Question

What is the difference in in the equity multiplier between bank A and bank B, each with ROA of 1.5%, but bank A has equity-to-asset ratio of 6%, while bank B has an equity-to asset-ratio of 10%?

Answer 1

6.7

Step-by-step explanation:

We can calculate the difference between the equity multiplier of Bank A and Bank B by using the equity multiplier formula. The equity multiplier is a financial leverage ratio that measures the amount of a firm's assets that are financed by its shareholders by comparing total assets with total shareholder's equity.

DATA

Bank A: Equity to asset ratio = 6%

Bank B: Equity to asset ratio = 10%

Bank A

Equity multiplier = total asset / total equity

Equity multiplier = 1.06/0.06

Equity multiplier = 17.67

Bank B

Equity multiplier = total asset / total equity

Equity multiplier = 1.10/0.1

Equity multiplier =11

Difference = 17.67-11

Difference = 6.7