Accounting Textbook Solutions - 38

An article in the Economist discussing the 2007-2009 recession states that "employers found it
difficult to reduce the cash value of the wages paid to their staff. (Foisting a pay cut on your
entire workforce hardly boosts morale.)" a. During a recession, couldn't firms reduce their labor
costs by the same, or possibl
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An article in the Economist noted that in the first half of 2015, the value of Canadian oil exports
declined and that "energy firms, which account for around a third of capital spending, are
expected to slash investment by nearly 40% this year." As a result, real GDP in Canada declined
during the first six months of 20
An article in the Wall Street Journal on the shadow banking system contained the following
observation: "If investors rush to the exits en masse, acting as a herd, asset prices could plummet
and markets could face funding problems." Why might people who have invested in a money
market mutual fund, for example, be more
Explain the three reasons the aggregate demand curve slopes downward.
Suppose you decide to withdraw $100 in currency from your checking account. What is the
effect on M1? Ignore any actions the bank may take as a result of your having withdrawn the
$100.
An economics student makes the following statement: "It's easy to understand why the aggregate
demand curve is downward sloping: When the price level increases, consumers substitute into
less expensive products, which decreases total spending in the economy." Briefly explain
whether you agree.
Explain whether each of the following will cause a shift of the AD curve or a movement along
the AD curve. a. Firms become more optimistic and increase their spending on machinery and
equipment. b. The federal government increases taxes in an attempt to reduce a budget deficit. c.
The U.S. economy experiences 4 perc
What is the multiplier effect? Use a 458-line diagram to illustrate the multiplier effect of a
decrease in government purchases.
Briefly discuss the factors that caused the recession of 2007-2009.
Suppose that the Federal Reserve makes a $10 million discount loan to First National Bank
(FNB) by increasing FNB's account at the Fed. a. Use a T-account to show the effect of this
transaction on FNB's balance sheet. Remember that the funds a bank has on deposit at the Fed
count as part of its reserves. b. Assume th
Suppose you withdraw $1,000 from a money market mutual fund and deposit the funds in your
bank checking account. Briefly explain how this action will affect M1 and M2.
Give the formula for the simple deposit multiplier. If the required reserve ratio is 20 percent,
what is the maximum increase in checking account deposits that will result from an increase in
bank reserves of $20,000? Is this maximum increase likely to occur? Briefly explain.
Consider the variables that shift long-run aggregate supply and the variables that shift short-run
aggregate supply. Match each of the following scenarios with one of the three graphs of long-run
aggregate supply and short-run aggregate supply. a. The expected future price level decreases. b.
Workers and firms adjust
Jet fuel is the largest operating cost for Delta Air Lines. In 2015, Delta's CEO Richard Anderson
announced that the firm was likely to save more than $2 billion during the year because of lower
fuel prices. Are firms like airlines that have costs that are dependent on raw material prices likely
to be more or less affe
Explain why the aggregate expenditure line is upward sloping, while the aggregate demand curve
is downward sloping.
Write a general expression for the aggregate expenditure function. If you think of the aggregate
expenditure function as a line on the 458-line diagram, what would be the intercept and what
would be the slope, using the general values represented by letters?
On January 1, 2002, Germany officially adopted the euro as its currency, and the deutsche mark
stopped being legal tender. According to an article in the Wall Street Journal, even 10 years later
many Germans continued using the deutsche mark, and many stores in Germany continued to
accept it. Briefly explain how it is
Consider the data in the following table for 1969 and 1970 (where the values for real GDP and
potential GDP are in 2009 dollars): a. In 1969, actual real GDP was greater than potential GDP.
