Milestone No. 14 Practice Questions Name: ________________ Please show your work
ID: 2814435 • Letter: M
Question
Milestone No. 14 Practice Questions Name: ________________
Please show your work and turn in this page along with in-class quiz to get half of credit.
1. A bank expects to pay a dividend of $5.30 next year and growth rate on dividends to be 5%. If the appropriate discount rate is 8%, what should the bank's stock price be in the market?
2. ABC Bank has a net profit margin of 5.6%, an asset utilization ratio of 16%, and an equity multiplier of 18. What is the bank's ROA?
3. ABC Bank has a net profit margin of 5.6%, an asset utilization ratio of 16%, and an equity multiplier of 18. What is the bank's ROE?
4. What is the equity multiplier for a bank whose equity is equal to 8 percent of total assets?
Explanation / Answer
1. Dividend= $5.30 and Dividend growth rate (g) = 5% and discount rate (r) = 8%
Stock Price (using the dividend discount model) = 5.30 / (8% - 5%) = $176.67
2. Net Profit Margin = Net Profit / Total Revenues ; Equity Multiplier = Total Assets / Shareholder's Equity ; Asset Utilisation Ratio = Net Sales /Total Assets and ROA = Net Income / Total Assets.
For this analysis we assume that Total Revenues and Net Sales are same.
RoA = Net Profit Margin * Asset Utilisation Ratio = 5.6% * 16% = 0.80%
3. RoE = RoA * Equity Multiplier = 0.80% * 18 = 14.40%
4. Equity Multiplier = Total Assets / Shareholder's Equity ; now if we assume TA = 100, then we have
Equity Multiplier = 100/8 = 12.5