Problem:
Onshore Bank has $20 million in assets, with risk-adjusted assets of $10 million. Tier I capital is $500,000 and Tier II capital is $400,000.
Required:
How will each of the following transactions affect the value of the Tier I and total capital ratios? What will the new value of each ratio be? The current value of the Tier I ratio is 5 percent and the total ratio is 9 percent.
a. The bank repurchases $100,000 of common stock with cash.
b. The bank issues $2 million of CDs and uses the proceeds to issue mortgage loans.
c. The bank receives $500,000 in deposits and invests them in T-bills.
d. The bank issues $800,000 in common stock and lends it to help finance a new shopping mall. The developer has an A+ credit rating.
e. The bank issues $1 million in non-qualifying perpetual preferred stock and purchases general obligation municipal bonds.
f. Homeowners pay back $4 million of mortgages and the bank uses the proceeds to build new ATMs.
Note: Please show how you came up with the solution.