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aston co dec2008

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › aston co dec2008

  • This topic has 0 replies, 1 voice, and was last updated 10 years ago by ASHOK.
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  • November 22, 2014 at 5:40 am #212070
    ASHOK
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    • Topics: 64
    • Replies: 103
    • ☆☆

    When the expected annual cash flow is less then standard deviation, what will happen?

    I the case of Aston as calculated by examiner says

    Given a critical cash value of zero (i.e. if the cash flow less interest falls below zero) then the expected cash difference to default including the $8,500 of cash in hand is $65,487. This figure represents 0•842 standard deviations.
    Using the standard normal tables this shows a value of 0•3 or a cumulative probability that the cash flow plus reserve will be above the default probability of 0•8. This tells us that there is a 20% chance of failure within 12 months.

    I want to know how is probability of non default is 80%? since standard deviation is above the expected annual cash flow after interest ie Annualised volatility = = 136•55% Standard deviation of annual cash flows = 136•55% × $56,987 = $77,818
    Expected annual cash flow is cash in hand plus $56,987•4.= $65487

    I only want to know that how probability of non default becomes 80% when volatility is greater than cash flow . I think default should be 80% and non default be 20%

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