1.

An investor holds the stock of First National Bank of Inseco and expects to receive a
dividend of $12 per share at the end of the year. Stock analysts have recently predicted
that the banks’s dividends will grow at approximately 8 percent a year indefinitely into
the future. If this is true, and if the appropriate risk –adjusted cost of capital (discount
rate ) for the bank is 15 percent, what should be the current price per share of Inseco’s
stock?
Solution:
Here,
Dividend at the end of the year (𝐷1 ) = $12
Growth rate (g) = 8%= .08
Discount rate (r) = 15%= 0.15
Current price (𝑃0 ) = ?
We know,
For one period model,
𝑫𝟏
𝑷𝟎 =
𝒓−𝒈

$𝟏𝟐
=
.𝟏𝟓−.𝟎𝟖
=$ 171.43
Answer: The current price per share of Inseco’s Stock is $ 171.43
2. Suppose that stock brokers have projected that Price State Bank and Trust
Company will pay a dividend of $3 per share on its common stock at the end of the
year; a dividend of $4.50 per share is expected for the next year, and $6 per share in
the following year. The risk-adjusted cost of capital for banks in Price State’s risk
class is 12 percent. If and investor holding Price State’s stock plans to hold that stock
for only three years and hopes to sell it at a price of $60 per share, what should the
value of the bank’s stock be in today’s market?
Solution:
Here,
Dividend at the end of 1st year (𝐷1 ) = $ 3
Dividend at the end of 2nd year (𝐷2 ) = $ 4.50
Dividend at the end of 3rd year(𝐷3 ) = $6
Selling price at the end 3rd year (𝑃3 ) = $ 60
Cost of capital (r) = 12% = 0.12
Value of bank’s stock (𝑷𝟎 ) = ?

Page 1 of 9
 We know,
For multiple period model
𝑫𝟏 𝑫𝟐 𝑫𝒏 𝑷𝒏
𝑷𝟎 = + + ⋯ . . + +
(𝟏 + 𝒓) (𝟏 + 𝒓)𝟐 (𝟏 + 𝒓)𝒏 (𝟏 + 𝒓)𝒏
Now,
𝟑 𝟒. 𝟓𝟎 𝟔 𝟔𝟎
𝑷𝟎 = + 𝟐
+ 𝟑
+
(𝟏+. 𝟏𝟐) (𝟏+. 𝟏𝟐) (𝟏+. 𝟏𝟐) (𝟏+. 𝟏𝟐)𝟑
=2.678+3.587+4.271+42.707
= $ 53.243
Answer: The Value of the bank’s stock in the today’s market is $ 53.243

3. The following information is for Shadowwood National Bank:

Description Amount ( in $
million)
Interest income $ 1,875
Interest expense $ 1,210
Total assets $ 15,765
Securities gains $ 21
Earning assets $ 12,612
Total Liabilities $ 15,440
Taxes $ 16
Shares of common stock outstanding 145000
Noninterest income $ 501
Noninterest expense $ 685
Provision for loan losses $ 381

Please Calculate:
a. ROE
b. ROA
c. Net Interest Margin
d. Earnings per Share
e. Net noninterest margin
f. Net operating margin
g. Net Returns before special transactions.

Page 2 of 9
Solution :
a) We know,
ROE= Net Profit Margin (NPM) × Equity Multiplier (EM) × Asset Utilization (AU)

= 0.04419 × 48.50 × 0.1507

= 0.3229
= 32.29%
We also know,
𝑵𝒆𝒕 𝒊𝒏𝒄𝒐𝒎𝒆 𝒂𝒇𝒕𝒆𝒓 𝒕𝒂𝒙𝒆𝒔
𝑵𝑷𝑴 =
𝑻𝒐𝒕𝒂𝒍 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒓𝒆𝒗𝒆𝒏𝒖𝒆𝒔

𝟏𝟎𝟓
=
𝟐𝟑𝟕𝟔
= 0.04419
Net income after taxes= Interest income – interest expense+ noninterest income – non
interest expense – provision for loan losses– taxes + securities gains

= 1,875-1,210+ 501-685-381-16+21
= $ 105 million
Total operating revenues = Interest income + Non interest income
= 1,875+ 501
= $ 2,376million

𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕
𝑬𝑴 =
𝑻𝒐𝒕𝒂𝒍 𝑬𝒒𝒖𝒊𝒕𝒚

𝟏𝟓,𝟕𝟔𝟓
=
𝟑𝟐𝟓
= 48.50
Total equity= Total Asset –Total Liablities
= $ 15,765m - $ 15,440m
= $ 325million

