Suppose a bank is operating with a leverage rate of 10. A 6 percent increase in the value of assets
A) will reduce liabilities by 6 percent.
B) will result in a 60 percent increase in owner's equity.
C) will result in a 60percent decrease in owner's equity.
D) will reduce liabilities by 10 percent.

Question

Quizplus · Accepted Answer

The leverage rate is calculated as the ratio of assets to owner's equity. In this case, if the leverage rate is 10, it means that for every $1 of owner's equity, the bank has $10 in assets. A 6 percent increase in the value of assets would mean that the bank's new assets would be 1.06 times the original assets. This would result in a new leverage rate of 10/1.06=9.43. The change in leverage rate from 10 to 9.43 is an increase in owner's equity of approximately 6 percent (1/9.43 - 1/10 = 0.06, or 6%). Therefore, the correct answer is B.

Suppose a Bank Is Operating with a Leverage Rate of 10