Suppose a bank is operating with a leverage rate of 10.A 6% increase in the value of assets

Question

Quizplus · Accepted Answer

The leverage ratio is calculated as follows: Leverage Ratio = Total Assets / Owner's Equity. Since the bank is operating with a leverage ratio of 10, this means that for every $1 of owner's equity, the bank has $10 in total assets. 
If there is a 6% increase in the value of the assets, this means that the new total asset value is 106% of the original value. Therefore, the new leverage ratio would be: New Leverage Ratio = 1.06 * Total Assets / Owner's Equity. 
Solving for the new owner's equity, we get: New Owner's Equity = Total Assets / New Leverage Ratio. 
Substituting in the original leverage ratio and the new leverage ratio, we get: 
New Owner's Equity = Total Assets / (1.06 * Total Assets / 10) = 10 / 1.06 = 9.43. 
This means that the owner's equity has increased by 9.43 / 1 = 943%, which is a 60% increase (not decrease, as in option C).

Suppose a Bank Is Operating with a Leverage Rate of 10.A