Question

The Office of the Superintendent of Financial Institutions (OSFI) is an independent agency of the Government of Canada, established in 1987 to contribute to the safety and soundness of the Canadian financial system. OSFI supervises and regulates federally registered banks and insurers, trust and loan companies, as well as private pension plans subject to federal oversight.

Go to OSFI website - under Financial Institutions - select Financial Data - select Bank. Populate the most recent consolidated balance sheet of the bank of your choice, and attach a printout

1. Calculate the Equity Multiplier.

2. Would you buy the share of this bank as an investment? Explain

Answer 1

1. Calculation of Equity Multiplier of Bank of Montreal.

Equity Multiplier = Total Assets/Total Equity

(781126584/43740796)

17.857

2. Decision - Equity multiplier is the ratio used to calculate financial leverage.Lower the Equity Multiplier lower the bank's financial leverage.A high Equity Multiplier indicates bank is using more debt than equity to finance its activities.Bank of Montreal has high Equity Multiplier i.e high usage of debt.Buying a share of a bank is a bit risky,however investment decision will be stictly based on the risk taking ability of the investor. Assuming a risk constraint it is advisable not to buy a share of Bank of Montreal as an investment.