The Farmers State Bank recently has been earning an “above average” (compared to the overall banking industry) return on total assets of 1.50 percent. The bank’s return on common equity is only 12 percent, compared with an industry average of 15 percent.
a. What reasons can you give for the bank’s low return on common equity?
b. What impact do you think this performance by the bank is having on the value of its debt and equity securities?