Accounting Questions: Money Supply, Capital Ratio, Selling Prices, Liabilities and Assets

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Prob 2-1 Determine the size of the M1 money supply using the following information. Answer in the green shaded cells below Currency plus traveler’s checks $25 million Negotiable CDs $10 million Demand deposits $13 million Other checkable deposits $12 million The M1 money supply would be: Prob 2-4 Following are components of the M1 money supply at the end of last year. What will be the size of the M1 money supply at the end of next year if currency grows by 10 percent, demand deposits grow by 5 percent, other checkable deposits grow by 8 percent, and the amount of traveler’s checks stays the same? Currency $700 billion Demand deposits $300 billion Other checkable deposits $300 billion Traveler’s checks $10 billion The M1 money supply would be: Prob 2-8 Assume that a country estimates its M1 money supply at $20 million. A broader measure of the money supply, M2, is $50 million. The country’s gross domestic product is $100 million. Production or real output for the country is 500,000 units or products. Show/Explain work in grey cells below and put final answer in green cell below a. Determine the velocity of money based on the M1 money supply. Times b. Determine the velocity of money based on the M2 money supply. Times c. Determine the average price for the real output. MV=PQ, M-money supply, V-velocity, P-price, Q-quantity V1=GDP\M1=100\20=5 V2=GDP\M2=100\50=2 PQ=100 million, Q=500,000, P=100,000,000\500,000=200 Average Price Prob 2-11 The One Product economy, which produces and sells only personal computers (PCs), expects that it can sell 500 more, or 12,500 PCs, next year. Nominal GDP was $20 million this year, and the money supply was $7 million. The central bank for the One Product economy plans to increase the money supply by 10 percent next year. Show/Explain work in grey cells below and put final answer in green cell below a. What was the average selling price for the personal computers this year? Average selling price b. What is the expected average selling price next year for personal computers if the velocity of money remains at this year’s turnover rate? What percentage change in price level is expected to occur? Expected average selling price % change in price c. If the objective is to keep the price level the same next year (i.e., no inflation), what percentage increase in the money supply should the central bank plan for? % increase in the money supply PQ=100 million, Q=500,000, P=100,000,000\500,000=200 PQ=GDP, P=$20,000,000\12,000=1,666.67 V=20/7=2.86, P1Q1=VM*1.1, P1=(2.86*7,700,000)/12,500=1762 %change in P=(P1-P)/P=(1,762-1,667)/1,667=5.7% M=(P*Q1)/V=(1,667*12,500)/2.86=7,285,839 % change in M =(M1-M)/M=(7,285,839- 7,000,000)/7,000,000=4.1% d. How would your answer in (c) change if the velocity of money is expected to be three times next year? What is it now? % increase in the money supply -0.77% M=(P*Q1)/V1=20,837,500/3=6,945,833 % change in M =(M1-M)/M=(6,945,833- 7,000,000)/7,000,000=-0.77% Prob 3-1 The following three one-year “discount” loans are available to you: Loan A: $120,000 at a 7 percent discount rate Loan B: $110,000 at a 6 percent discount rate Loan C: $130,000 at a 6.5 percent discount rate a. Determine the dollar amount of interest you would pay on each loan and indicate the amount of net proceeds each loan would provide. Which loan would provide you with the most upfront money when the loan takes place? Loan A Interest Loan A Net Proceeds Loan B Interest Loan B Net Proceeds Loan C Interest Loan C Net Proceeds Would provide the most upfront money when the loan takes place b. Calculate the percent interest rate or effective cost of each loan. Which one has the lowest cost? Effective interest rate for Loan A Effective interest rate for Loan B Effective interest rate for Loan C Would have the lowest effective intereate or cost Prob 3-5 Following are selected balance sheet accounts for Third State Bank: vault cash $2 million; U.S. government securities $5 million; demand deposits $13 million; nontransactional accounts $20 million; cash items in process of collection $4 million; loans to individuals $7 million; loans secured by real estate $9 million; federal funds purchased $4 million; and bank premises $11 million. a. From these accounts, select only the asset accounts and calculate the bank’s total assets. Account Name $$ Vault cash 2,000,000 U.S. government securities 5,000,000 Cash items in process of collection 4,000,000 Loan to individuals 7,000,000 Loan secured by real estate 9,000,000 Answer in the green shaded cells below Bank premises 11,000,000 Total assets b. Calculate the total liabilities for Third State Bank. Account Name $$ Demand deposits 13,000,000 Non transactual accounts 20,000,000 Federal funds purchased 4,000,000 Total Liabilities c. Based on the totals for assets and liabilities, determine the amount in the owners’ capital account. Account Name $$ Total Assets $ - Less: Total Liabilities $ - Equals: Owners' capital $ - Prob 3-10 Let’s assume that you have been asked to calculate risk-based capital ratios for a bank with the following accounts: Cash $5 million Government securities $7 million Mortgage loans $30 million Other loans $50 million Fixed assets $10 million Intangible assets $4 million Loan-loss reserves $5 million Owners’ equity $5 million Trust-preferred securities $3 million Cash assets and government securities are not considered risky. Loans secured by real estate have a 50 percent weighting factor. All other loans have a 100 percent weighting factor in terms of riskiness. Show/Explain work in grey cells below and put final answer in green cell below a. Calculate the equity capital ratio. Equity Capital Ratio \ b. Calculate the Tier 1 Ratio using risk-adjusted assets. Owners' equity \ Total assets = $5m\$106m*100=4.72% Selected Asset $$ Weight Weighted Amount Mortgage loans $ 30,000,000.00 50% Other loans $ 50,000,000.00 100% Fixed assets $ 10,000,000.00 100% Intangible assets $ 4,000,000.00 100% Totals $ 94,000,000.00 Tier 1 Ratio c. Calculate the Total Capital (Tier 1 plus Tier 2) Ratio using risk-adjusted assets. Total Capital Ratio Prob 3-11 11. Challenge Problem This problem focuses on bank capital management and various capital ratio measures. Following are recent balance sheet accounts for Prime First National Bank. Assets Liabilities and Owners' Capital Cash assets $ 17 million Demand deposits Loans secured by real estate 40 Time & savings Commercial loans 45 Federal funds Government securities owned 16 Trust-preferred Goodwill 5 Owners’ Capital 5 Bank fixed assets 15 Total assets $138 million Total liabilities $138 million and owners’ capital All amounts are in millions of dollars. Note: The bank has loan-loss reserves of $10 million. The real estate and commercial loans shown on the balance sheet are net of the loan-loss reserves. a. Calculate the equity capital ratio. Capital ratio (Owners' equity - Intangibles + Trust-preferred securities \ Risk assets= $4m\$79m*100=5.06% Loan-loss reserves <= 1.25% * Risk assets = $987,500 , (Owners' equity - Intangibles + Tru-pref sec + Loan-loss reserves )\ Risk assets= $4,987,500/$79m*100=6.31% Owners' equity \ Total assets = $5m\$138m*100=3.62% How could the bank increase its equity capital ratio? b. Risk-adjusted assets are estimated using the following weightings process: cash and government securities .00; real estate loans .50; commercial and other loans 1.00. Calculate the risk-adjusted assets amount for the bank. Selected Asset $$ Weight Weighted Amount Loans secured by real estates $ 40,000,000.00 50% Commercial loans $ 45,000,000.00 100% Goodwill $ 5,000,000.00 100% Fixed assets $ 15,000,000.00 100% Totals $ 105,000,000.00 c. Calculate the Tier 1 Ratio based on the information provided and the risk-adjusted assets estimate from Part b. (Owners' equity - Trust-preferred securities \ Risk Tier 1 Ratio d. Calculate the Total Capital (Tier 1 plus Tier 2) Ratio based on the information provided and the riskadjusted assets estimate from Part b. Total Capital Ratio e. What actions could the bank management team take to improve the bank’s Tier 1 and Total Capital ratios? (Owners' equity - Goodwill + Trust-preferred securities) \ Risk assets = $2m/$85m*100=2.35% Loan-loss reserve <= 1.25% * Risk assets= 1,062,500 , (Owners' equity - Goodwill + Trustpreferred securities + Loan loss reserves) \ Risk assets = $3,062,500/$85m*100=3.62%

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