𝑻𝒐𝒕𝒂𝒍 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑹𝒆𝒗𝒆𝒏𝒖𝒆𝒔

𝑨𝑼 =
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔

𝟐𝟑𝟕𝟔
=
𝟏𝟓,𝟕𝟔𝟓
= 0.1507

Page 3 of 9
b) We know,
𝑵𝒆𝒕 𝒊𝒏𝒄𝒐𝒎𝒆 𝒂𝒇𝒕𝒆𝒓 𝒕𝒂𝒙𝒆𝒔
𝑹𝑶𝑨 =
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔
105
=
15,765

= 0.00666
=0.67%
c) We know,
𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒊𝒏𝒄𝒐𝒎𝒆 − 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒆𝒙𝒑𝒆𝒏𝒔𝒆
𝑵𝒆𝒕 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 (𝑵𝑰𝑴) =
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔

𝟏𝟖𝟕𝟓−𝟏𝟐𝟏𝟎
=
𝟏𝟓𝟕𝟔𝟓
= 0.04218
= 4.218%
d) We know,
𝑵𝒆𝒕 𝒊𝒏𝒄𝒐𝒎𝒆 𝒂𝒇𝒕𝒆𝒓 𝒕𝒂𝒙𝒆𝒔
𝑬𝒂𝒓𝒏𝒊𝒏𝒈𝒔 𝑷𝒆𝒓 𝑺𝒉𝒂𝒓𝒆 (𝑬𝑷𝑺) =
𝑺𝒉𝒂𝒓𝒆𝒔 𝒐𝒇 𝒄𝒐𝒎𝒎𝒐𝒏 𝒔𝒕𝒐𝒄𝒌 𝒐𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈
$𝟏𝟎𝟓,𝟎𝟎𝟎,𝟎𝟎𝟎
=
𝟏𝟒𝟓𝟎𝟎𝟎
= $ 724.13793
e) We know,
𝑵𝒐𝒏 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒊𝒏𝒄𝒐𝒎𝒆 − 𝑵𝒐𝒏 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒆𝒙𝒑𝒆𝒏𝒔𝒆
𝑵𝒆𝒕 𝒏𝒐𝒏𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒎𝒂𝒓𝒈𝒊𝒏 =
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔
𝟓𝟎𝟏−𝟔𝟖𝟓
=
𝟏𝟓𝟕𝟔𝟓
= -0.01167
= - 0.1.167%
f) We know,
𝑻𝒐𝒕𝒂𝒍 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑹𝒆𝒗. −𝑻𝒐𝒕𝒂𝒍 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒆𝒙𝒑.
𝑵𝒆𝒕 𝒐𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒎𝒂𝒓𝒈𝒊𝒏 =
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕
𝟐𝟑𝟕𝟔−𝟐𝟐𝟕𝟔
=
𝟏𝟓𝟕𝟔𝟓
=0.006443 = 0.6443%
Total Operating Expense = Interest expense+ Noninterest expense+ provision for loan loss

Page 4 of 9
 = 1,210+685+381
=2276
g) We know,
𝑵𝒆𝒕 𝒊𝒏𝒄𝒐𝒎𝒆 𝒂𝒇𝒕𝒆𝒓 𝒕𝒂𝒙𝒆𝒔 𝒃𝒆𝒇𝒐𝒓𝒆 𝒔𝒆𝒄𝒖𝒓𝒊𝒕𝒚 𝒈𝒂𝒊𝒏𝒔
𝐍𝐞𝐭 𝐫𝐞𝐭𝐮𝐫𝐧𝐬 𝐛𝐞𝐟𝐨𝐫𝐞 𝐬𝐩𝐞𝐜𝐢𝐚𝐥 𝐭𝐫𝐚𝐧𝐬𝐚𝐜𝐭𝐢𝐨𝐧𝐬 =
𝑻𝒐𝒕𝒂𝒍 𝒆𝒒𝒖𝒊𝒕𝒚 𝒄𝒂𝒑𝒊𝒕𝒂𝒍

𝟒𝟔𝟓
=
𝟑𝟐𝟓
= 1.4307= 143.07%
Net income after taxes before security gains and other extraordinary items = interest
income- interest expense+ noninterest income – noninterest expense – tax
= 1875 – 1210+501-685 – 16 = 465
4. Blythe County National Bank Presents us with these figures for the year just
concluded. Please determine the net profit margin, equity multiplier, asset utilization
ratio, and ROE
Description Amount (in $ million)
Net income after taxes $ 16
Total operating revenues $ 215
Total assets $ 1,250
Total equity capital $ 111
Accounts

