### Problems with developing a numerical credit scoring system

Assignment Help Finance Basics
##### Reference no: EM1318544

1.      Name two financing options that are available to corporations. What are the benefits and disadvantages of each?

2.      Credit Scoring. Discuss the problems with developing a numerical credit scoring system for evaluating personal loans. You can only test your system using data for applicants who have in the past been granted credit. Is this a potential problem?

3.      Bond Pricing.Suppose that the J.C. Penney bond was issued at face value and that investors continue to demand a yield of 8.25%. Sketch what you think would happen to the bond price as the first interest payment date approaches and then passes. What about the price of the bond plus accrued interest?

4.      Tax and Leasing. We showed that the lease offered to Greymore Bus Lines had a positive NPV of \$820 if Greymore paid no tax and a +\$700 NPV to a lessor paying 35% tax. What is the minimum lease payment the lessor could accept under these assumptions? What is the maximum amount the Greymore could pay?

 0 1.00 2.00 3.00 4.00 5.00 6.00 7.00 cost of new bus 100 lost depreciation tax shield -7.00 -11.20 -6.74 -4.03 -4.03 -2.02 0.00 lease payment -16.9 -16.90 -16.90 -16.90 -16.90 -16.90 -16.90 -16.90 tax shield of lease payment 5.92 5.92 5.92 5.92 5.92 5.92 5.92 5.92 cash flow of lease 89.02 -17.99 -22.19 -17.71 -15.02 -15.02 -13.00 -10.99

i.            Greymore does not have to pay for the bus. This is equivalent to a cash inflow of \$100,000.

ii.            Greymore no longer owns the bus and cannot depreciate it. Therefore it gives up a valuable depreciation tax shield. We have assumed depreciation would be calculated using the five-year MACRS depreciation schedule.

iii.            Greymore must pay \$16,900 per year for eight years to the lessor. The first payment is due immediately.

iv.            However, these lease payments are fully tax-deductible. At a 35% marginal tax rate, the lease payments generate tax shields of \$5, 920 per year. You could say that the after-tax cost of the least payment is \$16, 900 - \$5, 920 = \$10, 980.

5.      Describe two types of risks that are seen in financial markets.  How can managers minimize these risks?

6.      Interest rate swaps. A year ago a bank entered into \$50 million five-year interest rate swap. It agreed to pay company each year a fixed rate of 6% and to receive in return LIBOR. When the bank entered into this swap, LIBOR was 5% but now interest rates have risen, so on a four year interest rate swap the bank could expect to pay 6.5% and receive LIBOR.

a)      Is the swap showing a profit or loss to the bank?

b)     Suppose that at this point company approaches the bank and asks to terminate the swap. Is there are four annual payments still remaining? How much should the bank charge the company to terminate?

7.      Insurance. Large businesses spend millions of dollars annually on insurance. Why? Should they insure against all risks or does insurance make more sense for some risks than others?

8.      Interest rate and exchange rates. Penny Farthing, the treasurer of International Bicycles, Inc. has noticed that the interest rate in Japan is below the rates in most other countries. She is, therefore, suggesting that the company should make an issue of Japanese yen bonds. Does this makes sense?

9.      Currency risk. In January 2012, an American investor buys 1,000 shares in a Mexican company at a price of 500 pesos each. The share does not pay any dividend.  A year later she sells the shares for 550 pesos each. The exchange rates when she buys the stock are shown in Table 27.1. Suppose the exchange rate at the time sale is 15.7 pesos = \$1.

Table 27.1 (Exchange rate)

 Abbreviation Spot Rate 1 month 3 month 1 year Mexico (Pesos) MXN 12.9495 12.9814 13.0495 13.3785

a)      How many dollars does she invest?

b)      What is her total return in pesos? In dollars?

c)      Do you think that she has made an exchange rate profit of loss? Explain.

#### Questions Cloud

 Compare and contrast outsourcing and offshoring : Compare and contrast outsourcing and offshoring.Identify two companies that outsource certain tasks. What is this reason that each of these companies outsource? Determining the missing side of triangle : Write down a program which will figure out the missing side of the right triangle utilizing the Pythagorean Theorem. Suppose that the user entries will make a triangle. Characteristics of successful entrepreneurs : Describe and explain the characteristics of successful entrepreneurs. Describe the benefits of entrepreneurial teams in a company workplace. Advantages and disadvantages of small businesses : Describe and explain the advantages and disadvantages of small businesses entering into international markets. How are small businesses important to an economy? Problems with developing a numerical credit scoring system : Name two financing options that are available to corporations. What are the benefits and disadvantages of each?  Credit Scoring . Discuss the problems with developing a numerical credit scoring system for evaluating personal loans. You can only test .. Situations the provisions of ucc : Because the UCC offers special protection to HDCs, innocent makers of notes or drawers of checks in fraudulent transactions often have no legal recourse. Determining standard deviation of percentage return : If one invested in Stock A, Determine standard deviation of percentage return? Draw a picture of a moving source : Draw a picture of a moving source and the waves surrounding it according to what you observed in this experiment. How does the spacing of the wavefronts in front of the source compare to those behind it? Designing an erd : xplain why all this normalization stuff is so significant?" he asks. "The old system worked “OK” most of time, and now you're telling me we require all these special rules. Why is this essential?" Develop the ERD in MS Visio.

### Write a Review

#### Calculation of cost of common stock shares

Calculation of cost of common stock shares and shares of common stock outstanding and it is presumed the Larsen Co

#### Computation of the current price of the bond

Computation of the current price of the bond and What is the value of the same bond if the interest is paid semi-annually

#### What effect does rising risk have on value of the asset

All else being the same, what effect does rising risk have on value of the asset. Describe in light of your findings in part a.

#### Computation of expected return of your portfolio

Computation of expected return and the volatility of your portfolio and Your plan is to borrow another \$50,000 at an interest rate of 5% per year for one year

#### Explain portfolio management

Explain Portfolio management - Forex Using the currency exposures and exchange rates given above

#### Computation of break even points

Computation of break even points - how large can his fixed operating costs be if he is to meet his profit target and what is his breakeven level of sales at the level of fixed operating costs determined.

#### Find the value of an individual bond

Calculation of issue value of bond considering time value of money - Find the value of an individual bond from this issue to an investor who purchases the Wilson bond on the date of issue (November 15, 2004) assuming they require an 8% return?

#### Computing investment to completely fund annuity in 50 years

How much would you have to invest yearly to completely fund annuity in 50 years, again suppose a 6% monthly compounding rate?

#### Computation of operating cash flows from capital project

Computation of operating cash flows from capital project and evaluating a project which will increase sales by \$50,000 and costs by \$30,000

#### Computation of compound annual dividend growth rate

Computation of compound annual dividend growth rate and current stock price and The chairman of Heller Industries told a meeting of financial analysts

#### Describe theory on discounted cash flows method

Describe theory on discounted cash flows method in Capital Budgeting but assets cannot be valued soundly if we do not have well-functioning capital markets

#### Computing the value of shareholders equity account

Compute the value of shareholders’ equity account for this firm? How much is net working capital?