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Chapter 9: Q. 23 (page 264)

Axle Bank reported an ROE of 16% and an ROA of 1.32%. What is the equity multiplier? How well capitalized is this bank?

Short Answer

Expert verified

Equity Multiplier is12.12

Step by step solution

01

Concept Introduction

Return on equity (ROE) is the standard of a firm's net earnings divided by its shareholders' equity. ROE is a gauge of a company's profitability and how efficiently it develops those profits.

02

Explanation

ROE = ROA ×EM

0.16=0.0132×EM

EM = 12.12= asset/equity

03

Final answer

This is a well-capitalized bank because its equity asset ratio exceeds the minimum required level.

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