KIC000063 - Assets aaJiQAI...

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(i) Applications for Actual Probabilities Banks use actual probabilities for: - Capital calculations and VaR - Calculation of expected portfolio losses - Monitoring of names in portfolio - Structured asset pricing Portfolio managers and funds use them for: - Expected portfolio losses - Assessing risk and return tradeoff - (om pareto ratings for investment decisions Fundamental Models Fundamental models should typically include - Financial Ratios - Level and growth variables - Industry factors - "Soft factors" ~~ ~\~ ... toJ:.torS - Macro factors Combining the information together requires some weighting scheme - Scorecard is an ad hoc way to weight the factors - A regression is a stattsttcauv robust way to estimate weights <15 long as the model is not mlsspecffed Financial Ratios Interest Coverage I: Cash f1ow/(lnterest Expense + Debt DueTI - EBITOA!lnterest Expense - EBITDA! LTDebt Leverage - Debt-to-Equity Ratio: Total Debt! Total Equity - Long-term Debt I Total Equity - Total Liabilities / 'rota! Assets - Total uabutttes ,' (Total Assets-Intangible
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Unformatted text preview: Assets) aaJiQAI ~ !O¥-=1n.=:L-"-------~-=-9Ut-'D'""""(v'------~:rnv.fSL 3 Financial Ratios Profitability (can replace denominator with Total Equity) Return on Assets: Net Income /Total Assets EBITOA / Total Assets-Operating Cash Flow / Total Assets Gross Margin liquidity-Cash & Marketable Securities I Current liabilities-Cash & Marketable Securities I Current Assets-Quick Ratio: (Current Assets-Jnventorvl / Current Liabilities-Current Ratio: Current Assets I Current Liabilities Other Ratios and Balance Sheet Factors Macro Factors These are the same factors for all firms, but some firms may have different sensitivity to them-Unemployment-Industrial production growth-GDPgrowth-Aggregate Default Rates-Default Yield Spread-Total bond market volume-New debt to new equity issues-Stock market returns • • • 4...
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This note was uploaded on 09/06/2011 for the course FIN 428 taught by Professor Hood during the Fall '11 term at Iowa State.

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KIC000063 - Assets aaJiQAI...

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