Solve for a target net worth ratio

Math majors can skip this one. I found it looking through my files and thought it might be useful to some credit union financial managers. The math problem is:

How much of a change in capital would it take to move the net worth ratio from the current level, to another level.

At first glance it seems fairly simple, until you realize that any change in net worth, changes the liability/capital side of the balance sheet, which by definition changes assets by the same amount. Since the net worth ratio is net worth divided by total assets, a single number is needed to satisfy the change in both assets and net worth.

NW1

The sheet in the workbook “TargetNetWorth” looks like this:

NW2

I added an additional sheet  that contains a table that can be used to determine how much assets can grow or how much capital can be lost, and still keep a desired net worth. Only two entries are required, the current asset balance and current net worth (yellow cells).

This table assumes an instantaneous change in assets or capital. Every cell is calculated, give the two inputs. In this example, if the credit union did not want to drop below a 7% net worth ratio, they could take on an additional $698,879,069 in assets and still have a 7% net worth ratio. Or, they could take a loss of $52,603,801 loss in net worth and maintain the 7% net worth ratio.

 

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