Category: Accounting

accounting information system
1. Prepare a blief statment that you may use in your resume to describe practical skills learning in accounting information system

2. Prepare a statment about how the materials and practices learning in accounting information system may be translated into bissiness careers. To complete this conduct a small piece of reserch into what type of knowledge and skills are required in the accounting professional and map these to the concepts,tools and methodology learning in this unit of study
3. Prepare a blief role-playing type scenario statement that concisely describe what you have learned in accounting information systems to a fictious senior manager of a public or public or private sectors organisation. Choose the type of organisation and design your statement to fit the concept accordingly.

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Finance Principle
Q1. Time Value of Money (Ch 4) & Interest Rates (Ch 5)
Bank Investment Scenarios
David plans to invest $10,000 in a 6-month term deposit with National Australia Bank (NAB). (For this question please refer to the ‘NAB Indicator rates –selected term deposit products’ schedule attached to this assignment).
a) What will David’s investment be worth when the above term deposit matures? (4 MARKS)
b) Sofia decides to employ a different investment strategy. She invests $10,000 in a 90-day term deposit and upon maturity she:
• consumes the interest by enjoying an evening at her favorite restaurant AND
• She then re-invests the principal ($10,000) in another 90-day term deposit (assume term deposit rates do not change over time). How does the return on her investment strategy (i.e. interest earned) compare with David’s strategy? (6 MARKS)
c) Jack invested $10,000 in a 9-month term deposit and his friend Sandra deposited $10,000 in a 12-month term deposit.
Jack wishes to have the exact same amount of monies available at the end of the 12 months as his friend Sandra. Thus Jack is aware he must re-invest the principal and any interest earned at the expiry of the 9-month term deposit.
2
What rate of interest on a 3-month investment must Jack earn on the monies at his disposal at the end of 9 months in order to ensure his and Sandra’s wealth is identical at end of month 12? (10 MARKS)
HINT (The correct answer must be given at the nominal interest rate (APR).
3
Q2. Interest Rates (Ch 5)
Lending Scenarios
Part I
You plan to borrow $380,000 from ANZ Bank to fund an investment opportunity. The Bank offers you a reduction in principal loan (in this type of loan repayments comprise principal plus interest) with a nominal interest rate (APR) of 6.8% compounded monthly over a 12-year period.
a) Calculate your monthly repayments to the Bank on the negotiated loan contract. (4 MARKS)
b) What will your outstanding dollar liability be to the Bank at the end of 6 years – assuming you choose not to negotiate a new loan facility with the Bank? (10 MARKS)
Part II
You have $100,000 at your disposal today. You wish to endow a college scholarship. You structure the scholarship so that, beginning today, it will pay out the same amount of money per year forever. The endowment discount rate is 7%.
c) Calculate the amount of money your donation will provide each year in perpetuity. (Note: The first payment to the scholarship does NOT begin next year but DOES begins today) (6 MARKS)
4
Q3. Net Present Value & Internal Rate of Return (Ch 8)
Capital Investment Scenarios
Dreamliner Airline is considering investing in several new aircraft. The initial investment will cost them $675 million. The investment is expected to produce revenue of $118 million per year over the next 25 years. The cost of running the new planes is $23 million per annum over the 25-year period.
a) Provide a graph showing the NPV (y-axis) over a range of the cost of capital (x-axis) from 0% to 20%. (Hint: Use of an excel spreadsheet is recommended. Please show workings) (10 MARKS)
b) Provide the IRR point to 2 decimal places. (4 MARKS)
c) Using the WACC you calculated in Q5 (you will not be able to answer this question until you complete Q5!) and following the IRR investment rule, should Dreamliner Airline take on the investment opportunity to buy the new planes? Explain why or why not? (4 MARKS)
d) Theory suggests the WACC calculation is simply an estimated figure for the cost of capital. Thus by how much could the company WACC deviate before Dreamliner Airline company managers would consider changing their investment decision? (2 MARKS)
5
Q4. Return and Risk (Ch 12)
Market Investment Scenarios
The following table shows monthly closing prices in dollars for four of Australia’s major stocks for given periods. These stocks are BHP Billiton (BHP), QBE Insurance (QBE), Wesfarmers (WES) and Woolworths (WOW). No dividends were paid by any of these companies during these periods.
Date
BHP
QBE
WES
WOW
3-Sep-12
$31.34
$12.37
$35.42
$30.56
1-Aug-12
$31.79
$13.03
$34.52
$29.62
2-Jul-12
$31.93
$14.04
$32.59
$28.57
1-Jun-12
$31.45
$13.38
$29.90
$26.80
1-May-12
$31.97
$12.38
$29.20
$26.44
2-Apr-12
$35.55
$13.84
$30.28
$25.94
You may answer this question using an EXCEL spreadsheet OR you may answer the question using CALCULATION or you may answer the question using both EXCEL and CALCULATION methods.
a) Determine the actual monthly historical returns for each of these stocks. (4 MARKS)
b) Determine the overall expected return for each stock given their historical returns for the complete period given. (4 MARKS)
c) Determine the overall volatility of each stock for the complete given period. (4 MARKS)
d) Plot the four stocks on a risk-return diagram. Label each stock with stock code. (4 MARKS)
e) Which stock appears the best investment on past performance, and why? (4 MARKS)
6
Q5. Cost of Capital (Ch 13)
Cost of funds Scenarios
Dreamliner Airline has 100,000 outstanding shares and is currently trading at $26 per share. The company expects the company dividend to be $2 per share next year. Thereafter the dividend will grow by 2 percent every year.
a) Calculate the cost of equity for this Company (Round the value to 4 decimal places). (4 MARKS)
This company’s only source of debt funding is by use of a perpetual note. This note is currently priced at $55. The note pays quarterly interest on a $100 face value. Assume a constant nominal rate of 4% (in practice the rate changes over time). The total number of notes on issue equal 50,000.
b) Calculate the cost of debt for this Company (Round the value to 4 decimal places). (8 MARKS)
c) Calculate the WACC for this Company (Note the tax rate is 30%). (Round the value to 4 decimal places).

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Business Plan for the first year of your own IT consultancy practice

 

Read the additional documents carefully, my first assignment was a failure, as we don’t have final exam for this course, this will be my last chance to past this course, otherwise I will not be able to graduate within this year, sorry for hard question.

You are required to prepare a customised, personalised Business Plan for the first year of your own IT consultancy practice based on your readings and research combined with your own experience, judgment, and preferences.

Assignment question/topic
The dual purposes of this assignment are to: (1) give students experience in formulating a feasible business plan for a consultancy practice; and (2) give the lecturer evidence of the student’s grasp of the course material.
The major issues to be considered by a consultant starting up a new practice are in large part the same as those of a client in need of a review and evaluation of business practices. Secondly, the Business Plan format and requirements are designed to reflect course topics, reading materials, guest lectures, and independent research.
A business plan (BP) is a generic term for a formal document that spells out an intended course of action and the reasoning behind it. The aim of this business plan is to document your strategic thinking about the business opportunity and the operational aspects of how it will work. Generation of a business plan as the major assessment is designed for you to synthesise your thinking and research about each aspect of a consultancy practice that is covered in this course. Consequently, the BP that you will submit will not match any format that you are likely to find in reference books on how to write business plans.
Books and articles may help you to understand the purpose of sections of the BP, such as knowing what business you are in, or assessing the competition, or determining a marketing strategy; but the format that you follow for the purposes of this assessment is the one designed for this course.
Each section of the BP is based on one of the topics in the course. You are responsible for covering all sections. To achieve a passing grade you must adequately discuss each of the required sections, and include a reasonable number of references to show that you have done research on your own, as well as having read the assigned readings.
On the following page is a section-by-section guide to writing the assignment. The first criterion in marking the assessment is that you have included all of the required sections. This checklist will be used by the markers. You should also use it when preparing your plan.

Questions to Ask Yourself to Help You Construct Your Business Plan
The following list of questions will help you to understand the purpose of each section in the Business Plan. These questions are not to be copied into your business plan.
• Purpose of my business (what am I setting out to do?)
• Type of business (what kind of services will I offer?)
• What is it that I know and can do that some people and businesses are willing to pay for?
• SWOT analysis
• What strengths do I have that will help my business be successful?
• What weaknesses do I have that I either needs to improve upon, or to have a strategy for that will counterbalance what I’m not good at?
• What’s happening in the world (opportunities) that will make my business even more attractive to people?
• What’s happening in the world (threats) that can adversely affect my business?
Target market
• Who needs what I have to offer?
• Who would be willing, and can afford to pay for it?
• Where are they located?
Financial Plan
• How much should I charge?
• What will it cost me to run my business?
• How much will I make (i.e., estimated revenue, fixed costs, direct costs, net profit)?
Getting business
• How will I let people know what I have to offer?
• How can I get to meet people who may be potential clients?
• What should I do if I am asked to do work that is beyond my capability?
• Who are my competitors?
• Who already does what I do?
• What are their strengths and weaknesses?
• What else could people do as an alternative to spending time and money to get advice from me?
What aspects of the management principles will I use in my business?
• Project management (Do I know enough about how to set-up and manage each client, and my business, on a ‘project’ basis?)
• Change management (Do I understand the deeply rooted behavioural responses of people to change in their lives and at work? Do I have sound strategies to help them cope, and to enable a solution to be implemented?)
• Quality management (Do I have a clear view of what service quality in consulting means, and the level that is appropriate for me to provide? Do I understand that there is both a cost for providing a quality service, and a cost for not providing it?)
• Benefits management (Am I really committed to ensuring that my clients both identify and realise the benefits of the planned change resulting from implementing the proposed solution?)
• Legal issues (Do I know where the dangers are in giving advice and in contractual arrangements as a consultant? How will I avoid the potential losses that can occur through ignorance and poor management?)
Growth Plan (assuming all goes well, wheredoI go from here?)
• What new business will I go after?
• Is it time to respond to tenders?
• Should I add new services, staff, and offices?
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Accounting and Decision Making

Summative Assignment
CASE STUDY INFORMATION

Dyed in the Wool Limited

Dyed in the Wool Limited (“DITW”) is a long established UK company making specialist fire retardant and waterproof textiles for industrial, defence and commercial markets.
The CEO is Jim Riley, who took over from his father when he retired 30 years ago. Jim and his family own all the shares in DITW.

In recent years Jim has been worried about DITW’s core market. Defence sales are declining due to cutbacks in the armed forces, and new entrants to the market are offering stronger technological solutions for proofing fabrics. To counter the effect of this decline, two years ago Jim decided to diversify DITW’s activities, investing in a new subsidiary company, HomeSpun Limited. HomeSpun is run by Mr Riley’s nephew, and sells furniture and home textiles to retail customers from three stores in the local area.

Jim’s background is in industrial manufacturing, and whilst he has no formal retail or accounting training, he is astute when it comes to gross margins, selling prices and manufacturing costs. DITW has a history of profitability over the years and pays out substantial annual dividends to the family shareholders, but until recently cash was also retained in the company for reinvestment in equipment and production facilities. The main manufacturing site, which was acquired by Mr Riley’s father over 50 years ago, is a former WWII munitions factory with 5 acres of land and buildings with plenty of space for expansion.

However, starting up the new retail subsidiary has seen cash flow out of DITW to fund start-up losses on lease costs, staffing, advertising and buying stock for the shops. Traditionally DITW was not the best at chasing its receivables and now with the additional pressure of HomeSpun’s cash requirements, DITW has been forced to use an overdraft for the first time. In fact, the company recently asked its bank for a third increase to the overdraft limit at £900,000, trebling the original request for facilities. The bank has notified DITW that it will not approve any further amounts beyond this latest agreement and has asked for copies of DITW’s financial statements for the year ending 31 December 2012 as soon as possible.

An interim accountant was recruited 6 weeks ago at the request of the company’s bankers. The new accountant has started to analyse HomeSpun’s management accounts. He is concerned about the lack of cash compared to the profits being reported. He wants to run some stock takes in the stores against the cost of stock reported in the management accounts as well as review the “buy now pay later” policies being offered to customers on large items in the shops.

In spite of the cash difficulties, Mr Riley is pleased with DITW’s investment in the new retail venture and is determined to continue expanding. HomeSpun has a very visible local presence, and local government and press have given it significant positive coverage about job creation and local enterprise development. He wants to continue with the roll-out of new store openings and is considering investing £1m in a joint venture (“JV”) manufacturing opportunity with Pratash Furniture & Textiles in Mumbai. This JV would manufacture a range of products already sold in HomeSpun’s shops, and supply directly to HomeSpun at a lower cost than buying from existing third party suppliers – Jim Riley says it will “cut out the middleman” and improve gross profit margins.

Approximately 30% of HomeSpun’s annual sales could be supplied from the JV entity.
DITW’s Board, led by Jim Riley, has some decisions to make. The company cannot secure further overdraft funding from the bank, yet HomeSpun continues to be cash consumptive and tax and dividends in DITW are due for payment in the next three months. In addition, DITW will need to raise further funding if the expansion plans (new stores and JV opportunity) take place. Financing options under discussion include:

• OPTION 1. Seek third party investor or venture capitalist to provide £1.5m new share capital to fund the £1m investment into the JV, payment of the 2012 dividend and any immediate cash requirements in HomeSpun (forecast at £54k cash outflow for Year 3). The overdraft would continue in place under this scenario.

• OPTION 2. Approach the bank to convert the £910k overdraft into a £2m long term loan at 8% annual interest, secured on land and buildings. This would pay for the £1m investment into the JV with a small amount of surplus to fund the forecast cash outflows for HomeSpun in Year 3 at £54k.

• OPTION 3. Walk away from the JV and slowly repay the overdraft by improving working capital management and withdrawing dividend payments for the next few years (Jim Riley has already flagged up that his family shareholders will not countenance this option willingly).

