Smart mortgage consultants

Entrepreneurship and economic progress

admin — Sun, 28 Mar 2010 15:44:55 +0000

Discovery and development of improved products and production methods propel economic progress. Think of the new products that have been introduced during the last fifty years; microwave ovens, videocassette recorders, color television sets, personal computers, fax machines, cellular telephone service, DVD and MP3 players, and better coronary artery bypass techniques come to mind. Innovations like these have had an enormous impact on our lives. But no one knows what the next innovative breakthrough will be or precisely which production techniques will minimize per-unit costs. Better ways of doing things do not just happen; they must be discovered and developed by entrepreneurs.
Is the entrepreneur’s new, visionary idea the greatest thing since the development of the fast-food chain? Or is it simply another dream that will soon vaporize? In a market economy, it is relatively easy to try new business ideas. A person needs only to win the support of a few investors willing to finance the innovative new product or production technology. How- ever, competition holds entrepreneurs and the investors who support them accountable: their ideas face a “reality check” imposed by production costs and consumers’ willingness to pay. Consumers are the ultimate judge and jury. If they do not value an innovative new product or service enough to cover its cost, that product or service will not survive in the marketplace.
Furthermore, today’s successful product may not pass tomorrow’s competitive test. Therefore, entrepreneurs must be good at anticipating, identifying, and quickly adopting improved ideas, be they their own or others’. They must constantly face the ongoing reality of dynamic change in a competitive world.

FORWARD CONTRACTS ON STOCK PORTFOLIOS

admin — Sat, 20 Jun 2009 13:42:16 +0000

Because modem portfolio theory and good common sense dictate that investors should hold diversified portfolios, it is reasonable to assume that forward contracts on specific stock portfolios would be useful. Suppose a pension fund manager knows that in three months he will need to sell about $20 million of stock to make payments to retirees. The manager has analyzed the portfolio and determined the precise identities of the stocks he wants to sell and the number of shares of each that he would like to sell. Thus the manager has designated a specific subportfolio to be sold. The problem is that the prices of these stocks in three months are uncertain. The manager can, however, lock in the sale prices by entering into a forward contract to sell the portfolio. This can be done one of two ways. The manager can enter into a forward contract on each stock that he wants to sell.
Alternatively, he can enter into a forward contract on the overall portfolio. The first way would be more costly, as each contract would incur administrative costs, whereas the second way would incur only one set of costs. Assume that the manager chooses the second method. He provides a list of the stocks and number of shares of each he wishes to sell to the dealer and obtains a quote. The dealer gives him a quote of $20,200,000. So, in three months, the manager will sell the stock to the dealer and receive $20,200,000. The transaction can be structured to call for either actual delivery or cash settlement, but in either case, the client will effectively receive $20,200,000 for the stock.’

what does selling or buying a house really cost?

admin — Fri, 05 Jun 2009 10:52:22 +0000

Brokerage Commissions, a direct cost: In the United States, if a house is sold, the seller’s broker typically receives six percent of the value of the house as commission (and splits this commission with the buyer’s agent). Thus, if a real estate agent manages to sell a house for $300,000, the commission is $18,000. Put di?erently, without an agent, the buyer and seller could have split the $18,000 between them. (Of course, brokers do many useful things, such as matching buyers and sellers, shepherding the selling process, etc., so the $18,000 may just be the intrinsic transaction cost to selling a house. However, inconsistent with this view, real estate commissions are much lower in other countries, and it is di?cult to see why the cost of selling houses would be exactly 6% in practically all markets in the United States.)
Although only the seller pays the broker’s cost, it makes sense to think of transaction costs in terms of round-trip costs—how much worse you are o? if you buy and then immediately sell an asset. You would mislead yourself if you thought that when you buy a house, you have not incurred any transaction costs because the seller had to pay them—you have incurred an implicit transaction cost in the future when you need to resell your investment. Of course, you usually do not immediately sell assets, so you should not forget about the timing of your future selling transaction costs in your NPV calculations.
Housing transaction costs are so high and so important that they are worth a digression. If you borrow to ?nance the investment, transaction may be higher than you think. The real estate agent earns 6% of the value of the house, not of the amount of money you put into the house. On a house purchase of $500,000, the typical loan is 80% of the purchase price, or $400,000, leaving you to put in $100,000 in equity. Selling the house the day after the purchase reduces the owner’s wealth of $100,000 by the commission of $30,000—for an investment rate of return of –30%. This is not a risk component; it is a pure and certain transaction cost.
Let us brie?y consider what happens if the house price decreases or increases by 10%. If house prices decline by 10%, or the buyer overpays by 10%, the house can only be resold for $450,000, which leaves $423,000 after agent commissions. The house owner is left with $23,000 on a $100,000 investment. A 10% decline in real estate values has reduced the home owner’s net worth by 77%! In comparison, a 10% increase in real estate values increases the value of the house to $550,000, which means that $517,000 is left after real estate commissions. The house owner’s rate of return for the same up movement is thus only 17%.
With the tools you already know, you can even estimate how the value of a typical house might change if the Internet could instantly and perfectly replace real estate agents. You cannot be too accurate—you can only obtain a back-of-the-envelope estimate. A typical house in the United States sells every seven years or so. Work with a $1,000,000 house, and assume that the expected house capital-gain appreciation is 0%—you consume all gains as rental enjoyment. In this case, the house will stay at $1,000,000 in value, the commission will stay constant at$60,000 and will be paid every 7 years. If the appropriate 7-year interest rate were 40% (around 5% per annum), then the value of the brokerage fees would be a perpetuity of $60, 000/40% = $150, 000. The capitalized transaction cost would therefore have lowered the value of the $1,000,000 house by $150,000. If you could eliminate all commissions, e.g., by selling equally e?ciently over the Internet, such a house would increase in value by about 15%. However, if you believed that the brokerage commission were to go up by the in?ation rate (2% per annum, or 15% per 7-years), the friction would not be $150,000 but $240,000—more like 25% of the value of the house, not just 15%.
Other direct costs: In addition to direct agent commissions, there are also many other direct transaction costs. These can range from advertising, to insurance company payments, to house inspectors, to the local land registry, to postage—all of which cost the parties money.
Indirect and opportunity costs: Then there is the seller’s own time required to learn as much . about the value of the house as possible, and the e?ort involved to help the agent sell the house. These may be signi?cant costs, even if they involve no cash outlay. After all, the seller could spend this time working or playing instead. Furthermore, not every house is suitable for every house buyer, and the seller has to ?nd the right buyer. If the house cannot be sold immediately but stays empty for a while, the foregone rent is part of the transaction cost. The implicit cost of not having the house be put to its best alternative use is called an opportunity cost. Opportunity costs are just as real as direct cash costs.

Estate Planning Problems

admin — Fri, 29 May 2009 08:23:49 +0000

Death is a certainty for all of us. Failure to carefully plan for this eventuality may result in inability to achieve your desired objectives. Consideration must be given, not only to the way property will be distributed at your death, but also to ensuring lifetime income for yourself and possibly a surviving spouse. Certain characteristics of agricultural estates pose additional problems. Lack of liquidity may require the sale of business assets in order to pay estate taxes and debts. Indivisibility makes periodic gifts more difficult. In addition, many farm operations are very capital-intensive with low cash returns relative to the amount of investment. These problems are not unique to agriculture. Many estates involving other closely-held businesses encounter similar problems.
Faced with these problems, and not knowing what to do, many families do nothing, or delay planning until it is too late. A few of the typical problems which may result from lack of planning include:
• The division of a farm under state inheritance laws results in small, uneconomical units.2 The combined value of the small units when sold separately may notequal the value of the farm when sold as a total unit; nor could the smaller units be separately operated as efficiently as the whole farm.
• The farm-operating heir may not be adequately compensated for contributions to capital improvements, labor and management, and the care of the parents. Understate inheritance laws, the heir will share equally with other broth- ers and sisters who have not made similar contributions.
• Guardianship of minor children may require close court supervision with numerous costs and restrictions where one or both parents die without a will.
• A will may be challenged for incompetency of the parent or parents who waited too long to make a will or the potential of undue influence being placed upon the parent from other sources or family members.
• Land may be divided and subdivided to the extent that it becomes difficult to obtain a mineral lease covering an entire tract inherited by widely scattered co-owners.
• It may be necessary to sell much of the estate if no provisions are made for payment of taxes and other costs.
• Estate taxes may be greater than they would have been if some other method of distributing the estate had been chosen.
• The farm-operating heir may be saddled with an impossible debt-load. This sometimes results from attempting to buy out the other heirs at an unreasonable price and on inadequate terms.
• Ill-feelings and bitterness may arise among heirs, resulting from lack of knowledge and understanding of the law.
• Parents may suffer from economic hardships due to unexpected illness or disability if insufficient property is re- tained to care for them adequately during their remaining years.
• Unnecessary problems may be created by not understanding implications of a joint tenancy or life estate.
• Problems may also arise from failure to consider desired qualifications of an executor.
Many of these problems could be eliminated by proper planning. Determining the facts in the particular transfer problem and understanding the alternative ways of handling the problem, are the first steps that must be taken.

