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A bank currently just meets its total capital requirements of 8%. The bank currently has a dividend payout ratio of 35%. Assets are expected to grow at 5%.
-If the bank expects its ROA to be .45%, what is the maximum dividend payout ratio to support the increase in assets?
A) 11.1%
B) 22.2%
C) 33.3%
D) 44.4%
E) 89.9%

Question

Quizplus · Accepted Answer

To maintain the bank's 8% total capital requirements as assets grow at 5%, the bank must maintain an ROA (Return on Assets) of at least 0.4% (8% x 5%). However, the bank only expects to earn an ROA of 0.45%, which means it can distribute 0.05% of its earnings as dividends while still maintaining the required capital level. Therefore, the maximum dividend payout ratio is 0.05%/0.45% = 11.1%.

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