Question

Why it is not suitable to use ROA and ROE to measure the performances of financial institutions?

Answer #1

**Answer:**

ROA- Return on Asset is the return generated with the help of company's assets.

ROE- Return on equity is the profit/return generated on the shareholder's equity.

ROA and ROE are not suitable to measure the performance of financial institutions because financial institutions such as banks, NBFCs do not have more physical assets like non finance companies so return on asset is not suitable, on the other hand, banks and NBFCs have leverage and less equity so ROE is also not suitable.

ROA and ROE should not be used because banks are highly leveraged. Bank may have higher ROA but it will be on risky assets.

RAROC is used in financial institutions. RAROC is "Risk adjusted return on capital" that is calculated:

**RAROC = Revenue-Operating cost-Expected loss / Risk
based required capital**

A firm’s ROE is typically not equal to its ROA. Why? When would
a firm’s ROA equal its ROE?

1) Financial Ration:
a) Please prove the relationship between ROE and ROA by using
Dupont Identity.
b) Based on relationship between ROE and ROA, please show the
proof that ROE is greater than ROA when total debt is greater than
0.
c) We know ROE is 10%, capital structure ratio (TE/TD) is 0.45,
please compute the ROA.

You have evaluated the ROA for a company, and the ROE. The ROA
is 6%, and the ROE is 15%. The industry average for the debt ratio
is .5. How does the Company’s use of debt compare to the industry
average?

What going to happen with ROA and ROE if a company wants to do
restructure of capital like make a bigger d/e ratio? Why? By which
details?

Walmart calculates and reports ROI, which is not a GAAP measure,
in addition to ROA. The firm provides the formula it uses to
calculate its ROI in its 10-K report. Examine the formula to try to
make sense of what the firm tries to measure. Why do you think it
makes sense for the firm to use ROI as well as ROA?

suppose a bank finds its ROA climbing by 50%, with its ROE
unchanged. ehat happened to its equity multiplier? why?

uppose for a firm that the tax rate is 23%, ROA is 7%, and ROE
is 10%. What happens to the firm's FCFF under each condition?
a) The firm's account's receivable increases by $100
What formula will you use?
What is the effect?
Show/explain your work.
b) The firm repays a loan of $100.
What formula will you use?
What is the effect?
Show work

Bank A has a Return on Equity (ROE) of 18.00% and a Return on
Assets (ROA) of 2.00%. Bank B has a Return on Equity (ROE) of
19.80% and a Return on Assets (ROA) of 1.60%. Using this
information, which is of the following is NOT possible?
Group of answer choices
Bank B has an equity multiplier of 12.38
Bank B has a profit margin of 24.00% and an Asset Utilisation
Ratio of 5.60%
Bank B has a profit margin...

Why
is 2-propanol a suitable solvent to use during the photo reduction
of benzophenone?

Why Are Financial Institutions Special? Financial Services:
Depository Institutions

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