Briefly explain how this is possible. b. Even though real GDP in 1970 was slightly greater than
real GDP in 1969, the unemployme
In an article in the Wall Street Journal, Kevin Brady, a member of Congress from Texas, stated,
"To get Congress to pass the Federal Reserve Act [in 1913, President Woodrow] Wilson had to
retain the support of ... northeastern lawmakers while convincing southern and western
Democrats that legislation would not ... crea
Friedrich Schneider, an economist at the Johannes Kepler University of Linz in Austria, made
the following observation about China: "The average Chinese trusts neither the Chinese banks
nor the Communist Party." a. If Schneider is correct, how might businesses and consumers prefer
to carry out transactions? b. The Ch
Economists Mary Daly, Bart Hobijn, and Timothy Ni of the Federal Reserve Bank of San
Francisco argue that "employers hesitate to reduce wages and workers are reluctant to accept
wage cuts, even during recessions." If a firm faces declining sales during a recession, why might
the firm's managers decide to lay off some w
Explain how each of the following events would affect the short-run aggregate supply curve. a.
An increase in the price level b. An increase in what the price level is expected to be in the future
c. A price level that is currently higher than expected d. An unexpected increase in the price of
an important raw mate
In a newspaper column, author Delia Ephron described a conversation with a friend who had a
large balance on her credit card with an interest rate of 18 percent per year. The friend was
worried about paying off the debt. Ephron was earning only 0.4 percent interest on her bank
certificate of deposit (CD). She considere
Suppose you deposit $2,000 in currency into your checking account at a branch of Bank of
America, which we will assume has no excess reserves at the time you make your deposit. Also
assume that the required reserve ratio is 0.20, or 20 percent. a. Use a T-account to show the
initial effect of this transaction on Bank
Why does an open market purchase of Treasury securities by the Federal Reserve increase bank
reserves? Why does an open market sale of Treasury securities by the Federal Reserve decrease
bank reserves?
Go to the Web site of the Federal Reserve Bank of St. Louis (FRED)
(research.stlouisfed.org/fred2/) and find data on real GDP (GDPCA) and the GDP price deflator
(USAGDPDEFAISMEI) for 1960, 1973, 1975, and 2007. a. In an AD-AS graph, using the actual
values for real GDP and the GDP price deflator, show equilibrium for
What are the four functions of money? Can something be considered money if it does not fulfill
all four functions?
What relationship does the aggregate demand curve show? What relationship does the aggregate
supply curve show?
In Figure 23.13 on page 796, the economy is initially in equilibrium at point A. Aggregate
expenditure and real GDP both equal $9.6 trillion. The increase in investment of $100 billion
increases aggregate expenditure to $9.7 trillion. If real GDP increases to $9.7 trillion, will the
economy be in equilibrium? Briefly e
Suppose that exports become more sensitive to changes in the price level in the United States.
That is, when the price level in the United States rises, exports decline by more than they
previously did. Will this change make the aggregate demand curve steeper or less steep? Briefly
explain.
The following is from an article on community banks: "Their commercial-lending businesses,

funded by their stable deposit bases, make them steady earners." What is commercial lending? In
what sense are loans "funded" by deposits?
Distinguish among money, income, and wealth. Which one of the three does the central bank of
a country control?
Draw a basic aggregate demand and aggregate supply graph (with LRAS constant) that shows
the economy in long-run equilibrium. a. Assume that there is a large increase in demand for U.S.
exports. Show the resulting short-run equilibrium on your graph. In this short-run equilibrium, is
the unemployment rate likely to be
What is the "shadow banking system"? Why were the financial firms of the shadow banking
system more vulnerable than commercial banks to bank runs?
What is corporate governance, and how might it be improved for the benefit of the owners and
customers of financial firms?
How do the structures of the European Central Bank (ECB), the Bank of Japan, and the
Peopleâ€™s Bank of China appear to be similar to the structure of the Federal Reserve System?
How are these powerful and influential central banks different from one another?
Consider the short-run aggregate supply curves in the following graph. What would cause a
movement from point A to point B on SRAS1? What would cause a movement from point A to
point C?
Explain the difference between aggregate expenditure and aggregate demand.

During the 2007-2009 period, the economies of the United Kingdom and the United States
experienced similar problems. High oil prices and a housing bubble affected both economies.
The financial crisis in the United States also affected investment in the United Kingdom, both by
limiting credit and by increasing risk prem
I. B. Michaels has a chance to participate in a new public offering by Hi-Tech Micro Computers.
His broker informs him that demand for the 700,000 shares to be issued is very strong. His
brokerâ€™s firm is assigned 25,000 shares in the distribution and will allow Michaels, a
relatively good customer, 1.3 percent of its
What nonbank businesses are bank holding companies permitted to acquire under the law?
