenarios: a. How will the ROE for OK State Bank change if total operating expenses, taxes, and total operating revenues each grow by 10 percent while assets and liabilities remain fixed? b. Suppose OK State's total assets and total liabilities increase by 10 percent, but its revenues and expenses (including taxes) are unchanged. How will the bank's ROE change? c. Can you determine what will happen to ROE if both operating revenues and expenses (including taxes) decline by 10 percent, with the bank's total assets and liabilities held constant? d. What does ROE become if OK State's assets and liabilities decrease by 10 percent, while its operating revenues, taxes, and operating expenses do not change?

step by step, please

Answer 1

As given in the question, the following is available:- Operating revenues = $150m Operating expenses = $125m Taxes = $5m Total Assets = $1,000m Total liabilities = $850m

Formula Base case Alternative (a) Alternative (b) Alternative (c) Alternative (d) Calulation of Shareholders funds: $900 Total Assets $1,000 $1,000 (Same as base case) $1,000 (Same as base case) $1,100 (base case + 10%, i.e. $1,000*110%) $935 (base case + 10%, i.e. $850*110%) (base case - 10%, i.e. $1,000*90%) $765 (base case - 10%, i.e. $850*90%) Total liabilities $850 $850 (Same as base case) $850 (Same as base case) Equity Shareholders funds Total Assets - Total Liabilities $150 $150 $165 $150 $135 Calulation of Profit after tax: Operating Revenues $150 $150 (Same as base case) $150 (Same as base case) Operating Expenses $125 $165 (base case + 10%, i.e. $150*110%) $137.5 (base case + 10%, i.e. $125*110%) $5.5 (base case + 10%, i.e. $5*110%) $125 (Same as base case) $135 (base case - 10%, i.e. $150*90% $112.5 (base case - 10%, i.e. $125*90%) $4.5 (base case - 10%, i.e. $5*90%) $125 (Same as base case) Taxes $5 $5 (Same as base case) $5 (Same as base case) Profit after tax $22 $20 $18 $20 Operating revenue- operating expenses-taxes Profit after tax/Equity Shareholders funds Return on Equity (ROE) 13.3% 14.7% 12.1% 12.0% 14.8%