The growth in bad-debt expense for ABC Company over the last 20 years is given ,
year growth in debt expense
1997 0.11
1998 0.09
1999 0.08
2000 0.08
2001 0.1
2002 0.11
2003 0.12
2004 0.1
2005 0.07
2006 0.09
2007 0.08
2008 0.05
2009 0.04
2010 0.08
2011 0.5
2012 0.01
2013 0.4
2014 0.03
2015 0.11
2016 0.13
a. With the help of different statistical tools discuss the financial health of the
company.
b. Assume that you are a branch manager with a leading bank and if the ABC Company’s Managing Director approaches you with a funding
request for its expansion plan, what will be your decision? Justify your
decision based on your statistical analysis
a. To discuss the financial health of the ABC Company, we can use different statistical tools such as trend analysis, mean, and standard deviation.
Trend analysis: We can analyze the trend in the growth of bad-debt expense over the last 20 years. By observing the data, we can see that there is variability in the growth rates. However, it is generally increasing from 1997 to 2011 before stabilizing in recent years. This suggests that the bad-debt expense has been growing over time, which can indicate potential financial challenges for the company.
Mean: We can calculate the mean (average) of the growth in bad-debt expense over the 20-year period. By summing up all the growth rates and dividing by the number of years (20), we can find the mean. In this case, the mean growth rate will be the overall average growth in bad-debt expense for the company over the years.
Standard deviation: We can calculate the standard deviation of the growth in bad-debt expense. This will measure the variability or dispersion in the growth rates. A higher standard deviation indicates greater variation in the growth rates, indicating more uncertainty or volatility in the bad-debt expense.
By calculating and analyzing these statistical measures, we can better assess the financial health of the company. A higher average growth rate and larger standard deviation may indicate higher financial risk and potential instability in the company's finances.
b. As a branch manager with a leading bank, the decision regarding funding ABC Company's expansion plan should be based on the statistical analysis of the company's financial health and other factors.
If the statistical analysis suggests that the company has a high average growth rate and a larger standard deviation, indicating potential financial challenges, it might be risky to provide funding for its expansion plan. However, other factors such as market conditions, industry outlook, the company's track record, and management expertise should also be considered.
If the statistical analysis indicates a stable and healthy financial condition, with a lower average growth rate and smaller standard deviation, it might be more favorable to provide funding for the expansion plan.
Ultimately, the decision should be justified by considering the overall financial health of the company, potential risks, and the bank's own risk appetite and lending policies. Consultation with other financial experts and conducting a thorough risk assessment would also be advisable before making a final decision.