The Damon Investment Company manages a mutual fund composed mostly of speculative stocks. You recently saw an ad claiming that investments in the funds have been earning a rate of return of 21%. This rate seemed quite high so you called a friend who works for Damon’s competitors. The friend told you that the 21% return figure was determined by dividing the two-year appreciation on investments in the fund by the average investment. In other words, $100 invested in the fund two years ago would have grown to $121 ($21/$100 = 21%).
Required:
Discuss the ethics of the 21% return claim made by the Damon Investment Company.
Read a selection of your colleagues’ postings.
Category: Business & Finance homework help
“Wall Street” is sometimes paired “with “Main Street” in conversation. Symbolically, “Wall Street” refers to financial institutions and securities traders that power the American financial system, while “Main Street” calls to mind retail shops of a smaller community, where “real people” interact, work, and live. This Discussion considers how one particular asset travels between Main Street and Wall Street to explore possible connections between personal financial decisions and the world of corporate finance, which is centered in activities taking place on Wall Street.
Module 5: Case Background Transcript
“Wall Street” is a street in New York where the New York Stock Exchange and related financial businesses are located. The term “Wall Street” refers to trading in financial products carried out in the major financial firms located on Wall Street and the people who work there. These people and activities often seem disconnected from the financial decisions undertaken by ordinary people on a day-to-day basis. Do the financial decisions of individuals affect the broader world of corporate finance? Put differently, how are the worlds of personal and corporate finance interrelated? We explore this issue in the following discussion as we consider how a personal loan becomes a tradable financial product called an “asset-backed security.” An asset-backed security is a complex financial instrument traded in major financial markets, including and firms located on Wall Street.
Whether it is originated or traded on Wall Street or on Main Street, the value of a financial asset or instrument depends on its stream of future payments. For instance, financial institutions consider a loan as an asset because its repayment creates a stream of income. Like all financial assets, however, loans are risky because their value depends on the repayment capacity of the borrower.
In the Module 2 Discussion: The Big Picture, we saw that borrowers differ in their capacity to provide assurance of ability to repay a loan. A borrower is considered risky who is less able to document income, assets, debt to income ratios or who has a history of poor repayment habits. The borrower may still be offered a loan at a higher rate of interest (this is called a sub-prime mortgage). In the Module 4 Discussion: Lending to Borrowers with Poor Credit Histories, we learned more about lending to borrowers who show evidence that they may not have the ability or inclination to meet the demands of debt agreements.
In Module 5, we learn about mortgage-backed securities traded on Wall Street. Mortgage-backed securities are long-term debt securities offering expected principal and interest payments as collateral. Mortgage-backed securities are composed of many mortgages gathered into a pool guaranteed by principal and interest cash flows. When a risky sub-prime mortgage loan is combined with a less risky mortgage loan, as a lender “packages” and sells mortgage-backed loans of varying risk, a diverse set of loans will have a lower risk of default and a higher probability of repayment than a single loan. In other words, the package should also have a lower risk of default and a higher probability of repayment than any of its underlying loan agreements, for reasons we will investigate more deeply in Module 6.
Mortgage loan agreements are somewhat unique because these financial instruments are additionally guaranteed by homes and land that may be seized and sold by the lender, if the borrower cannot repay their debt. If we assume prices of home and land are stable or rising in value (as has historically been true, except in rare circumstances), the homes and land serve as an effective supplementary guarantee to the holder of the loan package or “security” (Bernanke, 2019, p. 259). The assumption that mortgage loan agreements backed by real estate that consistently rises in value makes Wall Street comfortable trading in these assets. Wall Street trading in mortgage-backed securities originated in the 1970s and had become widespread preceding the Great Recession of 2008-2009. These assets were much riskier than Wall Street originally assumed, and this fact contributed to a rapid downturn in Wall Street trading as it became clear that many financial institutions held these very risky investments, which lost value suddenly as the real estate market collapsed.
Case
Assume that professional experience secures you employment at a well-known, large investment bank that trades in securities of many types, including mortgage-backed securities. This large bank is unlike a small community bank (a “Main Street” financial institution, such as the one you worked at while serving Jucheng and Dave in the Module 2 Discussion: The Big Picture), which typically holds loans after origination. Larger banks purchase loans from Main Street financial institutions and sell these to Wall Street firms, packaging and selling mortgage-backed securities to investors and financial intermediaries. Mutual funds, retirement funds, financial institutions, and large investors typically hold these securities as investment goods.
Noticing that home prices nationally have been rising at seemingly high rates while wages do not appear to be rising as quickly, you wonder how so many borrowers can qualify for home loans given this mismatch in price versus ability to pay. Your colleague Loren explains that most home loans are packaged and sold, so banks issuing mortgages frequently lend to “sub-prime” borrowers who may not necessarily be expected to meet loan demands in the longer term. She notes that few investors worry about default since home prices historically only move upward, on average, and loans are sold and packaged with many others, lowering the risk that the whole package, versus a few underlying assets, will fail. You wonder if managers at your firm fully understand the risks of holding mortgage-backed securities. Your colleague does not believe that your worries are valid, based on the structure of these large packages backed by homes and land. Loren asks you to consider two facts. First, large numbers of mortgages, packaged together, are low risk because the numbers or underlying mortgages reduce the risk of default. Second, most financial institutions, particularly large ones, hold these securities as investments, and these securities are reasonably liquid because so many entities purchase them regularly. In other words, asset-backed securities are easily sold if they appear troubled. She concludes that many large financial institutions probably hold substantial amounts of these securities, so she hopes she is correct.
