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Unformatted text preview: . Concept Checks-Chapter 5 5-3. What factors influence the stock price of a bank or other financial corporation? A bank's stock price is affected by all those factors affecting its profitability and risk exposure, particularly its rate of return on equity capital and risk to shareholder earnings. A bank can raise its stock price by creating an expectation in the minds of investors of greater earnings in the future, by lowering the bank's perceived risk exposure, or by a combination of increases in expected earnings and reduced risk. 5-12. Suppose a bank has an ROA of 0.80 percent and an equity multiplier of 12x what is its ROE? Suppose this bank's ROA falls to 0.60 percent. What size equity multiplier must it have to hold its ROE unchanged? The bank's ROE is: ROE = 0.80 percent *12 = 9.60 percent. If ROA falls to 0.60 percent, the bank's ROE and equity multiplier can be determined from: ROE = 9.60% = 0.60 percent * Equity Multiplier Equity Multiplier = 9.60 percent = 16x....
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- Spring '09