Homework Answers
We know ,
∆TA/TA={ ROA(1-DR)+∆EC/TA }/(EQ/TA)
Where ∆ - change
TA- Total Asset
ROA- Return on asset
DR- Dividend Ratio
EC- External Capital
EQ- Equity
Now substituting the values in the above formula we get :
.18={.0125(1-.3)+∆EC/TA}/.08
.0144=.00875+∆EC/TA
∆EC/TA = .00565 i.e. .5650%
Hence , the bank must issue .5650% of total assets as external capital.
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