How well do most new banks perform for the public and for their owners?
What is happening to bankingâ€™s share of the financial marketplace and why? What kind of
banking and financial system do you foresee for the future if present trends continue?
Becker Brothers is the managing underwriter for a 1.45-million-share issue by Jayâ€™s

Hamburger Heaven. Becker Brothers is â€œhandlingâ€ 10 percent of the issue. Its price is $27
per share and the price to the public is $28.95. Becker also provides the market stabilization
function. During the issuance, the market for
Can you see any advantages to allowing interstate banking? What about potential disadvantages?
What is a financial intermediary? What are its key characteristics? Is a bank a type of financial
intermediary? What other financial-services companies are financial intermediaries? What
important roles within the financial system do financial intermediaries play?
What is a financial department store? A universal bank? Why do you think these institutions
have become so important in the modern financial system?
How have bank failures influenced recent legislation?
What key areas or functions of a bank or other financial firm are regulated today?
What are the advantages of having a national bank charter? A state bank charter?
Midland Corporation has a net income of $19 million and 4 million shares outstanding. Its
common stock is currently selling for $48 per share. Midland plans to sell common stock to set
up a major new production facility with a net cost of $21,120,000. The production facility will
not produce a profit for one year, and
How can changes in the central bank loan (discount) rate and reserve requirements affect the
operations of depository institutions? What happens to the legal reserves of the banking system
when the Fed grants loans through the discount window? How about when these loans are
repaid? What are the effects of an increase i
Why do banks and other financial intermediaries exist in modern society, according to the theory
of finance?
How does the FDIC deal with most failures?
Trump Card Co. will issue stock at a retail (public) price of $32. The company will receive
$29.20 per share. a. What is the spread on the issue in percentage terms? b. If the firm demands
receiving a new price only $2.20 below the public price suggested in part a, what will the spread
be in percentage terms? c. To hol
Walton and Company is the managing investment banker for a major new underwriting. The
price of the stock to the investment banker is $23 per share. Other syndicate members may buy
the stock for $24.25. The price to the selected dealers group is $24.80, with a price to brokers of
$25.20. Finally, the price to the publi
What do you think the financial-services industry will look like 20 years from now? What are the
implications of your projections for its management today?
You are currently serving as president and chief executive officer of a unit bank that has been
operating out of its present location for five years. Due to the rapid growth of households and
businesses in the market area served by the bank and the challenges posed to your share of this
market by several aggressive com
How did the Equal Credit Opportunity Act and the Community Reinvestment Act address
discrimination?
Of what benefit is agency theory in helping us understand the consequences of changing control
of a financial-services firm? How can control by management as opposed to control by
stockholders affect the behavior and performance of a financial-services provider?
What relationship appears to exist between bank size, efficiency, and operating costs per unit of
service produced and delivered? How about among nonbank financial-service providers?
The Landers Corporation needs to raise $1.60 million of debt on a 20-year issue. If it places the
bonds privately, the interest rate will be 10 percent. Twenty thousand dollars in out-of-pocket
costs will be incurred. For a public issue, the interest rate will be 9 percent, and the underwriting
spread will be 2 percent
The Bailey Corporation, a manufacturer of medical supplies and equipment, is planning to sell its
shares to the general public for the first time. The firmâ€™s investment banker, Robert Merrill
and Company, is working with Bailey Corporation in determining a number of items.
Information on the Bailey Corporation follow
The Wrigley Corporation needs to raise $44 million. The investment banking firm of Tinkers,
Evers, & Chance will handle the transaction. a. If stock is utilized, 2,300,000 shares will be sold
to the public at $20.50 per share. The corporation will receive a net price of $19 per share. What
is the percentage underwriti
What new regulatory issues remain to be resolved now that interstate banking is possible and
security and insurance services are allowed to commingle with banking?
