Question

Axle Bank reported an ROE of $16\%$ and an ROA of $1.32\%$. What is the equity multiplier? How well capitalized is this bank?

Short answer

Equity Multiplier is$12.12$

Step-by-step solution

Concept Introduction

Return on equity (ROE) is the standard of a firm's net earnings divided by its shareholders' equity. ROE is a gauge of a company's profitability and how efficiently it develops those profits.

Explanation

ROE = ROA $\times$EM

$0.16=0.0132\times \mathrm{EM}$

EM = $12.12$= asset/equity

Final answer

This is a well-capitalized bank because its equity asset ratio exceeds the minimum required level.