Introduction to Finance

a. 
Calculate the common equity capital ratio.
b. 
If $2 million in bad loans were removed from the bank’s assets, 
show how the common equity capital ratio would change. 
7. 
Rearrange the following accounts to construct a bank balance sheet 
for Second National Bank. What are the total amounts that make the 
bank’s balance sheet balance?
Demand deposits: $20 million
Government securities owned: 
$7 
million
Cash assets: $5 million 
Bank fi xed assets: $14 million
Loans secured by real estate:
Time and savings deposits: 
$30 million
$40 million
Commercial and industrial
Federal funds purchased: 
loans: $18 million
$6 million
Stockholders’ equity: $6 million Other long-term liabilities: 
$2 
million
8. 
Use the data from Problem 7 for Second National Bank and cal-
culate the common equity capital ratio assuming that stockholders’ 
equity was equal to common equity (i.e., there was no preferred stock).
9. 
Tenth National Bank has common stock of $2 million, retained 
earnings of $5 million, loan-loss reserves of $3 million, and subor-
dinated notes outstanding in the amount of $4 million. Total bank 
assets are $105 million. Calculate the common equity capital ratio.
10. 
Let’s assume that you have been asked to calculate risk-based 
capital ratios for a bank with the following accounts:
Cash = $5 million
Government securities = $7 million
Mortgage loans = $30 million
Other loans = $50 million
Fixed assets = $10 million
Intangible assets = $4 million
Loan-loss reserves = $5 million
Common equity = $5 million
Trust-preferred securities = $3 million
Cash assets and government securities are not considered risky. 
Loans secured by real estate have a 50 percent weighting factor. All 
other loans have a 100 percent weighting factor in terms of riskiness.