Whether a ship owner attempting to insure an old vessel for twice its current market value is an adverse selection or a moral hazard issue Introduction: Moral hazard is a phenomenon where a party to a contract has an incentive to alter behaviour in a way which makes the contract less appealing to the other party.

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Answer 1

Question

Chapter 21, Problem 1PS

Summary Introduction

To determine:

Whether a ship owner attempting to insure an old vessel for twice its current market value is an adverse selection or a moral hazard issue

Introduction:

Moral hazard is a phenomenon where a party to a contract has an incentive to alter behaviour in a way which makes the contract less appealing to the other party.

Expert Solution & Answer

Answer to Problem 1PS

This is a problem related to moral hazard.

Explanation of Solution

Given Information:

Ship owner has attempted to insure an old vessel for twice its current value. Moral hazard is the reason why such act if insuring items for more than its market value or intrinsic value is prohibited as it creates an incentive.

The given problem is a case of moral hazard as the ship owner insures an old vessel for double its current market value. Now the ship owner now has an rational motive to create a loss and to file a claim later on. The issue of adverse selection will crop up only when due to improper information the buyer or the seller will choose a bad product or service. Such improper or undiagnosed information, if known earlier could prevent the transaction from occurring.

Considering this, the major difference between moral hazard and adverse selection is of movement. One party movement is beyond control once the deal occurred. Generally, a moral hazard is seen in case of insurance transactions.

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Ch 26: Assignment - Mergers and Corporate Control Widget Corp., which is considering the acquisition of Exteter Enterprise Inc., estimates that acquiring Exteter will result in an incremental value for the firm. The analysts involved in the deal have collected the following information from the projected financial statements of the target company: Data Collected (in millions of dollars) Year 1 Year 2 Year 3 EBIT $13.0 $15.6 $19.5 Interest expense 5.0 5.5 6.0 Debt 35.2 41.6 44.8 Total net operating capital 107.1 109.2 111.3 Exteter Enterprise Inc. is a publicly traded company, and its market-determined pre-merger beta is 1.00. You also have the following information about the company and the projected statements: •Exteter currently has a $38.00 million market value of equity and $24.70 million in debt. The risk-free rate is 3.5%, there is a 5.60% market risk premium, and the Capital Asset Pricing Model produces a pre-merger required rate of return on equity ISL of 9.10%. •Exteter's cost…

3. Problem 30-03 (Plan Funding) Plan Funding eBook Consolidated Industries is planning to operate for 10 more years and then cease operations. At that time (in 10 years), it expects to have the following pension benefit obligations: Year 11-15 16-20 21-25 Annual Total Payment $3,480,000 2,980,000 26-30 31-35 2,480,000 1,980,000 1,480,000 The current value of the firm's pension fund is $5.6 million. Assume that all cash flows occur at year-end. a. Consolidated's expected return on pension assets is 11%, and it uses 11% to discount the expected pension benefit payments. What is the present value of the firm's pension fund benefits? Do not round intermediate calculations. Round your answer to the nearest dollar. $ b. Is the plan underfunded or overfunded? Do not round intermediate calculations. Round your answer to two decimal places. Funding ratio= which means the assets are select than the PV of benefits and the plan is select Less or greater Select underfunded overfunded

Plan Funding Consolidated Industries is planning to operate for 10 more years and then cease operations. At that time (in 10 years), it expects to have the following pension benefit obligations: Year 11-15 16-20 21-25 Annual Total Payment $3,500,000 3,000,000 2,500,000 26-30 31-35 2,000,000 1,500,000 The current value of the firm's pension fund is $6.1 million. Assume that all cash flows occur at year-end. a. Consolidated's expected return on pension assets is 12%, and it uses 12% to discount the expected pension benefit payments. What is the present value of the firm's pension fund benefits? Do not round intermediate calculations. Round your answer to the nearest dollar. $ b. Is the plan underfunded or overfunded? Do not round intermediate calculations. Round your answer to two decimal places. Funding ratio = which means the assets are -Select- than the PV of benefits and the plan is -Select- ☑. Less or Greater Overfunded or Underfunded

Answer 2

Question

Chapter 21, Problem 1PS

Summary Introduction

To determine:

Whether a ship owner attempting to insure an old vessel for twice its current market value is an adverse selection or a moral hazard issue

Introduction:

Moral hazard is a phenomenon where a party to a contract has an incentive to alter behaviour in a way which makes the contract less appealing to the other party.

Expert Solution & Answer

Answer to Problem 1PS

This is a problem related to moral hazard.

Explanation of Solution

Given Information:

Ship owner has attempted to insure an old vessel for twice its current value. Moral hazard is the reason why such act if insuring items for more than its market value or intrinsic value is prohibited as it creates an incentive.

The given problem is a case of moral hazard as the ship owner insures an old vessel for double its current market value. Now the ship owner now has an rational motive to create a loss and to file a claim later on. The issue of adverse selection will crop up only when due to improper information the buyer or the seller will choose a bad product or service. Such improper or undiagnosed information, if known earlier could prevent the transaction from occurring.

Considering this, the major difference between moral hazard and adverse selection is of movement. One party movement is beyond control once the deal occurred. Generally, a moral hazard is seen in case of insurance transactions.

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Answer 3

Question

Chapter 21, Problem 1PS

Summary Introduction

To determine:

Whether a ship owner attempting to insure an old vessel for twice its current market value is an adverse selection or a moral hazard issue

Introduction:

Moral hazard is a phenomenon where a party to a contract has an incentive to alter behaviour in a way which makes the contract less appealing to the other party.

Expert Solution & Answer

Answer to Problem 1PS

This is a problem related to moral hazard.

Explanation of Solution

Given Information:

Ship owner has attempted to insure an old vessel for twice its current value. Moral hazard is the reason why such act if insuring items for more than its market value or intrinsic value is prohibited as it creates an incentive.

