Answered: If a bank maintains $10 billion in…

If a bank maintains $10 billion in assets with an ROA of 3%, what would happen to the ROE if the leverage ratio fell from 6% to 4% because of an increase in the use of borrowings?

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter7: Corporate Valuation And Stock Valuation

Section: Chapter Questions

Problem 1P: Ogier Incorporated currently has $800 million in sales, which are projected to grow by 10% in Year 1...

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Concept explainers

Interest Rate Risk Measurement and Management

Interest rate risk is a risk that arises due to fluctuation in interest rates. These interest rate risks control the value of fixed-return assets. Interest rates and the value of investments have an indirect relationship. When interest rates increase, the price of bonds or investments falls. Short-term investments carry lower risk than long-term investments as they have a short maturity period.

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If a bank maintains $10 billion in assets with an ROA of 3%, what would happen to the ROE if the leverage ratio fell from 6% to 4% because of an increase in the use of borrowings?

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