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Question 3 (14 marks) 3. a. The financial information of APPS Bank is shown as follows: Assets Reserves Loans Securities APPS Bank (in millions) Liabilities $50 Deposits $1,000 $700 Borrowing $100 $450 Bank Capital $100 Assume that APPS Bank has net profit after tax of $180 million: Calculate for APPS Bank's : i. return on assets (ROA) ii. return on equity (ROE) iii. leverage ratio. Show all your calculations. 4 marks b. Explain, with example, why a bank with a high debt-to-equity ratio may be more profitable than a bank with a lower debt-to-equity ratio, but would also have a higher level of risk. 5 marks c. In each of the following scenarios, determine if the immediate problem that a bank will likely to encounter is one of illiquidity or of insolvency: i. the economy enters a recession with unemployment rates rise sharply ii. the central bank just announced to increase the required reserve ratio by 100% Explain your answers. 5 marks

          Question 3 (14 marks)
3. a. The financial information of APPS Bank is shown as follows:
Assets
Reserves
Loans
Securities
APPS Bank
(in millions)
Liabilities
$50 Deposits
$1,000
$700 Borrowing
$100
$450 Bank Capital
$100
Assume that APPS Bank has net profit after tax of $180 million:
Calculate for APPS Bank's :
i. return on assets (ROA)
ii. return on equity (ROE)
iii. leverage ratio.
Show all your calculations.
4 marks
b. Explain, with example, why a bank with a high debt-to-equity ratio may be
more profitable than a bank with a lower debt-to-equity ratio, but would also
have a higher level of risk.
5 marks
c. In each of the following scenarios, determine if the immediate problem that a
bank will likely to encounter is one of illiquidity or of insolvency:
i. the economy enters a recession with unemployment rates rise sharply
ii. the central bank just announced to increase the required reserve ratio by
100%
Explain your answers.
5 marks

Question 3 (14 marks)
3. a. The financial information of APPS Bank is shown as follows:
Assets
Reserves
Loans
Securities
APPS Bank
(in millions)
Liabilities
50 Deposits1,000
700 Borrowing100
450 Bank Capital100
Assume that APPS Bank has net profit after tax of 180 million:
Calculate for APPS Bank's :
i. return on assets (ROA)
ii. return on equity (ROE)
iii. leverage ratio.
Show all your calculations.
4 marks
b. Explain, with example, why a bank with a high debt-to-equity ratio may be
more profitable than a bank with a lower debt-to-equity ratio, but would also
have a higher level of risk.
5 marks
c. In each of the following scenarios, determine if the immediate problem that a
bank will likely to encounter is one of illiquidity or of insolvency:
i. the economy enters a recession with unemployment rates rise sharply
ii. the central bank just announced to increase the required reserve ratio by
100%
Explain your answers.
5 marks

Added by Mikayla K.

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