ESTATE PLANNING

admin — Sat, 23 May 2009 08:22:43 +0000

In broad terms “estate planning” involves the acquisition, investment, protection and disposition of assets. Oklahoma families are faced with many problems in transferring property to the next generation. Increasing numbers of farm families are becoming aware of these problems, and are searching for satisfactory methods of transferring property within their families.
This publication is intended to furnish basic information about the problems existing, to point out the many alternatives that are available, and to encourage more families to make adequate plans. Major emphasis in this publication will be placed on minimization of disposition costs. Careful estate planning under legal advice can reduce probate expenses and tax losses.
This circular is not designed as a substitute for legal advice. Rather, it is designed to acquaint families with the various alternative methods of land transfer and thereby enable them to consult legal counsel more intelligently. An informed client makes better use of the lawyer’s time. Farm families are encouraged to use this publication as a means of becoming informed and then to consult an attorney to develop a plan best suited to their own situation.

control of finances

admin — Sun, 17 May 2009 08:22:34 +0000

Statements like “I have too much month at the end of the money” are often said as a joke. The reality of not having enough money to meet basic needs is no laughing matter. The best way to gain control of finances is to establish and manage a plan for spending. Planning for spending is a financial practice that many consumers fail to do. This leads to frustration with money matters and overuse of credit.
There are several steps that ensure success and put together the pieces of the financial puzzle. The worksheets provided could help determine where a family is, where they want to be, and how they can get there. The most important pieces to the puzzle are income, expenses, reserve accounts, and credit use.
Income. The most common source of income for most families and individuals is take home pay from work outside of the home. Use monthly net income rather than monthly gross income when planning. With net income, or take home pay, deductions have already been made for many expenses. Don’t list these again on the expense sheet. Overtime pay and other sources of income that are not regular or reliable can be used as a resource but should not be included in monthly net income. Changes in economic conditions can lead to a sharp reduction in overtime opportunities.
Expenses. In order to plan for spending, it is important to know where the money is going. If this is not known, write down how much and where spending occurs each month. This can be as simple as using a pocket sized tablet and a pencil or a computer with some money management software. Once spending is known, planning can begin.
When filling out a monthly expense sheet it is important to be as realistic and honest as possible. It is natural to underestimate expenses because it makes people feel in control. In the “current” column list all expenses. When completed, if they are too high, mark which expenses can be changed in the “adjusted” column. The “actual” column can be used to record actual spending for a month to determine how accurately current expenses are estimated. The “periodic” column
Reserve Account. Some bills are paid quarterly, semiannually, or annually such as car insurance and property taxes. Money needs to be set aside to pay these periodic expenses when they come due. The easiest way to do this is to place money needed for future bills into a separate account. Using a savings account will keep it out of the immediate reach and will actually earn some money (i.e. interest) as well. Figure the actual amount needed to set aside by following our directions. This is the most important step in planning because one large annual bill can completely undo a spending plan and lead to excessive credit use.
Credit Use. There are many advantages to using credit if it is handled wisely. Misuse of credit can be very costly. Financial educators recommend that no more than 15 percent of monthly net income should be spent on credit payments. For example a household with $2,000 net income per month paying more than $300 in credit card payments is probably headed for trouble. This figure does not include house payments.
Putting It Together. Putting everything in writing is just the first step. It takes time to make adjustments that will make all the pieces come together. Once the plan is finalized, changes in financial habits may be required. These changes take time and energy. It can help to remember what your goals are and how good it feels to reach them.
Explanation of monthly expenses
1. Savings is the most important part of expenses and should be figured first. Base this amount on savings goals that are established (example: $200 to go into Roth IRA or college savings fund).

