COLLEGE OF BUSINESS, HOSPITALITY AND TOURISM STUDIES

DEPARTMENT OF ECONOMICS, BANKING & FINANCE

BNK 603: BANKING OPERATIONS & MANAGEMENT TRIMESTER 1 2012 TUTORIAL 2 QUESTIONS 1. What are the essential differences among demand deposits, savings deposits, and time deposits? 2. What are primary reserves, and secondary reserves and what are they supposed to do? 3. Suppose that a bank holds cash in its vault of $4.1 million, short-term government securities of $10.4 million, privately issued money market instruments of $6.2 million, deposits at the Federal Reserve banks of $22.1 million, cash items in the process of collection of $2.8 million, and deposits placed with other banks of $18.4 million. How much in primary reserves does this bank hold? In secondary reserves? 4. Suppose a bank has an allowance for loan losses of $2.25 million at the beginning of the year, charges current income for a $350,000 provision for loan losses, charges off worthless loans of $250,000, and recovers $60,000 on loans previously charged off. What will be the balance in the allowance for loan losses at year-end? 5. Who are bankings chief competitors in the financial services? 6. If you know the following figures: Total Interest Income $150 Provision for Loan Loss Total Interest Expenses 90 Income Taxes Total Noninterest Income 25 Increases in banks undivided profits Total Noninterest Expenses 45 Please calculate these items: A. Net Interest Income B. Net Interest Income C. Pretax net operating income D. Net Income after Taxes E. Total Operating Revenues F. Total Operating Expenses G. Dividends paid to Common Stockholders 7. Why should banks and other corporate financial firms be concerned about their level of profitability and exposure to risk? $5 5 6

8. What individuals or groups are likely to be interested in these dimensions of performance for a financial institution? 9. What factors influence the stock price of a financial-services corporation? 10. Suppose that a bank is expected to pay an annual dividend of $5 per share on its stock in the current period and dividends are expected to grow 6 percent a year every year, and the minimum required return-to-equity capital based on the bank's perceived level of risk is 10 percent. Can you estimate the current value of the bank's stock? 11. Suppose a bank reports that its net income for the current year is $61 million, its assets total $2,144 million, and its liabilities amount to $962 million. What is its return on equity capital? 12. A bank estimates that its total revenues will amount to $255 million and its total expenses (including taxes) will equal $207 million this year. Its liabilities total $4,690 million while its equity capital amounts to $62 million. What is its return on assets? 13. Suppose that stockbrokers have projected that Yorktown Savings will pay a dividend of $3 per share on its common stock at the end of the year; a dividend of $4.50 per share is expected for the next year, and $ 5.50 per share in the following three year. The riskadjusted cost of capital for banks in Yorktowns risk class is 15 percent. If an investor holding Yorktowns stock plans to hold that stock for only four years and hopes to sell it at a price of $60 per share, what should the value of the banks stock be in todays market? 14. An investor holds the stock of Foremost Financials and expects to receive a dividend of $5.75 per share at the end of the year. Stock analysts recently predicted that the banks dividends will grow at approximately 3 percent a year indefinitely into the future. If this is true, and if the appropriate risk-adjusted cost of capital (discount rate) for the bank is 12.25 percent, what should be the current price per share of Foremost Financials stock? 15. The following information is for Blue Sky National Bank: Interest income Interest expense Total assets Securities losses or gains Earning assets Total liabilities Taxes paid Shares of Common Stock outstanding Noninterest income Noninterest expense Provision for loan losses $2,200 $1,400 $45,00 0 $21 $40,00 0 $38,00 0 $16 5,000 $800 $900 $100

Please calculate: A. ROE B. ROA C. Net interest margin D. Earnings per share E. Net noninterest margin F. Net operating margin

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