Case Questions
Initial Post
Based upon this module’s required reading and the background information given here, form an initial post covering the following four issues:
Section 1
Explain briefly how interest rate movements affect the valuation of any one debt or equity asset traded in financial markets.
Section 2
For the purchaser of mortgage-backed securities (e.g., financial institutions, intermediaries, or investors) or any other security that has an increased risk of default, identify one risk that you think is possible and explain your conclusion.
Section 3
Comment on any one aspect of the connection between Wall Street and Main Street that you learned about.
Responses to the questions do not need to exceed 1 paragraph.
Tell us your understanding of business analytics.
1. What is business analytics?
2. What are the applications of business analytics in the industry?
3. What are the skills and techniques that are required to become a business analyst?
4. How can we use analytics to make better decisions for business?
5. What are the challenges or trends in business analyst?
6. What is your journey becoming a business analyst?
4-page minimum. The cover page and reference page/s are not included in the above-stated page requirement.
Papers need to be formatted in APA 7th Edition style.
At least three outside peer-reviewed sources as references
Company : Berkshire Hathaway
Research the total compensation plan for the company you have chosen for your final project. Very briefly describe the elements they use to reward their employees (base pay, bonuses, time off, daycare, flex time, benefits, etc). Is their approach the best that it could be? If you were leading the company, what would you do to ensure their approach to motivating employees was fair and equitable? Is your approach financially feasible? Would you choose to be 100% transparent in your approach? Why or why not?
Your initial post should be 300+ words in length
You may consider using the same company and annual reports that you chose in your Week 1 – Discussion Forum, This choice will only work if the company generates the bulk of its revenue from the sale of goods and maintains inventory. If not, then you will need to select another company for this analysis. APPLE is the company
Address the following:
Calculate the inventory turnover ratio and number of days’ sales in inventory for the company for the latest two years. Obtain the industry averages for these ratios and any other pertinent information from the Mergent Online database, or another outside resource of your choice, and analyze the results.
Discuss what each of these ratios tells you about the company’s efficiency in managing its inventory, and how they compare to the industry average.
Identify the major causes of any changes in these ratios, and discuss your assessment of the company based on these changes.
If you are an investor, explain whether or not you are satisfied with the company’s inventory management.
Describe the process of your business operation from the first moment it opens to when it closes. Customer touch points. How do you deal with customer issues? Returns? Reward loyal customers, etc. Include an operations flow chart
Discuss potential suppliers
Production or service delivery process- use graphs and charts to map
Product/service returns process
Supplier relationship management
Logistics
Packaging
Transportation or delivery process
Ethical Considerations
Physical Plant Layout
Startup expenses (Ass. 4 – week 5) – use the template provided (course info tab). Recommend that you include a line item that is for Contingency Funds – for unexpected emergencies like your building repairs are not done when you expected them to and you have to pay an extra 2 months’ rent before you open your business, etc. Cite sources for all your data and assumptions. You will need discussion about the chart – do not just insert the chart and think you have completed this aspect of the assignment.
Why is the bond market so sensitive to interest rates? What is the mathematics behind this relationship? Do a Google search to find a corporate bond issue where the company has either defaulted on the payments or called back the bonds.
Using the same company and annual reports that you chose in your week 1 (the company is APPLE)
Calculate the gross profit ratio, operating margin ratio, and net income margin ratio for the latest two years, and obtain the industry average ratios (if available). You may use the Mergent Online database, or another outside resource of your choice.
Analyze these ratios and discuss what each of these ratios tells you about the company’s profitability, and how it compares to the industry averages.
Note any trends in these ratios from year-to-year, and discuss your assessment of the company based on these changes.
If you were an investor, explain why you would or would not buy stock in the company.
Your response should be a minimum of 200 words
Respond to the following questions:
Why do public utility companies usually have capital structures that are different from those of retail firms?
Why are earnings before interest and taxes (EBIT) generally considered to be independent of financial leverage? Why might EBIT be influenced by financial leverage at high debt levels?
Apa format
Prior to beginning work on this discussion,
Review Chapter 48 of the course textbook.
Between 1966 and 1975, the Orkin Exterminating Company, the world’s largest termite and pest control firm, offered its customers a “lifetime” guarantee that could be renewed each year by paying a definite amount specified in its contracts with the customers. The contracts gave no indication that the fees could be raised for any reasons other than certain narrowly specified ones. Beginning in 1980, Orkin unilaterally breached these contracts by imposing higher-than-agreed-upon annual renewal fees. Roughly 200,000 contracts were breached in this way. Orkin realized $7 million in additional revenues from customers who renewed at the higher fees. The additional fees did not purchase a higher level of service than that originally provided for in the contracts. Although some of Orkin’s competitors may have been willing to assume Orkin’s pre-1975 contracts at the fees stated therein, they would not have offered a fixed, locked-in “lifetime” renewal fee such as the one Orkin originally provided.
Under the three-part test for unfairness stated in the course textbook (see page 1363), did Orkin’s behavior violate FTC Act § 5’s prohibition against unfair acts or practices?
Discuss each element of the three-part test and how it applies to the Orkin case.
Your initial response should be a minimum of 200 words.