Explain why a bank with a high debt-to-equity ratio may be more profitable than a bank with a lower ratio but would also have a higher level of risk.
What will be an ideal response?
A bank with a high debt-to-equity ratio is financing the acquisition of assets with borrowed funds. The return (profit) earned on these assets belong to the owners (the providers of the bank's capital or equity). With a high debt-to-equity ratio, the owners of the bank stand to earn a higher return on equity than the owners of a bank with a lower debt-to-equity ratio, assuming the same return on assets. The problem or the risk comes from the fact that with the high leverage anything that reduces the value of assets can potentially wipe out the capital of the bank, leaving the bank insolvent since the capital cushion is inadequate to meet the drop in asset value.
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Consider a used car market in which half the cars are good and half are bad (lemons). A rational buyer in this market should
A) save up and buy a new car. B) offer to pay a price equal to the most she would pay for a good car. C) offer to pay a price equal to the most she would pay for a lemon. D) offer to pay a price somewhere between the price she would pay for a good car and the price she would pay for a lemon.
Miniville is an isolated town located on the southern shore of Lake Condescending, a very large lake. The western edge of Miniville is adjacent to impassable mountains and there are no towns or businesses for many miles to the east. The 300 residents of Miniville are evenly distributed along 3 miles of shoreline on the lake, east of the mountains. Lake Shore Drive, the only street in town, provides access to Miniville's homes and businesses. All residents live between the lake and the street; businesses locate on the other side of the street. Lake Shore Drive is 3 miles long, and the points labeled A, B, and C are 1, 2, and 3 miles from the western end of Lake Shore Drive, respectively. All residents of Miniville shop at the store located closest to their homes. src="https://qoschin.com/media/4/ppg__rrr0818190951__f1q215g1.jpg" alt="" style="vertical-align: 0.0px;" height="117" width="538" />________ residents of Miniville live west of point B, and ________ live east of point A.
A. 150; 150
B. 100; 200
C. 200; 100
D. 200; 200