If the bank made a 10% return on all interest-paying assets, then the ROE would be
A) 10%.
B) 38.5%.
C) 40.8%.
D) None of the above.

Question

Quizplus · Accepted Answer

ROE (Return on Equity) is calculated by dividing the net income by the shareholder's equity. Assuming the bank's only assets are its interest-paying assets and all profits come from these assets, a 10% return on these assets would increase the bank's net income. However, the actual ROE also depends on the bank's equity. If the bank leverages its equity (i.e., it has borrowed funds or other liabilities in addition to shareholder's equity to purchase these assets), the ROE can be significantly higher than the return on assets. Given the options, without specific numbers for net income, total assets, and shareholder's equity, we cannot calculate the exact ROE. However, the question seems to imply that with a 10% return on assets, the ROE would be significantly higher, suggesting that the bank is leveraging its equity. Therefore, 38.5% is a plausible ROE if the bank uses its equity efficiently to generate higher returns through leverage.

If the Bank Made a 10% Return on All Interest-Paying