A Bank Has Book Value of $5 Million in Liquid

question 13

Multiple Choice

A bank has book value of $5 million in liquid assets and $95 million in nonliquid assets. Large depositors unexpectedly withdraw $9.5 million in deposits. To cover the withdrawals the bank sells all of its liquid assets at book value. To raise the additional funds needed the bank sells the necessary amount of nonliquid assets at 80 cents per dollar of book value. As a result, the bank's equity will _____________.

• A) remain unchanged
• B) fall $4.5 million
• C) fall $3.6 million
• D) fall $1.4 million
• E) fall $5.0 million (9.5M - 5M) x 80% = 3.6M

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