The given problem is a case of moral hazard as the ship owner insures an old vessel for double its current market value. Now the ship owner now has an rational motive to create a loss and to file a claim later on. The issue of adverse selection will crop up only when due to improper information the buyer or the seller will choose a bad product or service. Such improper or undiagnosed information, if known earlier could prevent the transaction from occurring.

Considering this, the major difference between moral hazard and adverse selection is of movement. One party movement is beyond control once the deal occurred. Generally, a moral hazard is seen in case of insurance transactions.

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Answer 4

Question

Chapter 21, Problem 1PS

Summary Introduction

To determine:

Whether a ship owner attempting to insure an old vessel for twice its current market value is an adverse selection or a moral hazard issue

Introduction:

Moral hazard is a phenomenon where a party to a contract has an incentive to alter behaviour in a way which makes the contract less appealing to the other party.

Expert Solution & Answer

Answer to Problem 1PS

This is a problem related to moral hazard.

Explanation of Solution

Given Information:

Ship owner has attempted to insure an old vessel for twice its current value. Moral hazard is the reason why such act if insuring items for more than its market value or intrinsic value is prohibited as it creates an incentive.

The given problem is a case of moral hazard as the ship owner insures an old vessel for double its current market value. Now the ship owner now has an rational motive to create a loss and to file a claim later on. The issue of adverse selection will crop up only when due to improper information the buyer or the seller will choose a bad product or service. Such improper or undiagnosed information, if known earlier could prevent the transaction from occurring.

Considering this, the major difference between moral hazard and adverse selection is of movement. One party movement is beyond control once the deal occurred. Generally, a moral hazard is seen in case of insurance transactions.

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Answer 5

Chapter 21, Problem 1PS

Summary Introduction

To determine:

Whether a ship owner attempting to insure an old vessel for twice its current market value is an adverse selection or a moral hazard issue

Introduction:

Moral hazard is a phenomenon where a party to a contract has an incentive to alter behaviour in a way which makes the contract less appealing to the other party.

Expert Solution & Answer

Answer to Problem 1PS

This is a problem related to moral hazard.

Explanation of Solution

Given Information:

Ship owner has attempted to insure an old vessel for twice its current value. Moral hazard is the reason why such act if insuring items for more than its market value or intrinsic value is prohibited as it creates an incentive.

The given problem is a case of moral hazard as the ship owner insures an old vessel for double its current market value. Now the ship owner now has an rational motive to create a loss and to file a claim later on. The issue of adverse selection will crop up only when due to improper information the buyer or the seller will choose a bad product or service. Such improper or undiagnosed information, if known earlier could prevent the transaction from occurring.

Considering this, the major difference between moral hazard and adverse selection is of movement. One party movement is beyond control once the deal occurred. Generally, a moral hazard is seen in case of insurance transactions.

Answer 6

Chapter 21, Problem 1PS

Summary Introduction

To determine:

Whether a ship owner attempting to insure an old vessel for twice its current market value is an adverse selection or a moral hazard issue

Introduction:

Moral hazard is a phenomenon where a party to a contract has an incentive to alter behaviour in a way which makes the contract less appealing to the other party.

Expert Solution & Answer

Answer to Problem 1PS

This is a problem related to moral hazard.

Explanation of Solution

Given Information:

Ship owner has attempted to insure an old vessel for twice its current value. Moral hazard is the reason why such act if insuring items for more than its market value or intrinsic value is prohibited as it creates an incentive.

The given problem is a case of moral hazard as the ship owner insures an old vessel for double its current market value. Now the ship owner now has an rational motive to create a loss and to file a claim later on. The issue of adverse selection will crop up only when due to improper information the buyer or the seller will choose a bad product or service. Such improper or undiagnosed information, if known earlier could prevent the transaction from occurring.

Considering this, the major difference between moral hazard and adverse selection is of movement. One party movement is beyond control once the deal occurred. Generally, a moral hazard is seen in case of insurance transactions.

Answer 7

Chapter 21, Problem 1PS

Summary Introduction

To determine:

Whether a ship owner attempting to insure an old vessel for twice its current market value is an adverse selection or a moral hazard issue

Introduction:

Moral hazard is a phenomenon where a party to a contract has an incentive to alter behaviour in a way which makes the contract less appealing to the other party.

Answer 8

Expert Solution & Answer

Answer to Problem 1PS

This is a problem related to moral hazard.

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Explanation of Solution

Given Information:

Ship owner has attempted to insure an old vessel for twice its current value. Moral hazard is the reason why such act if insuring items for more than its market value or intrinsic value is prohibited as it creates an incentive.

The given problem is a case of moral hazard as the ship owner insures an old vessel for double its current market value. Now the ship owner now has an rational motive to create a loss and to file a claim later on. The issue of adverse selection will crop up only when due to improper information the buyer or the seller will choose a bad product or service. Such improper or undiagnosed information, if known earlier could prevent the transaction from occurring.

Considering this, the major difference between moral hazard and adverse selection is of movement. One party movement is beyond control once the deal occurred. Generally, a moral hazard is seen in case of insurance transactions.

Answer 12

Ch. 21 - Prob. 1PS Ch. 21 - 2. The same ship owner advertises a tariff whereby...Ch. 21 - Prob. 3PS Ch. 21 - Prob. 4PS Ch. 21 - Prob. 5PS Ch. 21 - Prob. 6PS Ch. 21 - With a 3inflation rate (Spreadsheet 21.2), by how...Ch. 21 - Prob. 8PS Ch. 21 - Prob. 9PS Ch. 21 - Prob. 10PS

Concept explainers

Answer to Problem 1PS

Explanation of Solution

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Chapter 21 Solutions