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What is the volatility of levered? banks roe

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Question - Suppose Levered Bank is funded with 2.2% equity and 97.8% debt. Its current market capitalization is ?$10.36 ?billion, and its? market-to-book ratio is 0.8. Levered Bank earns a 4.18% expected return on its assets? (the loans it? makes), and pays 3.8% on its debt.

New capital requirements will necessitate that Levered Bank increase its equity to 4.4% of its capital structure. It will issue new equity and use the funds to retire existing debt. The interest rate on its debt is expected to remain at 3.8%.

a. What is Levered? Bank's expected ROE with 2.2% ?equity?

b. Assuming perfect capital? markets, what will Levered? Bank's expected ROE be after it increases its equity to 4.4%??

c. Consider the difference between Levered? Bank's ROE and its cost of debt. How does this? "premium" compare before and after the? Bank's increase in? leverage?

d. Suppose the return on Levered? Bank's assets has a volatility of 0.22%. What is the volatility of Levered? Bank's ROE before and after the increase in? equity?

e. Does the reduction in Levered? Bank's ROE after the increase in equity reduce its attractiveness to? shareholders? Explain.

Reference no: EM132926295

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