Solution: We know,
𝑵𝒆𝒕 𝒊𝒏𝒄𝒐𝒎𝒆 𝒂𝒇𝒕𝒆𝒓 𝒕𝒂𝒙𝒆𝒔
𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 (𝑵𝑷𝑴) =
𝑻𝒐𝒕𝒂𝒍 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒓𝒆𝒗𝒆𝒏𝒖𝒆𝒔
𝟏𝟔
=
𝟐𝟏𝟓
= 0.074418 = 7.4418%
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕
𝑬𝒒𝒖𝒊𝒕𝒚 𝑴𝒖𝒍𝒕𝒊𝒑𝒍𝒊𝒆𝒓 (𝑬𝑴) =
𝑻𝒐𝒕𝒂𝒍 𝑬𝒒𝒖𝒊𝒕𝒚
𝟏,𝟐𝟓𝟎
= 𝟏𝟏𝟏

= 11.261
𝑻𝒐𝒕𝒂𝒍 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑹𝒆𝒗𝒆𝒏𝒖𝒆𝒔
𝑨𝒔𝒔𝒆𝒕 𝑼𝒕𝒊𝒍𝒊𝒛𝒂𝒕𝒊𝒐𝒏 (𝑨𝑼) =
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔
𝟐𝟏𝟓
=
𝟏𝟐𝟓𝟎
= 0.172= 17.2%

Page 5 of 9
 𝑹𝑶𝑬 = 𝑵𝑷𝑴 × 𝑬𝑴 × 𝑨𝑼
= 0.074418× 11.261× 0.172
= 0.14409
= 14.409%
5. Stock brokers have projected that ABC Bank will pay a dividend BDT 180 per share
on its common stock at the end of the year. The risk-adjusted cost of capital is 18
percent. If an investor plans to hold that stock for only four years and hopes to sell it
at a price of BDT 14,500 per share, what should the value of the bank's 7,000 stocks
be in today's market? Cumulative Growth rate of ABC Bank’s dividend each year is
5%.
Solution:
Here,
Growth rate of dividend , g = 5% = 0.05
Dividend at the end of 1st year, 𝐷1 = 180
Dividend at the end of 2nd year , 𝐷2 = 𝐷1 (1 + 𝑔)= 180 ( 1+.05) = 189
Dividend at the end of 3rd year, 𝐷3 = 𝐷2 (1 + 𝑔)= 189( 1+.05) = 198.45
Dividend at the end of 4th year 𝐷4 = 𝐷3 (1 + 𝑔) = 198.45(1 + .05) = 208.3725
Selling price ate the end of 4th year 𝑃4 = 14,500
Cost of capital, r = 18% =0.18
Value of 7000 stock = ?
At first, we have to calculate per share price or value of the stock ,
And we know,
𝑫𝟏 𝑫𝟐 𝑫𝒏 𝑷𝒏
𝑷𝟎 = + + ⋯ . . + +
(𝟏 + 𝒓) (𝟏 + 𝒓)𝟐 (𝟏 + 𝒓)𝒏 (𝟏 + 𝒓)𝒏
𝟏𝟖𝟎 𝟏𝟖𝟗 𝟏𝟗𝟖. 𝟒𝟓 𝟐𝟎𝟖. 𝟑𝟕𝟓 𝟏𝟒, 𝟓𝟎𝟎
= + 𝟐
+ 𝟑
+ 𝟒
+
(𝟏+. 𝟏𝟖) (𝟏+. 𝟏𝟖) (𝟏+. 𝟏𝟖) (𝟏+. 𝟏𝟖) (𝟏+. 𝟏𝟖)𝟒
= 152.542+135.737+ 120.783+ 107.478+7478.939
= $7995.47
So, Value of 7000 stock = $7995.47× 7000
= $ 5,59,68,290
Answer: Value of 7000 stock is $ 5,59,68,290

Page 6 of 9
6. Southern bank has following information. Please Calculate: a) Net interest margin
b) Net operating Margin c) Net non interest margin d) Earnings per share e)
ROE
Description BDT in
million
Interest expense 145
Noninterest expenses 78
Current assets 365
Securities gains 25
Paid up capital 5,450
Share premium 12
Taxes 8
Shares of common stock outstanding 350,000
Noninterest income 132
Retained earnings 36
Provision for loan losses 24
Fixed assets 4, 565
Interest income 278
Minority interest 18
Deferred tax 19

Solution:
a) We know,
𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒊𝒏𝒄𝒐𝒎𝒆 − 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒆𝒙𝒑𝒆𝒏𝒔𝒆
𝑵𝒆𝒕 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒎𝒂𝒓𝒈𝒊𝒏 =
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔

