Question

Bank Y and Bank Z both have assets of $1 billion. The return on assets for both banks is the same. Bank Y has liabilities of $600 million while Bank Z’s liabilities are $700 million. In which bank would you prefer to hold an equity stake? Bank Y Bank Z It depends on your preference for return versus risk

Answer 1

Assume return on asset is 100 million, we will use the dupont formula

ROA*(assets/equity)

Bank Y equity = 1 - 0.6= 400 million

Bank Z equity= 1-0.7 = 300 million

ROE Bank Y

(100/1000) *( 1,000/400)=100/400= 0.25 or 25%

ROE BANK Y

(100/1000)*(1000/300)=0.333 or 33%

Investor would prefer investing in Bank Y as it has a higher return on equity

Step-by-step explanation: