The study develops a model from which an option-adjusted spread approach is utilized for pricing individual mortgage servicing contracts. The pricing model is comprised of a stochastic interest rate process, an exogenous prepayment function and an assumed servicing cost, all of which jointly determines the contract’s future net cash flows and the rate at which to discount these cash flows. Then...

By postulating a simple stochastic process for the firm’s cash flows in which the drift and the variance of the process depend on the investment policy of the firm, we develop a theoretical model, determine the optimal investment policy and, given this policy, calculate the ratio of the current value of the firm and the current cash flow which we call the “cash flow multiplier”. The main contri...

Collateralized Debt Obligations (CDOs) are sophisticated financial products that offer a range of investments, known as tranches, at varying risk levels backed by a collateral pool typically consisting of corporate debt (bonds, loans, default swaps, etc.). The analysis of the risk-return properties of CDO tranches is complicated by the highly nonlinear and time dependent relationship between th...

________________________________________________________________________ Abstract This study examines the sensitivity of equity values of oil producers to changes in the uncertainty of future oil prices. We document that this sensitivity is negatively correlated with a firm's debt ratio and its production costs. These results indicate that companies that are more likely to experience financial ...

We extend Dechow and Dichev’s [2002] model of current accruals quality (CAQ) to consider total accruals quality (TAQ). While the two measures are conceptually similar (both reflect the standard deviation of the residuals from the mapping of accruals into lead and lag cash flows), they differ in terms of the definitions of accruals and cash flows as well as the number of lead and lag cash flow t...

We consider the internal rate of return (IRR) decision rule in capital budgeting problems with fuzzy cash flows. The possibility distribution of the IRR at any r ≥ 0, is defined to be the degree of possibility that the (fuzzy) net present value of the project with discount factor r equals to zero. We show that the possibility distribution of the IRR is a highly nonlinear function of quasi-trian...

A major advance in development of project selection tools came with the application of options reasoning to R&D. The options approach to project valuation seeks to correct the deficiencies of traditional methods of valuation through the recognition that managerial flexibility can bring significant value to a project. The main concern is how to deal with non-statistical imprecision we encounter ...

We analyze the nature of financial contracting when an entrepreneur can choose the specificity of investments and financial contracts are incomplete. Investing in projectspecific assets increases productivity but decreases liquidation value. This creates a strategic incentive to specialize assets to decrease the bargaining power of the financier when debt financing is used. By contrast, equity ...

Tobin’s Q model is one of the economic models for evaluation of companies, proposed by Tobin in 1968 and represents the ratio of the market value of the companies’ shares plus the book value of its debts to the book value of its assets. It seems that one reason for the difference in abilities of the above said companies to produce cash from operating and investing activities. Therefore this res...

Stock Liquidity and Corporate Cash Holdings: Feedback and the Cash as Ammunition Hypothesis We advance the feedback/cash as ammunition hypothesis, namely that firms hold cash to address feedback from stock prices to cash flows and growth opportunities. Firms with more liquid stocks are expected to hold more cash, the opposite of the prediction from a standard information asymmetry perspective o...