𝟐𝟕𝟖−𝟏𝟒𝟓
=
𝟒𝟗𝟑𝟎
= 0.026977
Total Assets = 4565+365= 4930m
b) We know,
𝑻𝒐𝒕𝒂𝒍 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑹𝒆𝒗𝒆𝒏𝒖𝒆−𝑻𝒐𝒕𝒂𝒍 𝒐𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒆𝒙𝒑𝒆𝒏𝒔𝒆
𝑵𝒆𝒕 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑴𝒂𝒓𝒈𝒊𝒏 =
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔
𝟒𝟏𝟎−𝟐𝟒𝟕
=
𝟒𝟗𝟑𝟎

= 0.03306= 3.306%
Total Operating Revenue = Interest income + noninterest income
= 278+132
= 410 m
Total Operating Expense = Interest Expense + Noninterest expense + Provision for loan
losses
= 145+78+24
= 247m

Page 7 of 9
 c) We know,
𝑵𝒐𝒏𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒊𝒏𝒄𝒐𝒎𝒆 − 𝑵𝒐𝒏𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒆𝒙𝒑𝒆𝒏𝒔𝒆
𝑵𝒆𝒕 𝒏𝒐𝒏𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒎𝒂𝒓𝒈𝒊𝒏 =
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔
𝟏𝟑𝟐−𝟕𝟖
= 𝟒𝟗𝟑𝟎

= 0.01095334

d) We know,
𝑵𝒆𝒕 𝒊𝒏𝒄𝒐𝒎𝒆 𝒂𝒇𝒕𝒆𝒓 𝒕𝒂𝒙
Earnings per share (EPS) =
𝑺𝒉𝒂𝒓𝒆𝒔 𝒐𝒇 𝒄𝒐𝒎𝒎𝒐𝒏 𝒔𝒕𝒐𝒄𝒌 𝒐𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈
𝟏𝟖𝟎,𝟎𝟎𝟎,𝟎𝟎𝟎
=
𝟑𝟓𝟎,𝟎𝟎𝟎
= $514.285
e) We know,
𝑵𝒆𝒕 𝒊𝒏𝒄𝒐𝒎𝒆 𝒂𝒇𝒕𝒆𝒓 𝒕𝒂𝒙𝒆𝒔
𝑹𝑶𝑬 =
𝑻𝒐𝒕𝒂𝒍 𝑬𝒒𝒖𝒊𝒕𝒚
𝟏𝟖𝟎
=
𝟓𝟓𝟏𝟔
Total equity = Paid up capital + Share premium + Retained earnings + Minority interest
= 5,450+ 12 + 36 + 18
= 5,516m

Net income after tax = interest income – interest expense + noninterest income –
noninterest expense– provision for loan losses –tax+ securities gains
= 278 – 145 + 132 – 78 -24 -8+25
= 180 million
7. Using this information for North South bank, calculate the bank's net interest margin,
non interest margin, and ROA.
Description BDT in
million
Extraordinary income 129
Fixed Assets 4,250
Noninterest expenses 87
Securities gains 65
Non Interest Income 128
Provision of loan losses 64
Interest Expenses 79
Interest Income 217
Current assets 1,301
Taxes 8

Page 8 of 9
Solution:
We know,
𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒊𝒏𝒄𝒐𝒎𝒆 − 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒆𝒙𝒑𝒆𝒏𝒔𝒆
𝑵𝒆𝒕 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒎𝒂𝒓𝒈𝒊𝒏 =
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔

217−79
=
5551
= 0.024860385 = 2.49%
Total Assets = Current Assets + Fixed Assets
= 4,250 + 1,301
= 5551m

𝑵𝒐𝒏𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒊𝒏𝒄𝒐𝒎𝒆 − 𝒏𝒐𝒏𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒆𝒙𝒑𝒆𝒏𝒔𝒆

𝑵𝒆𝒕 𝒏𝒐𝒏𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒎𝒂𝒓𝒈𝒊𝒏 =
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔
𝟏𝟐𝟖−𝟖𝟕
=
𝟓𝟓𝟓𝟏
= 0.00738 = .738 %
ROA= Net interest margin + Net noninterest margin + Special transactions affecting its
net income
= 0.024860385 + 0.00738 + 0.021978021
= 0.054218406
= 5.4218406%
𝑺𝒑𝒆𝒄𝒊𝒂𝒍 𝒊𝒏𝒄𝒐𝒎𝒆 𝒂𝒏𝒅 𝒆𝒙𝒑𝒆𝒏𝒔𝒆 𝒊𝒕𝒆𝒎𝒔
Special transactions affecting its net income =
𝑻𝒐𝒕𝒂𝒍 𝒂𝒔𝒔𝒆𝒕𝒔
𝟏𝟐𝟐
=
𝟓𝟓𝟓𝟏
= 0.021978021 = 2.198%
Special Income = Extraordinary income + Security gains – provision of loan losses – taxes
= 129+65 – 64 -8
= 122m

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