Dear Professor,
I am not understanding this exercise well, could you help me please? Why are we multiplying in the middle scenario for 2/3 and in the best scenario for 1/3? And how did we come up with the interest rate above 300%?
Thank you!
In reply to Margarida Rei Parreira Dias
Re: 8. Limits of Debt - In class Exercise 3
by Julio Crego -
If we do not go bankrupt in the middle scenario, we pay the debt payment with 2/3 probability. If we go bankrupt in the middle but not the best, we pay the debt payment with probability 1/3
To understand whether the best scenario will be bankruptcy, we ask ourselves whether there is an amount that we can promise the bank and not go bankrupt, while the bank has a positive NPV; or, equivalently, the expected discounted cash flow received by the bank exceeds 100. Therefore, we check the highest possible debt payment that does not lead to bankruptcy in the best scenario. Since the best scenario provides 400 in cash flows, 400 is the highest debt payment that does not lead to bankruptcy. 400 debt payment in a 100 loan means interest rate is 300%
To understand whether the best scenario will be bankruptcy, we ask ourselves whether there is an amount that we can promise the bank and not go bankrupt, while the bank has a positive NPV; or, equivalently, the expected discounted cash flow received by the bank exceeds 100. Therefore, we check the highest possible debt payment that does not lead to bankruptcy in the best scenario. Since the best scenario provides 400 in cash flows, 400 is the highest debt payment that does not lead to bankruptcy. 400 debt payment in a 100 loan means interest rate is 300%
In reply to Julio Crego
Re: 8. Limits of Debt - In class Exercise 3
Dear Professor,
is the consideration of 85 (and not 105) for the debt payment in the middle scenario an assumption, as it's still a risky scenario, so we should take into account the FDC of 20?
Thank you
is the consideration of 85 (and not 105) for the debt payment in the middle scenario an assumption, as it's still a risky scenario, so we should take into account the FDC of 20?
Thank you
In reply to Maria Carlota S. A. Cardoso Amaral
Re: 8. Limits of Debt - In class Exercise 3
by Julio Crego -
Correct
Hello Julio,
I have tried to reason through the explanations given in the forum but one point that I still do not really understand is how the interest payment was computed here.
What interest rate was used to get from 66.67 to 38.33?
Best,
Eric
I have tried to reason through the explanations given in the forum but one point that I still do not really understand is how the interest payment was computed here.
What interest rate was used to get from 66.67 to 38.33?
Best,
Eric
Hello Julio,
I have tried to reason through the explanations given in the forum but one point that I still do not really understand is how the interest payment was computed here.
What interest rate was used to get from 66.67 to 38.33?
Best,
Eric
I have tried to reason through the explanations given in the forum but one point that I still do not really understand is how the interest payment was computed here.
What interest rate was used to get from 66.67 to 38.33?
Best,
Eric
Check: https://moodle.novasbe.pt/mod/forum/discuss.php?d=91952#p140465