The reason behind the development of fixed interest rate mortgage with numerous patterns of payment did not address the problem faced by the lenders. And also discuss the lenders approach to overcome these problem.

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Answer 1

Question

Chapter 5, Problem 1Q

Summary Introduction

To discuss: The reason behind the development of fixed interest rate mortgage with numerous patterns of payment did not address the problem faced by the lenders. And also discuss the lenders approach to overcome these problem.

Expert Solution & Answer

Explanation of Solution

The fixed interest rate mortgage with various payment patterns does not adjust to the changes in economic condition and also does not address the inflationary effect on the expected rate of interest, the rate of interest is fixed on the date of origination and leftovers until the loan is reimbursed. Thus, moneylenders are underwriting the risk of any important variations in the implicit component of the mortgage interest rates – real rate of interest (r), the premium for expected inflation (f) and the risk premium (p) , this would result in lender’s financial loss.

To address such inflationary expectations on interest rate, the lender came with adjusted rate mortgage especially used to finance the single family residence. The ARM or adjusted rate mortgage are designed to adopt the change in the economic condition which help the lenders and borrowers share the interest rate risk which enables the lender to match cost of the interest with the changes in interest revenue more effectively and also helps borrower to get low cost financing.

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Wells and Associates has EBIT of $ 72800. Interest costs are $ 18400, and the firm has 15600 shares of common stock outstanding. Assume a 40 % tax rate. a. Use the degree of financial leverage (DFL) formula to calculate the DFL for the firm. b. Using a set of EBIT -EPS axes, plot Wells and Associates' financing plan. c. If the firm also has 1200 shares of preferred stock paying a $ 5.75 annual dividend per share, what is the DFL? d. Plot the financing plan, including the 1200 shares of $ 5.75 preferred stock, on the axes used in part (b). e. Briefly discuss the graph of the two financing plans.

Answer 2

Question

Chapter 5, Problem 1Q

Summary Introduction

To discuss: The reason behind the development of fixed interest rate mortgage with numerous patterns of payment did not address the problem faced by the lenders. And also discuss the lenders approach to overcome these problem.

Expert Solution & Answer

Explanation of Solution

The fixed interest rate mortgage with various payment patterns does not adjust to the changes in economic condition and also does not address the inflationary effect on the expected rate of interest, the rate of interest is fixed on the date of origination and leftovers until the loan is reimbursed. Thus, moneylenders are underwriting the risk of any important variations in the implicit component of the mortgage interest rates – real rate of interest (r), the premium for expected inflation (f) and the risk premium (p) , this would result in lender’s financial loss.

To address such inflationary expectations on interest rate, the lender came with adjusted rate mortgage especially used to finance the single family residence. The ARM or adjusted rate mortgage are designed to adopt the change in the economic condition which help the lenders and borrowers share the interest rate risk which enables the lender to match cost of the interest with the changes in interest revenue more effectively and also helps borrower to get low cost financing.

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Answer 3

Question

Chapter 5, Problem 1Q

Summary Introduction

To discuss: The reason behind the development of fixed interest rate mortgage with numerous patterns of payment did not address the problem faced by the lenders. And also discuss the lenders approach to overcome these problem.

Expert Solution & Answer

Explanation of Solution

The fixed interest rate mortgage with various payment patterns does not adjust to the changes in economic condition and also does not address the inflationary effect on the expected rate of interest, the rate of interest is fixed on the date of origination and leftovers until the loan is reimbursed. Thus, moneylenders are underwriting the risk of any important variations in the implicit component of the mortgage interest rates – real rate of interest (r), the premium for expected inflation (f) and the risk premium (p) , this would result in lender’s financial loss.

To address such inflationary expectations on interest rate, the lender came with adjusted rate mortgage especially used to finance the single family residence. The ARM or adjusted rate mortgage are designed to adopt the change in the economic condition which help the lenders and borrowers share the interest rate risk which enables the lender to match cost of the interest with the changes in interest revenue more effectively and also helps borrower to get low cost financing.

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Answer 4

Question

Chapter 5, Problem 1Q

Summary Introduction

To discuss: The reason behind the development of fixed interest rate mortgage with numerous patterns of payment did not address the problem faced by the lenders. And also discuss the lenders approach to overcome these problem.

