hw4fsd.doc - Jaegook Lee G26205244 Fourth Homework 1 A bank...

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Jaegook Lee G26205244 Fourth Homework 1. A bank wants to estimate the value of inventories or fixed assets pledged by a borrower as collateral in the event of default on a loan. Discuss why the value of this collateral is affected by the likely reasons that a borrower might default on its loan. In particular, compare the value of the collateral in the event of bankruptcy for a firm where the most likely reason for bankruptcy is due to risky investments in derivative securities to a more typical firm where failure of the firm’s core business is the main source of bankruptcy risk. Net cash flow from operating activities is decreased from 394,700 to 312,886, which means the ability to pay off the debts of the company is weakening. Thus, debtors may want to demand more collaterals as the risk of borrowing increased. At the time of bankruptcy due to failure of its core business, the value of assets collateralized would be less than the value on the balance sheet. On the other hand, at the time of
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  • Spring '14
  • Jones,C
  • Balance Sheet, Generally Accepted Accounting Principles

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