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Suppose Bank a Has a Leverage Ratio of 20 and Bank

question 102

Essay

Suppose Bank A has a leverage ratio of 20 and Bank B has a leverage ratio of 10. Explain the meaning of these ratios and what would happen to each of these banks if the value of their assets fell by 6 percent.


Definitions:

Accounting Profits

Accounting profits represent the financial gains of a business as calculated by subtracting total explicit costs from total revenues, according to standard accounting practices.

Industry Entry

The act or process of starting a new business or expanding into a new segment within a particular market or industry.

Average Product

The total output produced by a firm divided by the number of inputs used to produce that output.

Nonlabor Resources

Assets or inputs used in production that are not human labor, such as land, buildings, machinery, and raw materials.

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