6.5.Felblum

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Author:
Exam9
ID:
68294
Filename:
6.5.Felblum
Updated:
2011-02-22 22:22:41
Tags:
Felblum
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Felblum
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  1. 3 issues when using rating bureau's target PM
    • Does not consider time value of money
    • Does not respond to chg in competitive mkt environment to capture current return expectations
    • Uses sales as rate base, which doesn't take into account equity provided by investors
  2. Key challenges when using IRR model
    • How much surplus must be commited up front? → use industrywide surplus level
    • When can surplus be released? → in proportion to paid losses, EP, or a combination of the 2
  3. Pitfalls in IRR Analysis
    • IRR vs NPV: not equal when constraints on total resources
    • IRR gives no sense of scale
    • Difficult to use when multiple reversals (rare)
    • Mutually exlusive contracts: can be misleading to focus on IRR
    • Presentation of results: not always clear how IRR lower than target impacts the company

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