The accountant has distributed an email ahead of a Board meeting as follows:

Agenda for Board meeting

1. Completion and presentation of DITW’s year end financial statements.

2. Analysis of HomeSpun’s performance against budget since launch.

3. Review of operating cash cycle and cash outflows in DITW and HomeSpun.

4. Evaluation of trading and investment implications of the JV opportunity.

5. Options for raising further funds for the business.

Relevant financial information (see Appendices 1-5) has been prepared ahead of the Board meeting and distributed to all Board members.

Appendix 1
DITW draft Financial Statements
The draft Income Statement and Statement of Financial Position for DITW for the years ending 31 December 2012 and 2011 are reproduced below. These are in draft format pending the outcome of discussions at the Board meeting.
Income Statement for the year ended 31 December 2012:

2012 2011
£000 £000

Revenue
26,387
28,853
Cost of goods sold – labour
Cost of goods sold – material purchases (13,942)
(8,542) (14,052)
(10,387)
Gross profit 3,903 4,414

Factory overheads
(1,631)
(1,570)
Distribution costs (354) (398)
Sales and marketing costs (517) (495)
Administrative costs (623) (596)

Profit before interest and taxation
778
1,355

Interest charges
(51)
(22)
Profit before taxation 727 1,333

Taxation
(222)
(407)
Profit / (Loss) after taxation 505 926

Dividends declared
(425)
(750)
Retained profit 80 176

Statement of Financial Position as at 31 December 2012:

2012 2011
£000 £000
Non-current assets
Land and buildings 3,000 800
Plant and Equipment 1,953 2,358
4,953 3,158
Current Assets
Inventory 2,709 2,654
Trade receivables 2,056 1,909
Investment in HomeSpun Limited 1,451 651
Cash 9 278
6,225 5,492

Current Liabilities
Trade payables (2,699) (2,851)
Taxation payable (222) (407)
Bank overdraft (910) 0
Dividends payable (425) (750)
4,256 4,008

Net assets 6,922 4,642

Equity
Called up ordinary share capital 300 300
Revaluation reserve 2,200 0
Retained earnings 4,422 4,342
6,922 4,642
Additional notes:

• The carrying value of land and buildings has been increased to £3 million at 31 December 2012. This figure is based on an offer of £2.5million from a property developer (which Jim felt substantially undervalued the premises) earlier in the year. Since then the property market has slowed down a little but it was suggested that the balance sheet would look stronger by increasing the valuation attaching to the land and buildings, in the context of potentially raising money for the business.

• The depreciation charge in 2012 was £317,000. A piece of equipment which was carried in the books at a cost of £520,000 less accumulated depreciation of £388,000 was sold during the year at £100,000, resulting in a loss on sale. Both depreciation charges and any loss on sale are included in “factory overheads”. The new accountant has noticed that DITW often seems to sell equipment at a loss, although Jim Riley feels the company’s depreciation policies are adequate.

• DITW owns 100% of the shares in HomeSpun Limited. DITW contributed a lump sum to start the business, and has since been topping this up with further sums as required. There is no formal loan in place, so the investment has been shown in current assets.

• One of DITW’s customers has been disputing invoices raised on a long-term contract to supply materials. As at 31 December 2012 the total outstanding balance to this customer shown in receivables was £219,750. Jim Riley is confident that this sum will be recovered in full, but £137,000 relates to amounts due over 90 days and there are rumours in the industry that the customer may have financial difficulties. No provision has been made in the accounts against any part of this receivable. Inventory includes approximately £105,000 of materials specific to this customer, which are not sold to any other customer.

• There is also some confusion over a particular batch of pre-invoiced sales. DITW raised invoices for £52,000 on 30 December 2012 for goods which were still in stock at 31 December and would only be sent to the customer in early January 2013. The invoices were shown within revenue for 2012, and an additional £52,000 shown in receivables, plus a reduction in stock value of £44,200 which matches the entry in cost of sales. The accountant wants to reverse this transaction because the stock had not been physically delivered to the customer by 31 December 2012. However, he is meeting resistance from Mr Riley, who says the only reason the stock had not been sent was due to the Christmas holiday period and that in the light of the potential fund raising, the company should be putting “its best foot forward”.

• Interest is paid as soon as charged. Both tax and dividends due are normally paid within 3 months of year end to clear the full amount outstanding.

• Regarding presentation of the financial statements, the new accountant has explained that DITW is no longer exempt from preparing consolidated accounts and that the financial statements will need to be prepared on a consolidated basis prior to external publication.

• Finally, DITW launched a successful patent protection case against a competitor during 2011. The legal outcome concluded in favour of DITW and the competitor was required to pay damages of £30,000 which have been netted off administration costs (i.e. reducing the administration costs shown) for 2012. DITW’s legal costs on the case were £27,000, which were shown within administration costs in 2011.

Appendix 2
HomeSpun: Original budget and latest forecasts

A business plan was produced by HomeSpun’s management to support the original request for finance from DITW. The launch date for the business was 1 January 2011. The original profit and cash budgets from the business plan are shown below:

 

HomeSpun started trading on 1 January 2011. The sales, costs, profit, working capital balances and cash flows for the first two years of trading are shown below. All cash deficits to date – £651,000 in 2011 and £800,000 in 2012 – have been subsidised using further investment from DITW. HomeSpun’s management has used the actual results for 2011 and 2012 to develop a revised set of forecasts for the business for 2013 – 2015 as follows:

 

Appendix 3
Analysis of product costings for joint venture deal

Pratash Furniture & Textiles has identified three products, A, B and C, which are believed to represent an average cross-section of the overall range that the JV entity could produce for HomeSpun. Pratash has produced cost estimates for each of A, B and C which are shown below. Ex-factory (India) costs are shown in UK £ at current exchange rates, and the possibility of exchange rate movements impacting the financial data has not yet been taken into account.
Product A B C

Direct material cost 1.30 2.05 0.67
Direct labour cost 0.80 1.20 1.12
Variable overhead per unit 0.30 0.88 0.75
Fixed overhead per unit 2.05 3.56 2.98
Total cost ex-factory (India) 4.45 7.69 5.52

Estimated transport & duty to UK
1.56
2.69
1.93
Estimated cost landed in UK 6.01 10.38 7.45

The accountant at DITW has produced the following comparison table showing the potential uplift in gross margin from sourcing the products via the JV compared to the current situation is shown as follows:

Product A B C

Current
Selling price 19.99 24.99 22.99
Purchase price landed in UK from present distributor 9.86 13.55 12.25
Gross profit per unit 10.13 11.44 10.74

Potential
Selling price 19.99 24.99 22.99
Landed cost from JV entity 6.01 10.38 7.45
Gross profit per unit 13.98 14.61 15.54

Accountant note:

Taking the average product cost on the sample of three JV-sourced products and comparing this with the average cost on those same products as currently purchased indicates a significant potential uplift in gross margins might be available under the JV scenario.

If the JV went ahead on 1 January 2013, these new product costs could improve gross margins on 30% of HomeSpun’s revenue for Years 3 to 5 of the forecasts.

Appendix 4

Basic financial ratios

Revenue growth (%) = Revenue (yr 1) – Revenue (yr0)x 100
Revenue (yr 0)

Return on capital employed (%) = Profit before interest and taxationx 100
Equity plus Liabilities

Return on investment Profit before interest and taxation x 100
Investment cost

Gross profit margin (%) = Gross profit x 100
Revenue

Net profit margin (%) = Profit before interest and taxation x 100
Revenue

Inventory days = Inventory (year end) x 365
Cost of goods sold

Receivables days = Trade receivables x 365
Revenue

Payables days = Trade payables x 365
Purchases (Cost of goods sold)

Current ratio = Current assets
Current liabilities

Acid test or Quick ratio = Current assets less inventory
Current liabilities

Debt/equity ratio (%) = Total debtx 100
Total equity

Capital gearing ratio (%) = Total debt x 100
Total equity + Total debt

Interest cover (times) = Profit before interest and taxation
Interest charges

Dividend per share (pence) = Total dividends approved x 100
Number of ordinary shares
Appendix 5 – Present value table
Required:

As part of a business report which communicates the financial information, issues and potential solutions available to DITW ahead of the difficult decisions it must make, you are required to discuss and critically evaluate the following questions. You should use appropriate accounting and financial techniques to support your conclusions and recommendations.
1. Identify and critically discuss at least FOUR areas of subjective judgement in DITW’s financial statements for 2012. As part of your discussion, you should highlight any changes that you would recommend to ensure that the final statements are in accordance with the IASB’s Conceptual Framework and present a “true and fair” view as required by the Companies Act 2006 and GAAP.

2. Prepare the Statement of Cash Flows for DITW for 2012. Use only the financial statements and related accounting information provided by DITW in the original case study.

3. Critically evaluate HomeSpun’s performance against its original budget to date, highlighting possible reasons for the variances between budgeted and actual results. You should focus on HomeSpun’s sales, costs, profit and return on investment in your answer, and may use relevant financial ratios and variance analysis techniques to support your evaluation.

4. Calculate the operating cash cycles for each of DITW and HomeSpun in 2012. Using this information as well as the Statement of Cash Flows that you prepared in Q2, explain why DITW and Homespun are facing cash flow problems and recommend solutions for the Board which might improvecash generation in both arms of the business.

5. Differentiate between (i) absorption costing and (ii) marginal costing, discussing the reasons why DITW and Pratash Furniture & Textiles might have chosen absorption costing for the cost estimates shown in Appendix 3.
6. Critically evaluate the JV opportunity with Pratash Furniture & Textiles using an appropriate investment appraisal technique. You may assume that the JV starts on 1 January 2013 and runs until 31 December 2015, and that DITW’s cost of capital is 10%. Ignore the impact of tax. Your answer should recommend whether the proposed investment should proceed, supported by discussion of at leastTHREE other factors that the Board should take into account in their final appraisal of the investment opportunity.

7. Critically discuss the three options available to DITW for raising further funds for the business. Your analysis should highlight the effect on DITW’s liquidity, capital structure and financial risk from Options 1 (raising equity) and 2 (raising debt). You may base your calculations on the financial statements for DITW given in Appendix 1, making relevant adjustments as appropriate to each scenario.
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School Finance Budget Reduction Plan and Justification Essay

This assignment is twofold. You will first make a Budget Reduction Plan for a public high school and then write a justification essay.

1) Budget Reduction Plan
a) You are a principal who has been told by the superintendent to cut the school budget. Use the information sheet, “Budget Cuts” (I will upload this with some other resources) to view content, context, and tools for completing this assignment, including details about your role as the principal and the school budget breakdown.

b) Use the School Budget Breakdown table as presented in the aforementioned resource (“Budget Cuts”) to fully develop a budget reduction plan that addresses the budget cuts required by the superintendent. Identify and describe the primary sources of revenue available to your school, including:
i) Maintenance and operations budget allocations
ii) Capital budget
iii) Soft capital budget allocations
iv) Bonds
v) Federal grants
vi) State grants
vii) Title money
viii) Overrides
ix) Extracurricular fees
x) Tax credits
xi) Other

c) Identify the primary items paid for with each of the aforementioned sources of revenue.

d) Identify the source of each revenue stream (e.g., the maintenance and operations budget is funded by the state on a per-student basis from primary property tax; bonds are levies voted on by the community and paid for through a secondary property tax).

e) Identify the primary use of each source of revenue (e.g., the maintenance and operations budget is used to pay salaries or purchase consumable instructional supplies).

f) Identify what, if any, limitations are placed on each source of revenue (e.g., soft capital dollars cannot be used for salaries or stipends).

g) Identify which of the budget items above could be cut to meet the district requirements and from which revenue streams. Place your suggested cuts in the three areas below: Priority 1 will be cut first and Priority 3 will be cut last. Identify those cuts that afford the least impact to student learning.
i) Priority 1 areas
ii) Priority 2 areas
iii) Priority 3 areas

h) Identify those in a school who might be included in and excluded from the budgetary decision-making process. These persons would comprise a stakeholder team. Provide a rationale as to why you included/excluded each.

i) APA format is not required, but solid writing skill in APA style is expected.

2) Justification Essay
a) Write an essay (1,000-1,250 words) that discusses your justification for the items you chose to remove from the school budget and how you will meet the district requirements as you implement your plan of action. Consider the following:

i) How will your plan ensure that the appropriate stakeholders were involved in the process?
ii) How will your plan be implemented?
iii) How will you identify the programs to be preserved?
iv) How does your plan ensure the continued educability of all in spite of the budget reductions?
v) How does your plan continue to embrace the district’s vision of high standards of learning?
vi) How will your plan be communicated effectively to staff, parents, students, and community members?
vii) How will your plan determine the effectiveness of the cuts over time?
viii) How does your plan identify alternative sources of funding to replace the funding lost?

b) Prepare this assignment according to the APA guidelines.

 

Rubric

School Finance Budget Reduction Plan and Justification Essay
Points Possible 30

Criteria Achievement Level
Unsatisfactory Less Than Satisfactory Satisfactory Good Excellent
Budget Reduction Plan: Budget Proposal 0 points
Fails to address criteria of the assignment. 7.8 points
Some assignment criteria are present, but they are limited in detail and scope. 9 points
All assignment criteria are clearly discernable within the budget proposal. Strategies, curriculum, and instructional programs are individualized to stakeholders and measurable in outcomes. School profile is fully integrated into the plan. School’s role within the community is defined. 10.2 points
Criteria are detailed, comprehensive, and creatively presented. 12 points
Strategies and descriptions are at a high level of specificity as to the roles and responsibilities of individual stakeholders.
Justification Essay Criteria 0 points
Fails to address criteria of the assignment. 4.88 points
Some assignment criteria are present, but they are limited in detail and scope. 5.63 points
All assignment criteria are clearly discernable within the body of the essay; justification for specific cuts is presented. 6.38 points
Criteria are detailed and comprehensive; justification is reasonable and credible. 7.5 points
Indicates a high degree of understanding of the effect of the cuts on the major stakeholders within a school community.
Critical Thinking 0 points
Plan demonstrates little original thought and is unclear or simplistic. 1.95 points
Plan presents guidance for informed decision making for continuous school improvement, though inconsistently and with some gaps. 2.25 points
Plan demonstrates original thought regarding its composition and ability to inform decision making. 2.55 points
Identifies and assesses conclusions, implications, and consequences of the plan. 3 points
Demonstrates ownership for constructing knowledge and framing an original plan.
Essay Structure, Paragraph Development, and Transitions 0 points
Paragraphs and transitions consistently lack unity and coherence. No apparent connections between paragraphs. Transitions are inappropriate to purpose and scope. Organization is disjointed. 0.98 points
Some paragraphs and transitions may lack logical progression of ideas, unity, coherence, and/or cohesiveness. Some degree of organization is evident. 1.13 points
Paragraphs are generally competent, but ideas may show some inconsistency in organization and/or in their relationship to each other. 1.28 points
A logical progression of ideas between paragraphs is apparent. Paragraphs exhibit a unity, coherence, and cohesiveness. Topic sentences and concluding remarks are used as appropriate to purpose, discipline, and scope. 1.5 points
There is a sophisticated construction of the essay. Ideas collectively progress and relate to each other. The writer has been careful to use paragraph and transition construction to guide the reader.
Paper Format
(Use of appropriate style for the major and assignment) 0 points
Template is not used appropriately, or documentation format is rarely followed correctly. 0.98 points
Appropriate template is used, but some elements are missing or mistaken. A lack of control with formatting is apparent. 1.13 points
Appropriate template is used. Formatting is correct, although some minor errors may be present. 1.28 points
Appropriate template is fully used. There are virtually no errors in formatting style. 1.5 points
All format elements are correct.
Research Citations
(In-text citations for paraphrasing and direct quotes, and reference page listing and formatting, as appropriate to assignment and style) 0 points
No reference page is included. No citations are used. 0.98 points
Reference page is present. Citations are inconsistently used. 1.13 points
Reference page is included and lists sources used in the paper. Sources are appropriately documented, although some errors may be present 1.28 points
Reference page is present and fully inclusive of all cited sources. Documentation is appropriate and citation style is usually correct. 1.5 points
In-text citations and a reference page are complete and correct. The documentation of cited sources is free of error.
Language Use and Audience Awareness (includes sentence construction, word choice, etc.) 0 points

Inappropriate word choice and/or sentence construction, lack of variety in language use. Writer appears to be unaware of audience. 0.98 points

Inconsistencies in language choice sentence structure, and/or word choice are present. The writer exhibits some lack of control in using figures of speech appropriately. 1.13 points

Sentence structure is correct and occasionally varies. Language is appropriate to the targeted audience for the most part. 1.28 points

The writer is clearly aware of the audience; uses a variety of sentence structures and appropriate vocabulary for the target audience; uses figures of speech to communicate clearly. 1.5 points

The writer uses a variety of sentence constructions, figures of speech, and word choice in unique and creative ways that are appropriate to purpose, discipline, and scope.
Mechanics of Writing
(includes spelling, punctuation, grammar, and language use) 0 points
Surface errors are pervasive enough that they impede communication of meaning. Inappropriate word choice and/or sentence construction are employed. 0.98 points
Frequent and repetitive mechanical errors distract the reader. Inconsistencies in language choice (register) and/or word choice are present. 1.13 points
Some mechanical errors or typos are present, but are not overly distracting to the reader. Audience-appropriate language is employed. 1.28 points
Prose is largely free of mechanical errors, although a few may be present. The writer uses a variety of sentence structures and effective figures of speech. 1.5 points
The writer is clearly in command of standard, written academic English.
The Reality of School Finance

Some of the following reading for the course. May some will help. The pdfs will be uploaded to this assignment.
• Read “8th Annual Salary Survey” by Dessoff, from District Administration (2008).
• Read “Environmentally Friendly Schools Payoff” by LaFee, from Education Digest (2008).
• Read “The Dutch Experience With Weighted Student Funding” by Fiske and Ladd, from Phi Delta Kappan (2010).
• Read “Property Taxation and Equity in Public School Finance” by Kent and Sowards, from Journal of Property Tax Assessment & Administration (2009).
• Read “The Effect of School Finance Reforms on the Level and Growth of Per-Pupil Expenditures” by Downes and Shah, from Peabody Journal of Education (2006).
• Read “Finance Structures and How They Constrain Resource Allocation,” located on the Center on Reinventing Public Education Web site at http://web.archive.org/web/20080602015344/http://www.crpe.org/cs/crpe/view/projects/3?page=initiatives&initiative=11
• Explore The Education Trust Web site, located at http://www.edtrust.org/issues/our-advocacy-agenda/funding-fairness, for information about school funding.
Introduction
Determining where to allocate resources is a big job for school administrators. While the majority of the school budget is allocated toward staff compensation and benefits, the rest of the budget allocations need to be prioritized in a manner that helps the district meet goals and standards for student academic performance. This lesson will discuss district resource allocation, including teacher salaries, building level allocations, and the education of special populations.
How Schools Allocate and Use Resources
Expenditures are usually divided into categories, such as professional salaries, classified salaries, employee benefits, materials and supplies, and capital expenditures. States also collect expenditure data by broad program area or function, such as instruction, administration, transportation, plant operations and maintenance, and debt service. In addition to hiring licensed staff members such as teachers, administrators, and specialized staff (librarians, counselors, etc.), school districts also hire instructional aides, cafeteria workers, custodians, and other staff members to keep the school running. The single biggest expenditure in school districts is for personnel. However, the number of instructional staff is declining while more instructional aides are being hired (Silva, 2009).
In 1950, teachers made up 74% of the total school staff. In 1960, that percentage fell to 64% and in 1995 that number dropped to 52% of individuals identified as instructional staff (Picus, 2000). The percentage of teachers dropped nearly 33% in the second half of the 20th century; many teachers have been replaced by instructional aides and pupil support staff, which cuts down on human resources (HR) expenses. However, the budget cut is not proportional; technology expenses and other programs have increased in the budget while the core teacher percentage has decreased (Odden&Picus, 2004). On the other hand, President Obama promised to allocate $517.3 million of the 2010 federal budget toward teacher salary incentives (U.S. Department of Education, 2009).
Teacher Salary
Most districts compensate teachers under a single salary schedule wherein teachers are provided compensation based on years of experience and level of education (Strizek et al., 2006). These schedules typically set a minimum and maximum salary. The advantages of a single salary schedule include:
• Equality in awarding pay.
• Salaries are awarded based on objective criteria.
• A predictable and easily understood system for calculating pay. (Goldhaber et al., 2007)
Disadvantages to single salary schedules include:
• They provide rewards for things that are at best loosely connected to teacher performance quality (Brimley & Garfield, 2008).
• They do not differentiate job rigor between teaching positions (Prince, 2002).
• They reduce the opportunity for rewarding those with special skills or aptitude additional pay (Goldhaber et al., 2007; Goldhaber& Liu, 2003).
Keep in mind that teacher salary schedules are created to inform both teachers and the system. From a teacher standpoint, the advantage of a scale includes predictability of compensation and acknowledgement for taking on additional duties or pursing advanced degrees. Ideally, these systems serve to promote the values and beliefs the organization intends to promote.
From the position of the Board of Education, salary scales create a predictable mechanism for budget alignment that allows the district to ensure that they have the appropriate resource levels available to sustain the work being done in the classroom. Over time, districts can begin to become strategic in predicting how staff members move through the scale and in anticipating cost implications. This level of transparency and organization also helps in maintaining relationships with the community.
Building-Level Allocations
The establishment of building-level allocations is driven to a great extent by factors such as the size of the school district and its management philosophy (Brimley & Garfield, 2008). Some districts, for example, have highly centralized management structures wherein many budgetary line items are centralized rather than allocated for control at the building level. A more centralized allocation is often easier to manage from a district perspective and can provide economy of scale due to point-of-purchase leverage (Brimley & Garfield, 2008).
Conversely, a more decentralized budget allows for increased levels of control at the building level. Fundamentally, this allows principals or building project managers to change their line item allocations as needs arise and opportunities avail themselves. For example, a principal may be working with staff and decide to shift line item allocations for field trips and paper and instead purchase technology resources. With more technology, the need for paper may diminish and Internet accessibility may allow teachers to take advantage of virtual field trips, thus saving money in the long run. This local flexibility is not possible in highly centralized districts where building level allocations are neither flexible nor negotiable (Brimley & Garfield, 2008).
However, from a district perspective, the capacity to drive down price when making purchases is dramatically increased when, for example, a district’s budget director purchases consumables such as paper or hardware on a much larger scale. Just about every district ebbs and flows in its degree of comfort between both centralized and decentralized budget functions (Brimley & Garfield, 2008).
Education Special Populations
What districts must also keep in mind is that educating groups of children can have very different cost structures from one district to the next based on the cost of doing business and based on the special needs of the population being served. For example, the state of New York could look at the average cost of educating a child in its state and come up with a per-pupil dollar amount. That dollar amount however, may be much lower than the actual cost of educating a child from a highly impoverished urban area where very few community members speak English as their primary language (Brimley & Garfield, 2008).
Conversely there are rural areas in New York state where the cost of living is much less than in Buffalo or New York City. However, the per-pupil transportation costs in these urban settings would be dramatically influenced by the geographic challenges they face. Other times, communities can be dramatically impacted by shifts in the population. For example, after Hurricane Katrina, there were a number of school districts in Texas that inherited thousands of families from New Orleans, all migrating to Texas to find relief from the devastation they experienced.
Furthermore, some districts experience unplanned immigration of citizens from other countries; all moving into the area due to work or family connections (Brimley & Garfield, 2008). If a dozen families from Vietnam decide to all come to a community to live and work, the children served in that public school will likely have unique needs that will need to be considered when establishing a budget allocation.
Finally, other factors such as shifts in the economy have a huge impact as well. If a large and profitable manufacturing plant is erected in town, it will likely bring hundreds or even thousands of new community members to the area. Depending on the work being done, the needs of the students who come along with these new families must be considered in constructing a budget. What makes school finance so challenging is the fact that even the most sensitive economic and population predictors cannot account for these types of changes coming to the district (Brimley & Garfield, 2008).

 

CONCLUSION:
All of the aspects of this course should be addressed when developing a school budget. Administrators must be aware of all of the revenue sources for the budget, as well as how to respond to changes in available resources. In addition, legal knowledge will empower school leaders to make appropriate decisions regarding grants and other programs. When creating a budget, the more administrators know about the school’s rights and responsibilities, the better they will be able to address the needs of all the educational stakeholders.

REFERENCES:
Brimley, V., & Garfield, R. (2008).Financing education (10th ed.). Boston, MA: Pearson Education.
Goldhaber, D., DeArmond, M., Liu, A, & Player, D. (2007).Returns to skill and teacher wage premiums: What can we learn by comparing the teacher and private sector labor markets? School Finance Redesign Project Working Paper No. 8. Seattle, WA: Center on Reinventing Public Education.
Goldhaber, D., & Liu, A. (2003). Occupational choices and the academic proficiency of the teacher workforce. In Developments in school finance: 2001-02 – Fiscal proceedings from the annual state data conferences of July 2001 and July 2002. Washington, DC: U.S. Department of Education/National Center for Education Statistics.
Odden, A., &Picus, L. (2004). School finance. New York: McGraw Hill.
Picus, L. O. (2000). How schools allocate and use their resources. ERIC Digest 143. Retrieved December 6, 2004, from http://eric.uoregon.edu/publications/digests/digest143.html
Prince, C. D. (2002).Higher pay in hard-to-staff schools: The case for financial incentives. Arlington, VA: American Association of School Administrators.
Silva, E. (2009). Teachers at work: Improving teacher quality through school design. Education Sector Reports. Retrieved October 16, 2010 from http://www.educationsector.org/usr_doc/Teachers_at_Work.pdf
Strizek, G. A., Pittsonberger, J. L., Riordan, K. E., Lyter, D. M., &Orlofsky, G. F. (2006). Characteristics of schools, districts, teachers, principals, and school libraries in the United States: 2003-04 schools and staffing survey. Washington, DC: U.S. Department of Education/National Center for Education Statistics.
U.S. Department of Education. (2009). Fiscal year 2010 budget summary—May 7, 2009.Retrieved August 7, 2009, from http://www.ed.gov/about/overview/budget/budget10/summary/edlite-section1.html

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Analysis for Credit Risk

Task 1
In Task 1 of this Assignment 4 you are required to follow the six step CRISP DM process and make use of the data mining tool RapidMiner to analyse and report on the creditrisk_train. csv and creditrisk_score.csv data sets provided for Assignment 4. You should refer to the data dictionary for creditrisk_train.csv (see Table 1 below). In Task 1 and 2 of Assignment 4 you are required to consider all of the business understanding, data understanding, data preparation, modelling, evaluation and deployment phases of the CRISP DM process.