Suppose you are managing a medium-size branch banking organization (holding about $25
billion in assets) with all of its branch offices located within the same state. The board of
directors has asked you to look into the possibility of the bank offering limited security trading
and investment banking services as well a
What is a branch banking organization?
Which businesses are bankingâ€™s closest and toughest competitors? What services do they
offer that compete directly with banksâ€™ services?
Explain the difference between consolidation and convergence. Are these trends in banking and
financial services related? Do they influence each other? How?
What is the Glass-Steagall Act, and why was it important in banking history?
Why were the Sarbanes-Oxley, Bank Secrecy, and USA Patriot Acts enacted in the United
States? What impact are these laws and their supporting regulations likely to have on the
financial-services sector?
What are unit banks?

Why is it so difficult to measure output and economies of scale and scope in the financial-
services industry? How could this measurement problem affect any conclusions reached about
firm size, efficiency, and expense behavior?
Explain how the FACT, Check 21, 2005 Bankruptcy, Financial Services Regulatory Relief, and
Federal Deposit Insurance Reform Acts are likely to affect the revenues and costs of financial
firms and their services to customers.
Tyson Iron Works is about to go public. It currently has aftertax earnings of $4,400,000, and
4,200,000 shares are owned by the present stockholders. The new public issue will represent
500,000 new shares. The new shares will be priced to the public at $25 per share with a 3 percent
spread on the offering price. There
How is the structure of the nonbank financial-services industry changing? How do the
organizational and structural changes occurring today among nonbank financial-service firms
parallel those experienced by the banking industry?
Why is the physical presence of a bank still important to many customers despite recent
advances in long-distance communications technology?
What is a primary dealer, and why are they important?
What key role does the FDIC play in the chartering process?
First Security Trust National Bank of Boston is considering making aggressive entry into the
Peopleâ€™s Republic of China, possibly filing the necessary documents with the government in
Beijing to establish future physical and electronic service facilities. What advantages might such
a move bring to the management and
Why did the federal insurance system run into serious problems in the 1980s and 1990s? Can the
current federal insurance system be improved? In what ways?
Winston Sporting Goods is considering a public offering of common stock. Its investment banker
has informed the company that the retail price will be $16.85 per share for 550,000 shares. The
company will receive $15.40 per share and will incur $180,000 in registration, accounting, and
printing fees. a. What is the spre
Under U.S. law what must a corporation do to qualify and be regulated as a commercial bank?
Describe the typical organization of a smaller community bank and a larger money-center bank.
What does each major division or administrative unit within the organization do?
What are the key factors the organizers of a new financial firm should consider before deciding
to seek a charter?
Of the business activities listed here, which activities can be conducted through U.S.-regulated
holding companies today?
What kinds of information must the organizers of new national banks provide the Comptroller of
the Currency in order to get a charter? Why might this required information be important?
For each of the actions described, explain which government agency or agencies a financial
manager must deal with and what laws are involved: A. Chartering a new bank. B. Establishing
new bank branch offices. C. Forming a bank holding company (BHC) or financial holding
company (FHC). D. Completing a bank merger. E. Mak
What key roles does the Federal Reserve System perform in the banking and financial system?
When must a holding company register with the Federal Reserve Board?
Suppose the Fed purchases $500 million in government securities from a primary dealer. What
will happen to the level of legal reserves in the banking system and by how much will they
change?
What services does the Federal Reserve provide to depository institutions?
What trend in branch banking has been prominent in the United States in recent years?
What is monetary policy?
What changes have occurred in U.S. banksâ€™ authority to cross state lines?
What are the reasons for regulating each of these key areas or functions?
Assume Sybase Software is thinking about three different size offerings for issuance of
additional shares. What is the percentage underwriting spread for each sizeoffer?

Are there any significant advantages or disadvantages for holding companies or the public if
these companies acquire banks or nonbank business ventures?
How would you describe the size distribution of American banks and the concentration of
industry assets inside the United States? What is happening in general to the size distribution and
concentration of banks in the United States and in other industrialized nations and why?
If the Fed loans depository institutions $200 million in reserves from the discount windows of
the Federal Reserve banks, by how much will the legal reserves of the banking system change?
