Application of discriminant analysis, Finance Basics

Assignment Help:

Application of Discriminant Analysis

Application of Discriminant Analysis to the Selection of Applicants, Discriminative analysis is a statistical model such can be used to accept or refuse a prospective credit customer. The discriminate analysis is as same to regression analysis however it assumed as the observations come from two different universal sets or in credit analysis, the good and bad customers.  To demonstrate let us suppose that two factors are significant in evaluating a credit applicant the quick ratio and total worth to total assets ratio.

The discriminate function will be of the form as.

ft = a1(X1) + a2(X2)

Whereas:    X1 is quick ratio

                    X2 is the network to total assets

                    a1 and a2 are parameters

The parameters can be computed with the employ of the following equations as:

a1      =        (Szz dx - Sxzdz)/Sxx Sxx - Sxz²

a2      =        (Szz dx - Sxzdz)/Szz Sxx - Sxz²

Whereas:    Sxx represents the variances of X1

Szz represents the variances of X2

Sxz is the covariance of variables of X1 and X2

dx is the difference between the average of X1's bad accounts and X2's good accounts

dz represents the difference between the average of X's bad accounts and X's good accounts.

The next step is to determine the minimum cut-off value of the function below at which credit will not be given.  This value is referred to as the discriminate value and is denoted by f*.

Once the discriminate function has been developed it can then be used to analyze credit applicants.  The important assumption here is that new credit applicants will have the same characteristics as the ones used to develop the mode.

More than two variables can be utilized to determine the discriminate function.  In that a case the discriminate function will be of the form of.

ft  =  a1x1 + a2x2 + ... + anxn


Related Discussions:- Application of discriminant analysis

Calculate the net present values and irr, Task 1 (I) A plc is an investme...

Task 1 (I) A plc is an investment organisation which is considering 2 potential new investments. These are mutually exclusive options in that the acceptance of any one investment

Disadvantages of floatation of new shares, Disadvantages of Floatation of N...

Disadvantages of Floatation of New Shares 1. The cost of getting a quotation is high, mainly when a new issue of shares is completed and the company is small. It means that su

Journal entries, Sam start business with his savings $20000, a gift from hi...

Sam start business with his savings $20000, a gift from his parents $10000 and a personal loan from his friends of $5000. All money is deposited in a bank account.

Determine the component of return, Determine the Component of Return ...

Determine the Component of Return Rate of return from an investment consists of the two: (i) Yield: Interest or dividend received is called yield. (ii) Capital Appreci

Example of dividend basis valuation, Example of Dividend Basis Valuatio...

Example of Dividend Basis Valuation Company Laxmi Synthetics pays a dividend of 10% on its Sh.60 par value ordinary shares.  This company uses a discount rate of 15%.  A

Inventory turnover, Ask question #MinimQuestion You are the financial acc...

Ask question #MinimQuestion You are the financial accountant of Donald Bhd, a manufacturer and wholesaler of soft drinks. Donald Bhd is in direct competition with Fizz Bhd and Po

Money or discount markets - financial markets, Money or Discount Markets - ...

Money or Discount Markets - Financial Markets 1. Are discount and acceptance financial institutions 2. This is a market for S.T funds growing up in one year. Money market w

Calculate the current stock price, The Bim-Bom Company is expected to pay a...

The Bim-Bom Company is expected to pay a dividend of $3.10 per share at the end of the year, and that dividend is expected to grow at a constant rate of 4.00% per annum.  The compa

Financial cycle, what is the applicability of a financial cycle to poultry...

what is the applicability of a financial cycle to poultry?

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd