QuestionRefer to the following Leeds Bank financial information.
\begin{tabular}{|c|c|}
\hline Net Profit Margin & \\
\hline Net Income & RM2,000,000 \\
\hline Total Assets & RM82,500,000 \\
\hline Total Equity & RM8,250,000 \\
\hline
\end{tabular}
Calculate bank's Equity Multiplier.
A. 2.4 times
B. 4.13 times
C. 6.6 times
D. 5 times
E. 10 times
Studdy Solution
STEP 1
What is this asking?
We need to figure out how much bigger the bank's assets are compared to its equity, which tells us how much they're using borrowed money.
Watch out!
Don't mix up assets and equity!
Assets are everything the bank owns, while equity is only the portion that belongs to the owners.
STEP 2
1. Understand Equity Multiplier
2. Calculate Equity Multiplier
STEP 3
Alright, so what's an *Equity Multiplier*?
It basically tells us how much of the bank's assets are funded by the owners' money (equity) versus borrowed money.
A **higher** equity multiplier means the bank uses **more** borrowed money.
STEP 4
The formula is super simple: Equity Multiplier = \frac{\mbox{Total Assets}}{\mbox{Total Equity}}.
It's a ratio showing how many times larger the assets are compared to the equity.
STEP 5
**Plug in the values!** We know from the table that **Total Assets** are \mbox{RM}82{,}500{,}000 and **Total Equity** is \mbox{RM}8{,}250{,}000.
STEP 6
Let's **calculate**! \mbox{Equity Multiplier} = \frac{\mbox{RM}82{,}500{,}000}{\mbox{RM}8{,}250{,}000}
STEP 7
Dividing these numbers, we get: \mbox{Equity Multiplier} = \frac{82{,}500{,}000}{8{,}250{,}000} = 10
STEP 8
So, the **Equity Multiplier** is **10**.
This means the bank's assets are **10 times** bigger than its equity.
For every 1 the owners have put in, the bank has in assets.
STEP 9
The bank's Equity Multiplier is **10 times**, which corresponds to answer choice E.
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