What happens when these loans are repaid by the borrowing institutions?
Kevinâ€™s Bacon Company Inc. has earnings of $9 million with 2,100,000 shares outstanding
before a public distribution. Seven hundred thousand shares will be included in the sale, of which
400,000 are new corporate shares, and 300,000 are shares currently owned by Ann Fry, the
founder and CEO. The 300,000 shares that A
What advantages can you see to banks affiliating with insurance companies? How might such an
affiliation benefit a bank? An insurer? Can you identify any possible disadvantages to such an
affiliation? Can you cite any real-world examples of bank-insurer affiliations? How well do they
appear to have worked out in practi
The management of Mitchell Labs decided to go private in 2002 by buying all 2.80 million of its
outstanding shares at $24.80 per share. By 2006, management had restructured the company by
selling off the petroleum research division for $10.75 million, the fiber technology division for
$8.45 million, and the synthetic p
See if you can develop a good case for and against the regulation of financial institutions in the
following areas: A. Restrictions on the number of new financial-service institutions allowed to
enter the industry each year. B. Restrictions on which depository institutions are eligible for
government-sponsored deposit
What trends are affecting the way banks and their competitors are organized today?
The Presley Corporation is about to go public. It currently has aftertax earnings of $7,200,000,
and 2,100,000 shares are owned by the present stockholders (the Presley family). The new public
issue will represent 800,000 new shares. The new shares will be priced to the public at $25 per
share, with a 5 percent spread
In what ways is the regulation of nonbank financial institutions different from the regulation of
banks in the United States? How are they similar?
Which financial-service firms are regulated primarily at the federal level and which at the state
level? Can you see problems in this type of regulatory structure?
Can you explain why many of the forces you named in the answer to the previous question have
led to significant problems for the management of banks and other financial firms and for their
stockholders?
Why is the establishment of new branch offices usually favored over the chartering of new
financial firms as a vehicle for delivering financial services?
The investment banking firm of Einstein & Co. will use a dividend valuation model to appraise
the shares of the Modern Physics Corporation. Dividends (D1) at the end of the current year will
be $1.64. The growth rate (g) is 8 percent and the discount rate (Ke) is 13 percent. a. What
should be the price of the stock to
What did the Riegle-Neal Interstate Banking Act do? Why was it passed into law?
How did the Federal Reserve and selected other central banks expands their policy tools to deal
with the great credit crisis of 2007â€“2009? Did their efforts work satisfactorily?
The term bank has been applied broadly over the years to include a diverse set of financial-
service institutions, which offer different financial-service packages. Identify as many of the
different kinds of banks as you can. How do the banks you have identified compare to the largest
banking group of allâ€”the commerci
What is the principal role of the Comptroller of the Currency?
Can you make a case for having only one regulatory agency for financial-service firms?
What happens when a central bank like the Federal Reserve expands its assets? Is there any
upper limit to a central bankâ€™s assets? Why?
What is the principal job performed by the FDIC?
As a financial journalist, you are writing an article explaining how the U.S. market shares of
small, medium, and large banks have changed over the last 25 years. Utilize Exhibit 3â€“2 to
approximate the market shares for the years 1985, 1990, 1995, 2000, 2005, and 2010 for small,
medium, and large banks. Identify and
What is a bank? How does a bank differ from most other financial-service providers?
Why is the creation (chartering) of new banks closely regulated? What about nonbank financial
firms?
What different kinds of services do banks offer the public today? What services do their closest
competitors offer?
Why are some banks reaching out to become one-stop financial-service conglomerates? Is this a
good idea, in your opinion?
What changes in regulation did the Gramm-Leach-Bliley (Financial Services Modernization) Act
bring about? Why?
How have banking and the financial-services market changed in recent years? What powerful
forces are shaping financial markets and institutions today? Which of these forces do you think
will continue into the future?
Suppose the Federal Reserve's discount rate is 4 percent. This afternoon, the Federal Reserve
Board announces that it is approving the request of several of its Reserve Banks to raise their
discount rates to 4.5 percent. What is likely to happen to other interest rates tomorrow morning?
