Question 1

According to the textbook,a bank's asset-utilization ratio reflects the mix and yield on a bank's portfolio of assets.

Accepted Answer

The asset-utilization ratio measures how effectively a bank is generating revenue from its assets, including loans, investments, and other earning assets, as well as the mix and yield on those assets. It is calculated by dividing the bank's net interest income by its average earning assets. Therefore, the statement that the asset-utilization ratio reflects the mix and yield on a bank's portfolio of assets is true.

Question 2

The ratio of non-performing assets to total loans and leases is a measure of credit risk in banking industry.

Accepted Answer

The ratio of non-performing assets to total loans and leases is a commonly used measure of credit risk in the banking industry. It reflects the level of loans and leases that are not being repaid in a timely manner and therefore pose a risk to the bank's financial health. A higher ratio indicates higher credit risk, while a lower ratio suggests lower credit risk.

Question 3

ROA measures how capably the management of a financial institution has been converting the institution's assets into net earnings.

Accepted Answer

This is a correct statement. Return on assets (ROA) is a financial ratio that measures how efficiently a company is using its assets to generate earnings. A higher ROA indicates that the management of the financial institution is generating more profits from the same amount of assets.

Question 4

If the discount factor associated with the value of a bank's stock rises,the bank's stock price should rise,other factors held constant.

Accepted Answer

A higher discount factor implies a lower discount rate, which increases the present value of future cash flows, thus potentially increasing the stock price. However, the statement is reversed; if the discount factor rises (meaning the discount rate decreases), it should indeed increase the stock price, not the other way around. The explanation provided applies to the general relationship between discount factors, discount rates, and stock prices, correcting the misunderstanding in the question's premise.

Question 5

According to the text,the ratio of a bank's net after-tax income to pre-tax net operating income is a measure of tax management efficiency.

Accepted Answer

The text states that the ratio of a bank's net after-tax income to pre-tax net operating income is a measure of tax management efficiency.

Question 6

If a bank adds more full-time employees and posts the same net operating income,its employee productivity ratio,as defined in the text,must fall.

Accepted Answer

The employee productivity ratio is calculated by dividing net operating income by the number of full-time employees. If the bank adds more full-time employees while keeping the net operating income the same, the denominator of the ratio (number of full-time employees) increases while the numerator (net operating income) remains unchanged. This would result in a lower productivity ratio, indicating lower efficiency and profitability per employee.

Question 7

One of the traditional measures of earnings efficiency is ________________________ or total interest income over total earnings assets less total interest expenses over total interest bearing bank liabilities.It measures the effectiveness of a firm's intermediation function in the borrowing and lending of money.

Accepted Answer

The answer of One of the traditional measures of earnings...

Question 8

One part of ROE is ________________________ or net income divided by pre-tax net operating income,which measures a financial firm's use of security gains and losses and other tax management tools to minimize tax exposure.

Accepted Answer

The answer of One part of ROE is ________________________ or...

Question 9

According to the textbook,the most profitable U.S.banks in terms of both ROA and ROE are medium-size institutions in the asset size range of $100 million to $10 billion.

Accepted Answer

The textbook states that medium-size institutions in the asset range of $100 million to $10 billion have consistently been the most profitable U.S. banks in terms of both ROA and ROE.

Question 10

As data processing of financial information becomes more important,managers of financial firms can realize cost savings from _______________________,transferring tasks from inside the firm to other firms specializing in information technology.

Accepted Answer

The answer of As data processing of financial information becomes...

Question 11

Basic principles of financial management suggest that attempting to maximize a bank's stock value is the key objective for banks which should have priority over all other goals.

Accepted Answer

The basic principles of financial management suggest that the primary objective of most businesses, including banks, is to maximize their shareholder's wealth, which is reflected in the bank's stock value. Therefore, attempting to maximize a bank's stock value is the key objective for banks, and it should have priority over all other goals.

Question 12

A bank's profit margin or ratio of net after-tax income to total operating revenue is a measure of financial leverage for a bank.

Accepted Answer

A bank's profit margin or ratio of net after-tax income to total operating revenue is a measure of profitability, not financial leverage. Financial leverage is measured by the ratio of total debt to equity or assets.

Question 13

________________________ is the uncertainty associated with public opinion.Negative publicity (whether true or not)can affect a financial firm's earnings by dissuading customers from using the services of the institution.

Accepted Answer

The answer of ________________________ is the uncertainty associated with public...

Question 14

According to the textbook,the ratio of a bank's pre-tax net operating income to total operating revenues is a measure of expense-control efficiency.

Accepted Answer

The ratio of a bank's pre-tax net operating income to total operating revenues is a measure of expense-control efficiency because it shows how much of the bank's revenue is being used to cover expenses. A higher ratio indicates that the bank is doing a good job of controlling its expenses, while a lower ratio indicates that the bank is spending too much on expenses.

Question 15

In recent years,the U.S.banking industry's equity multiplier has generally risen in response to regulatory pressure to raise more capital.

Accepted Answer

The equity multiplier is a measure of financial leverage, calculated as total assets divided by total shareholders' equity. If the banking industry were under regulatory pressure to raise more capital, we would expect the equity multiplier to decrease, not rise, because raising more capital increases shareholders' equity, which in turn would lower the equity multiplier assuming total assets remain constant or don't increase at the same rate.

Question 16

Financial institutions that pursue the "quiet life" as a goal face less risk of losing earnings or market share.

Accepted Answer

Financial institutions that pursue a "quiet life" aim for stability and risk aversion, which can lead to less aggressive competition and innovation, reducing the risk of losing earnings or market share.

Question 17

One of the measures of a bank's efficiency and return is "earnings spread".It is calculated by the ratio of total interest income to total liabilities as reduced by the ratio of total interest expenses to total assets.

Accepted Answer

Earnings spread is calculated as the difference between the interest income generated by the bank on its assets (like loans) and the interest paid out on its liabilities (like deposits), not by the ratio described.

Question 18

A bank's ROA equals its ROE times the ratio of total assets divided by total equity capital.

Accepted Answer

ROA (Return on Assets) is calculated as Net Income divided by Total Assets, and ROE (Return on Equity) is calculated as Net Income divided by Shareholder's Equity. The relationship described does not accurately represent how ROA is derived from ROE or vice versa.

Question 19

Net profit margin can be split into two parts,________________________ and tax management efficiency.The first part is pre-tax net operating income over total operating revenue which looks at how many dollars of revenue survive after operating expenses are removed.

Accepted Answer

The answer of Net profit margin can be split into...

Question 20

If the expected stream of future dividends for a bank's shareholder rises,the bank's stock price should also rise,other factors held constant.

Accepted Answer

When the expected stream of future dividends for a bank's shareholder rises, it indicates that the bank is performing well and is generating higher profits. This, in turn, will increase the demand for the bank's stock, ultimately leading to a rise in the stock price. However, this holds true only when other factors are held constant, such as interest rates, economic conditions, and market competition, which can also affect the stock price.

Quiz 6: Measuring and Evaluating the Performance of Banks and Their Principal Competitors