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The Wall Street Journal (March 12, 2007) reported that an analyst with the Center for Financial Research and Analysis found an interesting item in an earnings report from New Century Financial Corporation, a mortgage lending company specializing in "subprime" loans to borrowers with checkered credit histories. The analyst discovered that New Century had for the first time combined two categories of reserves for losses. New Century combined the reserve for losses on defaulted loans with a reserve for losses on real estate that had been acquired through foreclosure. By putting the two reserve accounts together, New Century could show that total reserves for losses had increased only slightly from the prior period. Hidden, though, was the fact that the reserve for losses on bad loans actually dropped by 8.7 percent. The Center for Financial Research and Analysis pointed out the discrepancy of a drop in reserves at a time when defaults on subprime mortgages were increasing across the country
REQUIRED:
Discuss the effect of "reserves for loan losses" on the financial statements and why a company such as New Century might be reluctant to increase the reserve. Discuss what economic factors influence loan defaults (and especially loans in the subprime mortgage market).
Assume an option trader bought 10 July 25 calls on General Electric Co. (GE) for 1.35. If the stock closed at 28 on expiration and the option position was liquidated, calculate the dollar amount of profit or loss on the trade before commissions an..
If you were assigned to prepare a capital expenditure budget request to add a retail pharmacy in the hospital, which two individuals from your department(s) would you want to have on your team to help you
Explain the relationship between risk and return Identify an example of risk and return. Explain which is more risky bonds or common stocks. Explain how understanding risk and return will help you in future business ventures.
Company Checkpoint issued bonds at a discount where each $1,000 face(par) bond was issued for $900. The coupon rate is stated as 3.75%. Company Delta issued its bonds at par(each $1,000 of bond was issued for $1,000) with a coupon rate of 4%. As a..
Explain why increased regulatory capital requirements lead to a greater consolidation of banking firms via mergers and acquisitions.
Mortgage lenders with fixed-rate mortgages should benefit when interest rates decline, yet research has shown that this favorable impact is dampened. By what?
two mutually exclusive investments cost 10000 each and have the following cash inflows. the firmrsquos cost of capital
(a) Calculate the current estimate of the covariance between the assets. (b) On the assumption that the prices of the assets at close of trading today are $20.5 and $40.5, update the correlation estimate.
QUESTION 1Suppose a company will issue new 5-year debt with a face value of $1,000 and a coupon rate of 8 percent, paid annually. If the issuing price is $1080 and the tax rate is 40 percent. What is the after-tax cost of debt? If the expected rate o..
A mutual fund offers “A” shares, which have a 5% upfront load and an expense ratio of 0.76%. The fund also offers “B” shares, which have a 3% back-end load and an expense ratio of 0.87%. Which shares make more sense for an investor looking over an 18..
shapland inc. has fixed operating costs of 500000 and variable costs of 50 per unit. if it sells the product for 75 per
suppose the current exchange rate for the russian ruble is rub 34.50. the expected exchange rate in three years is rub
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