Question

A bank has book value of $5 million in liquid assets and $95 million in nonliquid assets. Large depositors unexpectedly withdraw $9.5 million in deposits. To cover the withdrawals the bank sells all of its liquid assets at book value. To raise the additional funds needed the bank sells the necessary amount of nonliquid assets at 80 cents per dollar of book value. As a result, the bank's equity will _____________.

A. remain unchanged
B. fall $4.5 million
C. fall $3.6 million
D. fall $1.4 million
E. fall $5.0 million

Answer 1

correct option is C. fall $3.6 million

Step-by-step explanation:

given data

book value = $5 million

liquid assets = $95 million

unexpectedly withdraw = $9.5 million

non liquid assets = 80 cents per dollar

to find out

bank's equity will

solution

we get here bank equity that is express as

bank equity = ( unexpectedly withdraw - book value ) × non liquid assets % .............1

put here value

bank equity = ( 9.5 million - 5 million ) × 80 %

bank equity = 4.5 million × 80 %

bank equity = 3.6 million fall

so correct option is C. fall $3.6 million