Carefully explain the reasoning
How did the Federal Reserve change the policy and practice of the discount window recently?
Why was this change made?
Leading money center banks in the United States have accelerated their investment banking
activities all over the globe in recent years, purchasing corporate debt securities and stock from
their business customers and reselling those securities to investors in the open market. Is this a
desirable move by banking organi
Do branch banks seem to perform differently than unit banks? In what ways? Can you explain
any differences?
The Trading Desk at the Federal Reserve Bank of New York elects to sell $100 million in U.S.
government securities to its list of primary dealers. If other factors are held constant, what is
likely to happen to the supply of legal reserves available? To deposits and loans? To interest
rates?
Consider the issue of whether or not the government should provide a system of deposit
insurance. Should it be wholly or partly subsidized by the taxpayers? What portion of the cost
should be borne by depository institutions? by depositors? Should riskier depository institutions
pay higher deposit insurance premiums? E
Richmond Rent-A-Car is about to go public. The investment banking firm of Tinkers, Evers, and
Chance is attempting to price the issue. The car rental industry generally trades at a 20 percent
discount below the P/E ratio on the Standard & Poorâ€™s 500 Stock Index. Assume that index
currently has a P/E ratio of 25. The
How does the Fed affect the banking and financial system through open market operations
(OMO)? Why is OMO the preferred tool for many central banks around the globe?
What advantages might a unit bank have over banks of other organizational types? What
disadvantages?
What is expense-preference behavior? How could it affect the performance of a financial firm?
Why must we be concerned about privacy in the sharing and use of a financial-service
customerâ€™s information? Can the financial system operate efficiently if sharing nonpublic
information is forbidden? How far, in your opinion, should we go in regulating who gets access
to private information?
What is return on equity capital, and what aspect of performance is it supposed to measure? Can
you see how this performance measure might be useful to the managers of financial firms?
What services do ATMs provide? What are the principal limitations of ATMs as a service
provider? Should ATM carry fees? Why?
How do the financial statements of major nonbank financial firms resemble or differ from bank
financial statements? Why do these differences or similarities exist?
Which of these account items or entries would normally occur on a bankâ€™s balance sheet
(Report of Condition) and which on a bankâ€™s income and expense statement (Report of
Income)? Federal funds sold...... Deposits due to banks Addition to undivided profits... . Leases
of business equipment to customers Credit car
You recently graduated from college with a business degree and accepted a position at a major
corporation earning more than you could have ever dreamed. You want to (1) Open a checking
account for transaction purposes, (2) Open a savings account for emergencies, (3) Invest in an
equity mutual fund for that far-off f

What are the principal limitations of duration gap analysis? Can you think of some way of
reducing the impact of these limitations?
How can financial firms better promote Internet service options?
Suppose that a bank holds cash in its vault of $1.4 million, short-term government securities of
$12.4 million, privately issued money market instruments of $5.2 million, deposits at the Federal
Reserve banks of $20.1 million, cash items in the process of collection of $0.6 million, and
deposits placed with other banks
Life Is Good Financial Services has provided Good Things to Eat Groceries a proposal for in-
store branches in two of its four Davidson locations. Good Things to Eat counter proposed
opening one in-store branch in one of the two proposed locations as a test case. The locations
would be identified as the Lily Branch or t
Suppose a banker tells you that his bank in the year just completed had total interest expenses on
all borrowings of $12 million and noninterest expenses of $5 million, while interest income from
earning assets totaled $16 million and noninterest revenues totaled $2 million.
OK State Bank reports total operating revenues of $150 million, with total operating expenses of
$125 million, and owes taxes of $5 million. It has total assets of $1.00 billion and total liabilities
of $850 million. What is the bankâ€™s ROE?
If you know the following figures: Please calculate these items: Total assets _______ Net loans
_______ Undivided profits _______ Fed funds sold _______ Depreciation _______
Totaldeposits _______
What is the return on assets (ROA), and why is it important? Might the ROA measure be
important to bankingâ€™s key competitors?
What changes are occurring in the design of, and the roles played by, branch offices? Please
explain why these changes are occurring.
What new and innovative sites have been selected for new branch offices in recent years? Why
have these sites been chosen by some financial firms? Do you have any ideas about other sites
that you believe should be considered?
The Sea Level Bank has Gross Loans of $800 million with an ALL account of $45 million. Two
years ago the bank made a loan for $12 million to finance the Sunset Hotel. Two million dollars
in principal was repaid before the borrowers defaulted on the loan. The Loan Committee at Sea
Level Bank believes the hotel will sell
Which accounts are most important and which are least important on the asset side of a bank's
balance sheet?
Stilwater Bank and Trust Company has an average asset duration of 3.25 years and an average
liability duration of 1.75 years. Its liabilities amount to $485 million, while its assets total $512
million. Suppose that interest rates were 7 percent and then rise to 8 percent. What will happen to
the value of the Stilwater
Suppose Carroll Bank and Trust reports interest-sensitive assets of $570 million and interest-
sensitive liabilities of $685 million. What is the bankâ€™s dollar interest-sensitive gap? Its
relative interest-sensitive gap and interest-sensitivity ratio?
Why should banks and other corporate financial firms be concerned about their level of
profitability and exposure to risk?
The latest report of condition and income and expense statement for Smiling Merchants National
Bank are as shown in the following tables: Smiling Merchants National Bank (complete) Income
and Expense Statement (Report of Income) Interest and fees on loans $50 Interest and
dividends on securities 6 Total inte
First State Security Bank is planning to set up its own Web page to advertise its location and
services on the Internet and to offer customers selected service options, such as paying recurring
households bills, verifying account balances, and dispensing deposit account and loan
application forms. What factors should F
What are the principal components of ROE, and what does each of these components measure?
Why do the financial statements issued by banks and by nonbank financial-service providers
look increasingly similar today? Which nonbank financial firms have balance sheets and income
statements that closely resemble those of commercial banks (especially community banks)?
You were informed that a bankâ€™s latest income and expense statement contained the
following figures (in $ millions): Net interest income .......... $800 Net noninterest income.........
(500) Pretax net operating income........ 372 Security gains ............. 100 Increases in bankâ€™s
undivided profits.... 2
Why do you think the organizers of a new financial firm are usually expected to put together a
detailed business plan, including marketing, management, and financial components?
For each of the following transactions, which items on a bankâ€™s statement of income and
expenses (Report of Income) would be affected? a. Office supplies are purchased so the bank
will have enough deposit slips and other necessary forms for customer and employee use next
week. b. The bank sets aside funds to be contr
What forces cause interest rates to change? What kinds of risk do financial firms face when
interest rates change?
Artâ€™s Sporting Goods ordered a shipment of soccer equipment from a manufacturer and
distributor in Munich. Payment for the shipment (which is valued at $3.5 million U.S.) must be
made in Euros that have changed in value in the last 30 days from 0.6423 euros/$ to 0.6673
euros/$. If this trend is expected to continue,
Commerce National Bank reports interest-sensitive assets of $870 million and interest-sensitive
liabilities of $625 million during the coming month. Is the bank asset sensitive or liability
sensitive? What is likely to happen to the bankâ€™s net interest margin if interest rates rise? If
they fall?
An analysis of the BHCPR reports on BB&T is presented in this chapterâ€™s appendix. We

examined a wide variety of profitability measures for that bank, including ROA, ROE, net profit
margin, net interest and operating margins, and asset utilization. However, the various measures
of earnings risk, credit risk, liquidity
Why are bank accounting practices under attack right now? In what ways could financial
institutions improve their accounting methods?
Who are banking chief competitors in the financial-services marketplace?