a) Research the concepts of credit risk and credit scoring in determining whether a financial institution should lend at an appropriate level of risk or not lend to a loan application. This will provide you with a business understanding of the dataset you will be analysing in Assignment 4. Identify which (variables) attributes can be omitted from your credit risk data mining model and why. Comment on your findings in relation to determining the credit risk of loan applicants.
b) Conduct an exploratory analysis of the creditrisk_train.csv data set. Are there any missing values, variables with unusal patterns? How consistent are the characteristics of the creditrisk_train.csv and creditrisk_score.csv datasets? Are there any interesting relationships between the potential predictor variables and your target variable credit risk? (Hint: identify the variables that will allow you to split the data set into subgroups). Comment on what variables in the data set creditrisk_train.csv might influence differences in credit scores and credit risk ratings and possible approval or rejection of loan applications?
c) Run a decision tree analysis using RapidMiner. Consider what variables you will want to include in this analysis and report on the results. (Hint: Identify what your target variable and predictor variables are.). Comment on the results of your final model.
d) Run a neural network analysis using RapidMiner, Aagain consider what variables you will want to include in this analysis and report on the results. (Hint: Identify what your target variable and predictor variables are.) Comment on the results of your final model.
e) Based on the results of the Decision Tree analysis and Neural Network analysis – What are the key variables and rules for predicting either good credit risk or bad credit risk? (Hint: with RapidMiner you will need to validate your models on the creditrisk_train.csv data using a number of validation processes for the two models you have generated previously using decision trees and neural network models). Comment on your two predictive models for credit risk scoring in relation to a false/positive matrix, lift chart and ROC chart (Note: for the evaluation operator reports – charts Lift and ROC you will need to convert the target variable credit.risk to a nominal variable with two values (Good and Bad). Comment on the results of your final model.
Overall for Task 1 you need to report on the output of each analysis in sub task activity a to f and briefly comment on the important aspects of each analysis and relevance to credit risk scoring in determining whether to approve a loan with an appropriate credit risk rating or to not lend to a loan application.
Note the final outputs from your statistical analyses in RapidMiner (graphs, decision trees, neural network, statistical analysis results tables should be included as an appendices in your report to provide support for your conclusions regarding each analysis and are not included in the word count.
Explore, Modify, Model,Assessment) and CRISP-DM (Cross Industry Standard Process for Data Mining) are the three major attempts to standardize the data mining process (Azevedo, 2008). Even though they have similar processes, CRISP-DM is the popular methodology in the fields of data mining. In the previous assignment, we have discussed about CRISP-DM through the analysis for the survival rate of passengers on the Titanic.

In this assignment, we will pay more attention to evaluation and visualization of analysis. The important of evaluation and visualization as well as validation of modeling and deployment will be discussed in task 2 and task 3. However, we will still use CRISP-DM to analyze the credit risk.

2. Task 1

2.1 Subtask a
2.1.1 Business Understanding
Credit risk refers to the risk that a borrower will default on any type of debt by failing to make payments which it is obligated to do. The risk is primarily that of the lender and includes lost principal and interest, disruption to cash flows, and increased collection costs. The loss may be complete or partial and can arise in a number of circumstances (Wikipedia.org).To reduce a financial institution’s credit risk, the lender may perform a credit check on the potential borrowers to determine whether a borrower should lend at an appropriate level of risk or not lend to a loan application.

2.1.2 Data Understanding
You have two data sets. One is creditrisk_train.csv, which is a training data set containing the previous history, borrower’s financial informationand the target variable (Credit.Risk). The other is creditrisk_score.csv, which is a dataset to will be predicted. Two data sets include 10 variables. The data dictionary for two data sets is shown in Table 1.

Attributes Data Type Description
Row.No integer Unique identifier for each row.
Application.ID integer Unique identifier for loan application
Credit.Score integer Credit score give to the loan application
This is a measure of the creditworthiness of the applicant.
Late.Payments integer History of late payments with existing loans
Months.In.Job Integer Months in current job
Debt.To.Income.Ratio Real The percentage of borrower’s gross income that goes toward paying debts
Loan.Amount Integer Loan amount requested
Liquid.Assets Integer Liquid.assets
Num.Credit.Lines Integer Number of credit lines
Credit.Risk Polynominal Credit risk rating(Very Low, Low, Moderate, High, Do not lend)
Table 1 Data Dictionary for credit risk data sets

With two data sets and an understanding of what it means, we can proceed to data preparation process.

2.2 Subtask b

2.2.1 Data preparation
We need to consider data consolidation, cleaning and transformation to be sure that the data sets should keep consistency. Firstly, in the data sets, there are two unique identifiers. We do not need one of them, because these are duplicated. Using Select Attributes in RapidMiner, the attribute, RowNo has been eliminated for the analysis (Figure 2-1).
Figure 2-1. Omitting an unnecessary attribute

Secondly, we need to consider that there will are any missing values in the data sets. Fortunately, there is no missing value (Figure 2-2), so we do not need to replace or impute missing values. Are there any variables with unusual patterns? As we consider the data understanding, all attributes have valid types and ranges. For example, Months_In_job (months in current job) attribute has the proper range between 2 and 102 months, with about overall 27 months. How about consistency between creditrisk_train and creditrisk_score? All values in the scoring data set are in the range of the training data set. For instance, in terms of Liquid_Assets attribute, the range from 834 to 24297 in the scoring data set is a subset of those of the training data set, in which the range is between 830 and 24699 (Figure 2-2 and Figure 2-3). As a result, we do not need any data cleansing.
Lastly, as data transformation, the Application.ID attribute has been used as an id, which is implemented by Set Role in RapidMiner. One of the nice side-effects of setting an attribute’s role to ‘id’ rather than removing it using a Select Attributes is that it makes each record easier to match back to individual people later, when viewing predictions in results perspective (Matthew, 2012). Before applying some modeling such as decision tree and neural network in this assignment, as a target variable, Credit.Risk attribute should be set role into a ‘label’ attribute. Most predictive model operators expect the training stream to supply a ‘label’ attribute. The label attribute has five values; Very Low, Low, Moderate, High and DO NOT LEND, which will be predicted in the scoring data set. That is why all values in Credit.Risk attribute are missing. Figure 2-2 and figure 2-3 are meta data for the two data sets, respectively.
Figure 2-2. Meta data for the training data set
Figure 2-3. Meta data for the scoring data set

The next step is to add predictive model operators to the training data set. In this assignment, we will use only two models; decision tree and neural network. One of the main reasons to choose a decision tree is that the appeal of decision trees lies in their relative power, ease of use, robustness with a variety of data and levels of measurement, and ease of interpretability (Barry, 2006).Decision trees are a simple, but powerful form of multiple variable analyses. When it comes to artificial neural networks, it has been shown to be very promising computational systems in many forecasting and business classification applications due to their ability to learn from the data, their nonparametric nature (i.e., no rigid assumptions), and their ability to generalize (Haykin, 2009).
Firstly, we added the basic decision tree in the main process (Figure 2-4). In RapidMiner, there are four criterion on which attributes will be selected for splitting; gain_ratio, information_gain, gini_index and accuracy. In this step, we will use accuracy criterion. Other criterion will be applied at the evaluation progress.

