What is the return on equity for a bank that has an equity multiplier of 9, an interest expense ratio of 6%, and a return on assets of 1.2%?
A) 10.8%
B) 6.0%
C) 8.0%
D) 4.8%
E) 0.65%

Question

Quizplus · Accepted Answer

Return on Equity = Return on Assets × Equity Multiplier
Equity Multiplier = Total Assets ÷ Shareholders' Equity

Given:
Equity Multiplier = 9
Interest Expense Ratio = 6%
Return on Assets = 1.2%

We can find the Equity Ratio as:
Equity Ratio = 1 ÷ Equity Multiplier
Equity Ratio = 1 ÷ 9
Equity Ratio = 0.1111 or 11.11%

Now we can find the Return on Equity as:
Return on Equity = Return on Assets × Equity Multiplier
Return on Equity = 1.2% × 9
Return on Equity = 10.8%

What Is the Return on Equity for a Bank That