Suppose that stockbrokers have projected that Jamestown Savings will pay a dividend of $2.50
per share on its common stock at the end of the year; a dividend of $3.25 per share is expected
for the next year, and $4.00 per share in the following two years. The risk-adjusted cost of capital
for banks in Jamestownâ€™s ris
Suppose that a bank is expected to pay an annual dividend of $4 per share on its stock in the
current period and dividends are expected to grow 5 percent a year every year, and the minimum
required return-to-equity capital based on the bank's perceived level of risk is 10 percent. Can
you estimate the current value of
Suppose a bank has an allowance for loan losses of $1.25 million at the beginning of the year,
charges current income for a $250,000 provision for loan losses, charges off worthless loans of
$150,000, and recovers $50,000 on loans previously charged off. What will be the balance in the
allowance for loan losses at year
What factors have motivated financial institutions to develop funds management techniques in
recent years?
If a bank has a net interest margin of 2.50%, a noninterest margin of âˆ’1.85%, and a ratio of
provision for loan losses, taxes, security gains, and extraordinary items of âˆ’0.47%, what is its
ROA?
What makes it so difficult to correctly forecast interest rate changes?
Conway 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. Net
income........... $ 30.00 Total operating revenues..... 135.00 Total assets........... 1,750.00 Total
equity capital accounts... 170.
Runnals National Bank has experienced the following trends over the past five years (all figures
in millions of dollars):
Why do many experts regard the telephone as a key instrument in the delivery of financial
services in the future? What advantages does the telephone have over other service-delivery
vehicles?
What financial services are currently available on the Internet? What problems have been
encountered in trying to offer Internet-delivered services?
What is the relationship between the provision for loan losses on a bank's Report of Income and
the allowance for loan losses on its Report of Condition?
What individuals or groups are likely to be interested in these dimensions of performance for a
financial institution?
How are the balance sheets and income statements of finance companies, insurers, and securities
firms similar to those of banks, and in what ways are they different? What might explain the
differences you observe?
Who charters new banks in the United States?

Mountain Savings reported these figures (in millions) on its income statement for the past five
years. Calculate the institutionâ€™s ROA in each year. Are there any adverse trends? Any
favorable trends? What seems to be happening to thisinstitution?
Oriole Savings Association has a ratio of equity capital to total assets of 9 percent. In contrast,
Cardinal Savings reports an equity-capital-to-asset ratio of 7 percent. What is the value of the
equity multiplier for each of these institutions? Suppose that both institutions have an ROA of
0.67 percent. What must eac
What are the essential differences among demand deposits, savings deposits, and time deposits?
What major trends are changing the content of the financial statements prepared by financial
firms?
Suppose a bank reports net income of $12, pre-tax net income of $15, operating revenues of
$100, assets of $600, and $50 in equity capital. What is the bank's ROE? Tax management
efficiency indicator? Expense control efficiency indicator? Asset management efficiency
indicator? Funds management efficiency indicator?
If you know the following figures: Please calculate these items: Net interest income
¬¬¬¬¬________ Net noninterest income ________ Pretax net operating income ________ Net
income after taxes ________ Total operating revenues ________ Total operating expenses
________ Dividends paid to commonstockholde
What items on a bank's balance sheet and income statement can be used to measure its risk
exposure? To what other financial institutions do these risk measures seem to apply?
Zebra Group holds total assets of $25 billion and equity capital of $2 billion and has just posted
an ROA of 0.95 percent. What is the financial firmâ€™s ROE?
A group of businesspeople from Scott Island are considering filing an application with the state
banking commission to charter a new bank. Due to a lack of current banking facilities within a
10-mile radius of the community, the organizing group estimates that the initial banking facility
would cost about $3.3 million
In rank order, what are the most important revenue and expense items on a Report of Income?
For each of the transactions described here, which of at least two accounts on a bankâ€™s
balance sheet (Report of Condition) would be affected by each transaction?
What is the yield curve, and why is it important to know about its shape or slope?
Along with the Report of Condition submitted above, Norfolk has also prepared a Report of
Income for the FDIC. Please fill in the missing items from its statement shown below (all figures
in millions of dollars): Report of Income Total interest income................... $200 Total interest
expense...................
Norfolk National Bank has just submitted its Report of Condition to the FDIC. Please fill in the
missing items from its statement shown below (all figures in millions of dollars): Report of
Condition Total assets........................................ $4,000.00 Cash and due from depository
institutions .... 90.

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