FRM Part II · FRM Exam Part II · Capital Structure in Banks
A bank's equity beta rises when leverage increases. Using CAPM with a risk-free rate of 2% and market premium of 5%, the cost of equity moves from 8% to 11% after the bank cuts its capital ratio. What is the change in equity beta?
Beta equals (cost of equity minus 2%) divided by 5%. It rises from 1.2 to 1.8, an increase of 0.6.
- A0.3
- B0.6Correct
- C0.9
- D1.2
Explanation
Cost of equity = 2% + beta x 5%. Beta before = 6/5 = 1.2; after = 9/5 = 1.8. Change = 0.6. Using the full cost change without dividing by premium would give 3, a base error.
Did you get it right without looking?
One question tells you little. A timed set on Capital Structure in Banks shows your real accuracy, how long you take and where you lose marks.
More Capital Structure in Banks questions
- A bank's regulatory capital framework under Basel III distinguishes between going-concern and gone-concern capital. Which of the following i…
- A bank's CFO argues that, because equity is more expensive than deposits, the bank should replace equity with deposits to lower its weighted…
- A bank's CFO argues that, because equity is more expensive than deposits and debt, the bank should replace equity funding with debt to lower…
- A bank's economic capital model estimates a one-year 99.9% credit loss quantile of USD 1,200 million on a loan portfolio whose expected loss…
- Under Basel III, a bank that is not a G-SIB has a 4.5% CET1 minimum, a 2.5% capital conservation buffer and a 1.0% countercyclical buffer cu…
- A bank has two business units. Unit A has standalone economic capital of 60 million and Unit B has 40 million. Because of diversification, t…