Cash for silver or gold

admin — Sun, 10 May 2009 08:06:14 +0000

The company was started in 2007. It is the first refinery to work directly with the public specializing in acquiring unwanted jewelry made of precious metals, such as silver. Cash4gold is one of the largest jewelry appraisers and buyers from the public in the country. It is estimated that the company completed more than 700,000 transactions since its inception. It employs nearly 300 people at the moment. There are some controversies connected with how the company conducts its business. Whether to believe some of the stories told by former customers or not is up to each individual. The fact is that the company has a 100% Customer Satisfaction Guaranteed Policy, which everyone knows from its famous Super Bowl commercial. Another company, which specializes in silver reclaiming is Argent Refining, a member of the Glass Association of North America. If you’re in financial trouble and can’t pay your mortgage installment but you have some broken jewelry, you can contact their appraisers and see what they can do for you.

Payday loans

admin — Fri, 01 May 2009 08:19:29 +0000

A payday loan is also known as a paycheck advance or payday advance. It is a small, short-term loan intended to cover a borrower’s current expenses until he or she receives his/her next paycheck. There are numerous legislations regulating payday loans. Some jurisdictions impose strict usury limits, limiting the nominal annual percentage rate (APR) that a lender can charge while others outlaw payday lending entirely. Due to a high APR of these loans, it’s better to apply for a regular loans or a line of credit. Even a regular credit card has a much lower interest rate. If you ‘re having financial problems and can’t pay your mortgage installment, payday loans are only temporary solutions that are going to cause more trouble in a long run.

CORPORATE MISGOVERNANCE

admin — Tue, 21 Apr 2009 14:13:49 +0000

So, if the risk-averse investor continues to park good money with bad company directors, what can be done to protect the innocent? The investor has to be both reasonable and proactive. We have seen the pitfalls from the side of the ?nancial experts who have lost investors’ money, partly from a lack of proper communication. This fault can come from both sides, either the salesperson “ramping” a ?nancial instrument that is more risky (or much valuable) than is likely within the bounds of reality, or the investor having a risk appetite that is completely unsuitable. Furthermore, there is a problem with the regulatory moves to make self-disclosure best practice for the industry when the salespeople do not want to, or cannot, reveal the true extent of risk.
Regular people, not Wall Street professionals, have lost a collective fortune by relying on the tainted advice of the biggest and most trusted names in the world of ?nance.
As one Merrill Lynch analyst wrote:
We are losing people money and I don’t like it. John and Mary Smith are losing their retirement (money) because we don’t want . . . an investment banking client – the CFO of Goto.com to be mad at us.
We have to admit that a corporate gagging order, under many slogans (“Don’t rock the boat”, “Don’t tell the customer more than you have to” etc.), is likely to continue despite all legal moves for full disclosure. Faced with this scenario, it is incumbent upon the John and Mary Smiths of this world to take on the role of investigative investor and to evaluate the extant risk and fair valuation themselves. They should forget reputation and actively ask themselves whether the business opportunity offered really merits an appropriate investment.
What is more appropriate is that investors do not pass the investment mandate so readily to the “experts”, but consider the suitability risk. The suitability risk has been de?ned as: “The risk that the institution sells the client the ‘wrong’ product, which the client later claims to be inappropriate for its needs or level of experience.
Aristotle was asked what reason was. He gave examples of what reason was, and what a reasonable man would do under certain circumstances. This question still unsettles modern legal thinking two millennia after the Greek classics. The US Supreme Court employs the “reasonable man” hypothesis, to determine what a reasonable person would do under speci?c circumstances. Degrees of reasonable risk and reasonable return still trouble us today.
Determining a reasonable risk-return performance is a more dedicated and complex task than many banks have thought, even now. One view takes this task as a combination of three horizontal processes cutting across all business lines throughout the corporation:
1. Setting up risk-return guidelines and benchmarks.
2. Risk-return decision making (“ex ante perspective”).
3. Risk-return monitoring (“ex post perspective”).
It is time for the John and Mary Smiths of the investment world to extend their snouts and sniff out the risk themselves.
What has emerged over recent months is a renewed effort to force “corporate transparency” and disclosure. There are numerous moves to improve corporate governance and we track a handful of them. Will these moves drive the thieving or incompetent directors into the open? Faced with such corporate uncertainty, we need a risk management strategy to handle the potential danger. We compare this project initiation or remit according to the best practice in RAMP (risk analysis and management of projects). RAMP offers us the risk management actions to choose:

Avoiding risk
Reducing risk
Reducing uncertainty
Transferring risk
Insuring risk
Sharing risk

Nobody loves a loser, and there are few dealing operations in banking and fund management that would wish to appear anything less than a winner.

Types of Financial Analysis, part 2

admin — Tue, 14 Apr 2009 20:59:56 +0000

Most people do not recognize that it wasn’t until the beginning of the Depression Era, the early 1930s, when the New York Stock Exchange mandated basically what we call today the matching principle: the accounting matching of revenues and expenses, as undertaken in the typical income statement, that a separate form of income determination apart from the balance sheet grew to general use. And so it was not until the Depression Era that the income statement, the matching principle, and the separate determination of net income gained ascendancy as the predominant form of financial analysis. Further, we can see why this would be the case at that time. During the Great Depression income was so scarce and hard to come by that its separate determination was called for. In the early 1930s, interest rates were extremely low, in some cases negative. Banks closed their doors in record numbers, and the power of bankers to influence the course of events was on the decline. Income analysis became more and more important, and net income analysis and the income statement predominated as a form of financial analysis. This persisted until relatively recently.

In the 1970s, with great inflation, income computations according to the traditional methods, with the use of historical costs, became a bit silly and meaningless due to the misapplication of valuation with respect to the balance sheet. The significant level of inflation made these historical costs less meaningful, and what was found on the balance sheet (basically historical cost determined assets that represented unexpired costs) went into the income statement as these costs expired. In that these costs were no longer a reflection of current valuation in a highly inflationary era, the balance sheet (which was already in considerable disrepute) went into even further decline as an analytical tool, and an understanding developed that the income statement was not very meaningful, either, without some adjustments. Accordingly, price level adjustments that had been developed for some time resurfaced as a means of enhancing the analytical use of both the balance sheet and the income statement.

Basically, the conditions of the time led to an understanding that neither the income statement nor the balance sheet was of much analytical value in dealing with the prevalent business environment. Different product costing techniques, such as LIFO, FIFO, and average, led to very different accounting results. Similarly, different depreciation techniques – straight- line, double declining balance, etc. – led to very different income statement and balance sheet results. And while new financial analytical methods were called for, it was really old techniques that were found to deal with the requirements of the times.

Cash flow analysis became more and more in vogue because of its ability to deal with the economic exigencies of the time and its lessened degree (as compared to the balance sheet and the income statement) of being subject to accounting manipulation by the preparers of financial statements in order to portray the desired results. Today, cash flow analysis truly is by far the most important kind of financial analysis, and most finance professors now deal with their students in terms of free cash flow (cash flow from continuing operations less capital expenditures and dividends) in that it leads to an enhanced ability to effectively analyze the firm, regardless of the level of inflation or the accounting techniques that are used. That is, free cash flow provides a far better handle on the solvency and productive operations of a firm than the income statement or the balance sheet. This is especially true in difficult and volatile economic times.

With the return of the ascendancy of cash flow analysis after many centuries have also come many alternative ways of understanding cash flow. Free cash flow is just one of them; there are others. It has been an interesting metamorphosis through the years. We’re back where we started at the dawn of the Industrial Revolution, with cash flow predominating as a financial analytical tool.

The high-profile bankruptcies of the 1990s and early 2000s have certainly helped bring about this change. Moreover, the financial bubble at that time, which in many ways reflects other such bubbles of other centuries, also reflects this – a need to get away from allowing businesses to tell us what they want to tell us and what they want us to believe they are worth. We have to look beyond some of the inherent misstatements in the balance sheet and the income statement and the amenability of these forms of financial analysis to manipulation by some unscrupulous financial managers who sometimes find it desirable to tell lies to cover misdeeds or poor financial performance. It is important that financial analysts employ techniques that will effectively determine the value of businesses they are studying.