Consider the following bank balance sheet.Assets: 250Labilities: 225; Capital 25What is the leverage ratio?

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The question provides a simple balance sheet snapshot: Assets = 250, Liabilities = 225, Capital (Equity) = 25. To compute leverage, we must first clarify what “leverage ratio” means, since there are multiple common definitions.

- Common banking/finance definition: leverage ratio can be interpreted as assets divided by capital (equity), i.e., Leverage = Assets / Equity. If we apply this, we use the values 250 (assets) and 25 (equity): 250 ÷ 25 = 10. This yields a leverage value of 10 times.
- Alternative interpretation: leverage can also be expressed as liabilities divided by equity (debt-to-equity ratio), i.e., Leverage = Liabilities / Equity. Using 225 (liabilities) and 25 (equity): 225 ÷ 25 = 9. This yields a leverage value of 9 times.

The key point is that the numerical result depends entirely on which ratio you are asked to compute. If the instruction or context specifies the ratio as assets-to-equity, the result would be 10. If the instruction specifies debt-to-equity, the result would be 9. Since the problem statement does not name a specific ratio, both interpretations are demonstrated here to illustrate the possible answers.

Additionally, recall that in some contexts leverage is framed as total exposure relative to capital, which aligns with assets-to-equity (10 in this case), while other contexts focus strictly on debt relative to equity (9 here). Be mindful of the exact definition used in your course or problem set to determine which value to report.

24/25(3) LUBS1953 Economic Theory and Applications for Finance (40717) IS-LM Model II Review 24/25(3) LUBS1953 Economic Theory and Applications for Finance (40717) IS-LM Model II Review

Consider the following bank balance sheet.Assets: 250Labilities: 225; Capital 25What is the leverage ratio?

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