Expert Solution & Answer

Explanation of Solution

The fixed interest rate mortgage with various payment patterns does not adjust to the changes in economic condition and also does not address the inflationary effect on the expected rate of interest, the rate of interest is fixed on the date of origination and leftovers until the loan is reimbursed. Thus, moneylenders are underwriting the risk of any important variations in the implicit component of the mortgage interest rates – real rate of interest (r), the premium for expected inflation (f) and the risk premium (p) , this would result in lender’s financial loss.

To address such inflationary expectations on interest rate, the lender came with adjusted rate mortgage especially used to finance the single family residence. The ARM or adjusted rate mortgage are designed to adopt the change in the economic condition which help the lenders and borrowers share the interest rate risk which enables the lender to match cost of the interest with the changes in interest revenue more effectively and also helps borrower to get low cost financing.

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Answer 5

Chapter 5, Problem 1Q

Summary Introduction

To discuss: The reason behind the development of fixed interest rate mortgage with numerous patterns of payment did not address the problem faced by the lenders. And also discuss the lenders approach to overcome these problem.

Expert Solution & Answer

Explanation of Solution

The fixed interest rate mortgage with various payment patterns does not adjust to the changes in economic condition and also does not address the inflationary effect on the expected rate of interest, the rate of interest is fixed on the date of origination and leftovers until the loan is reimbursed. Thus, moneylenders are underwriting the risk of any important variations in the implicit component of the mortgage interest rates – real rate of interest (r), the premium for expected inflation (f) and the risk premium (p) , this would result in lender’s financial loss.

To address such inflationary expectations on interest rate, the lender came with adjusted rate mortgage especially used to finance the single family residence. The ARM or adjusted rate mortgage are designed to adopt the change in the economic condition which help the lenders and borrowers share the interest rate risk which enables the lender to match cost of the interest with the changes in interest revenue more effectively and also helps borrower to get low cost financing.

Answer 6

Chapter 5, Problem 1Q

Summary Introduction

To discuss: The reason behind the development of fixed interest rate mortgage with numerous patterns of payment did not address the problem faced by the lenders. And also discuss the lenders approach to overcome these problem.

Expert Solution & Answer

Explanation of Solution

The fixed interest rate mortgage with various payment patterns does not adjust to the changes in economic condition and also does not address the inflationary effect on the expected rate of interest, the rate of interest is fixed on the date of origination and leftovers until the loan is reimbursed. Thus, moneylenders are underwriting the risk of any important variations in the implicit component of the mortgage interest rates – real rate of interest (r), the premium for expected inflation (f) and the risk premium (p) , this would result in lender’s financial loss.

To address such inflationary expectations on interest rate, the lender came with adjusted rate mortgage especially used to finance the single family residence. The ARM or adjusted rate mortgage are designed to adopt the change in the economic condition which help the lenders and borrowers share the interest rate risk which enables the lender to match cost of the interest with the changes in interest revenue more effectively and also helps borrower to get low cost financing.

Answer 7

Chapter 5, Problem 1Q

Summary Introduction

To discuss: The reason behind the development of fixed interest rate mortgage with numerous patterns of payment did not address the problem faced by the lenders. And also discuss the lenders approach to overcome these problem.

Answer 8

Expert Solution & Answer

Explanation of Solution

The fixed interest rate mortgage with various payment patterns does not adjust to the changes in economic condition and also does not address the inflationary effect on the expected rate of interest, the rate of interest is fixed on the date of origination and leftovers until the loan is reimbursed. Thus, moneylenders are underwriting the risk of any important variations in the implicit component of the mortgage interest rates – real rate of interest (r), the premium for expected inflation (f) and the risk premium (p) , this would result in lender’s financial loss.

To address such inflationary expectations on interest rate, the lender came with adjusted rate mortgage especially used to finance the single family residence. The ARM or adjusted rate mortgage are designed to adopt the change in the economic condition which help the lenders and borrowers share the interest rate risk which enables the lender to match cost of the interest with the changes in interest revenue more effectively and also helps borrower to get low cost financing.