Share
Explore BrainMass

deferred acquisition costs, high debt ratios, credit risk

Answer the attached questions with at least five sentences each.

? What are deferred acquisition costs? How are deferred acquisition costs computed? Should deferred acquisition costs be treated the same way that amortization are treated in the firm's accounting statements? Should deferred acquisition costs be treated the same way as amortization costs in the computation of enterprise value?
? Why do banks (depositories) have such high ratios of debt to assets (heavy use of financial or debt leverage)?
? Given the capital structure of a bank, why must it keep a low degree of credit risk exposure?
? How are the liabilities of banks related to monetary aggregates, that is, different measures of money?
? Explain why banks are better off when interest rates are falling than when interest rates are on the rise.
? What is meant by the following statement: When banks create credit, they can do so by creating money (monetary liabilities) and lending it out.
? In the context of claims transformation, explain why there is an inevitable mismatch between the bank's portfolio of assets and its portfolio of liabilities.

Solution Preview

? What are deferred acquisition costs? How are deferred acquisition costs computed? Should deferred acquisition costs be treated the same way that amortization are treated in the firm's accounting statements? Should deferred acquisition costs be treated the same way as amortization costs in the computation of enterprise value?
Deferred acquisition costs are used in insurance when the cost of acquiring a new customer is spread over the period of insurance contract. Deferred acquisition costs are computed by adding the commissions paid to the brokers, underwriting costs or commissions paid to outside agents for acquiring the customers. The reason Deferred acquisition costs are capitalized is to spread the expenses and match the cost with revenues. When deferred acquisition costs are recognized in the income statement the process is very similar to that as amortization. In the firm's accounting statements, the deferred acquisition costs appear as an intangible asset. The Deferred acquisition costs represent the unwritten expense being written off; similarly amortization also is the process of writing off intangible assets. While valuing enterprises, deferred acquisition costs should be treated in the same way as amortization.

? Why do banks (depositories) have such high ratios of debt to assets (heavy use of financial or debt leverage)?
The banks have high ratios of debt to assets because they can borrow at a relatively lower rate and extend loans (develop lucrative assets) with relatively low risks. The difference between the borrowing rate and the lending rate represents the profit. In Europe most banks report a leverage ratio of close ...

Solution Summary

This answer provides you an excellent discussion on deferred acquisition costs, high debt ratios, credit risk, claims transformation

$2.19