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?Leonardo, a senior executive at the Las Vegas Home? Bank, either offers only? low-risk prime mortgages or a combination of prime and riskier subprime mortgages. If he provides only prime? mortgages, the? bank's profit is ?$320 million with certainty. If he sell both prime and subprime? mortgages, the bank earns ?$1 comma 600 million with a 25 ?% probability or minus ?$640 million with a 75 ?% ?probability, because subprime loans carry a high risk of default. ?Before, Leonardo received 1 ?% of the? bank's profit if it was positive and nothing? (but got to keep his? job) if it was negative. Under his new? contract, Leonardo receives a salary of ?$2.4 million a year and 0.25 ?% of the? bank's profit. If the bank suffers a? loss, Leonardo is? fired, so that he loses his salary and receives no bonus. Assume Leonardo is risk neutral. Show that? shareholders' expected earnings are higher with the new compensation scheme than with the original one. With the original compensation? scheme, shareholders' expected earnings? (the bank's profit before paying? Leonardo's salary) are ?$___________million.  ?(Enter your response as a whole number and include a minus sign if? necessary.) With the new compensation? scheme, shareholders' expected earnings? (the bank's profit before paying? Leonardo's salary) are ?$_______ million. ?(Enter your response as a whole number and include a minus sign if? necessary.)

Financial Management, Finance

  • Category:- Financial Management
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