Figure 2-4. The Decision Tree operators added to the model

In Figure 2-5, we will see the preliminary tree using the accuracy criterion. As we see, Credit_Score is the best predictor to determine which Credit_Risk borrowers are belonging to. In the case that credit score is less than or equal to 518, the next best predictor is Debt_Income_Ratio attribute. If Debt_Income_Ratio is greater than about 10%, the borrowers expect their credit risk to belong to the ‘DO NOT LEND’.

Figure 2-5. Decision tree results using accuracy

In Figure 2-6, the prediction for the class ‘DO NOT LEND’ is 100%, because there are no other class frequencies in the class. Although the training data is going to predict that if Debt_Income_Ratio is less than 10%, the borrowers belong to the ‘High’ credit risk class, the model is not 100% based on that prediction, because there are 163 ‘High’ frequencies and one ‘DO NOT LEND’ frequency (Figure 2-6). When we get to the Evaluation process, we will discuss how this uncertainty translates into confidence percentages and how to validate these confidences.
Figure 2-6. Class frequencies for DO NOT LEND and High

Like this, we can predict other credit risks following to the nodes and leaves of the decision tree. The interesting thing is that in the decision tree using accuracy criterion only four variables have influenced on the prediction of the credit risk, which are Credit_Score, Debt_Income_Ratio, Late_Payments and Months_In_Job. The three attributes; Loan_Amt, Liquid_Assets and Num_Credit_Lines have not been related to the prediction. Of cause, if we change accuracy criterion to other criterion such as gain_ratio, information_gain and gini_index, the three attributes are used for the prediction.

Secondly, like the decision tree, we have prepared two data sets and applied the Set Role operator as well as the Select Attribute operator. Then we added the neural network operator in the main process (Figure 2-7).
Figure 2-7. The Neural network operators added to the model

2.3 Subtask c
2.3.1 Modeling – Decision Tree
While we were preparing the data, we decided to use only four predictor variables. Through the Select Attribute operator, four variables, id variable and the target variable are selected. The next step is to apply the decision tree model to the scoring data. In Figure 2-8, the CreditRisk Scoring data set is linked to the unlabelleddata port (unl). To show the results, the label predictions (lab) port and the decision tree model (mod) are connected to res ports.

Figure 2-8. Applying the decision tree model to the scoring data, and outputting label predictions (lab) and a decision tree model (mod).

When we apply the model, we will see familiar results in the decision tree. However, the tree has been applied to the scoring data.
Figure 2-9 Meta data for scoring data set predictions.

Confidence attributes have been created by RapidMiner, along with a prediction attribute. Also we can see four predictor attributes; Credit_Score, Late_Payments, Months_In_Job and Debt_Income_Ratio (Figure 2-9). The interesting thing is that the max value of confidence Moderate is 0.972, which means there will be false positive predictions. In the evaluation process, we will validate decision trees.
Figure 2-10 Predictions and their associated confidence percentages using the decision tree

RapidMiner is completely convinced that Applicant ID 88858 is going to be Very Low (100%), while applicant 628458 is going to be Low with 98.2% confidence. Even though applicant 628458 has 1.8% at confidence Very Low, this applicant is predicted as the Low credit risk. The confidence will be changed according to the criterion. As for this, we will discuss at the evaluation stage.

2.4 Subtask d
2.4.1 Modeling – Neural Network
We can see the graphical view of the neural network model. The circles in the neural network graph are nodes, and the lines between nodes are called neurons. The input circles have each predictor attribute, while the output nodes have each target value, in which there are Moderate, High, Low, DO NOT LEND and Very Low. The thicker and darker the neuron is between nodes, the strong the affinity between the nodes (Matthew, 2012).
Figure 2-11 A graphical view of the improved neural network

Like the decision tree, we can see similar metadata for the scoring data set predictions. However, the predictions and confidence make a little difference. Only the Very Low value has 100% convince. As for DO NOT LEND, it’s max confidence is 0.498 (49.8%) so that there is no prediction for DO NOT LEND.
Figure 2-12 Meta data for scoring data set predictions using the neural network.

As we selected four attributes instead of the all predictor variables, we can see similar result. Thus, we can be sure that the four predictor variables are enough to predict the credit risk. However, we cannot close our eyes, because as the range of the other attributes change in the real world, they are able to become a potential predictor variable.

Figure 2-13 Meta data with four predictor variables

In Figure 2-14, like the decision tree, 888858 and 628458 have similar confidences, in which they are going to be Very Low and Low, respectively. In terms of applicant 863682, there is a great difference. Even though, the prediction for Credit Risk is Moderate, confidence in the neural network is only 0.622 (62.2%), while those of the decision tree is 0.972 (97.2%).
Figure 2-14 Predictions and their associated confidence percentages using the neural network

2.5 Subtask e
2.5.1 Evaluation (Confusion Matrix)
Model Evaluation is an integral part of the model development process. It helps to find the best model that represents our data and how well the chosen model will work in the future.
This step assesses the degree to which the selected model meets the business objectives and, if so, to what extent (Efraim et al, p.174). In this assignment, we used Cross-Validation, which is a statistical method of evaluatingand comparing learning algorithms by dividing datainto two segments: one used to learn or train a modeland the other used to validate the model (Payam, 2008).
In Figure 2-15, we can see two Validation operators. One is for the decision tree and the other is for the neural network. We used the Multiply operator, which copies its input object to all connected output ports. It does not modify the input object.

Figure 2-15 Validating the decision tree and the neural network.

RapidMiner calculates a 95.41% accuracy rate for this model. This overall accuracy rate reflects the class precision rates for each possible value in the Credit_Risk attribute. For example, the class precision (or true positive rate) of pred.Moderate is 94.54%, leaving us with a 5.46% false positive rate for this value. Surprisingly, the true positive rate of pred.DO NO LEND is 0%. That’s why there is no prediction in the DO NOT LEND value.
Figure 2-16 Evaluating the predictive quality of the neural network

When it comes to the decision tree using gain_ratiocriterion, the overall accuracy is 97.19%, which is higher than those of the neural network. Even the class precision rate for pred.DO NOT LEND is 87.50%, leaving us with a 12.50% false positive rate.
Figure 2-17Evaluating the predictive quality of the decision tree using gain_ratiocriterion

Now, we can see another confusion matrix, which is derived from the decision tree using accuracy criterion. The model’s ability to predict is significantly improved. Even though the probability of false positive is only 2.07%, we can trust the prediction of the decision tree.
Figure 2-18 Evaluating the predictive quality of the decision tree using accuracy criterion

2.5.2 Evaluation (Lift Charts)
To use lift charts and ROC curves for evaluating models, we need to convert the target variable credit.risk to a nominal variable with two values (Good and Bad). In order to do this, the Map operator is used. Figure 2-19 show how to change the old values to the new values. What value belongs to Good or Bad depends on the decision of real business. It will be sure that DO NOT LEND and High values are bad credit risk as Moderate, Low and Very Low to Good.
Figure 2-19 Converting the target variable to a nominal variable with two values (Good and Bad)

Figure 2-20 is the final main process for both Compare ROCs and Create Lift Chart operators. We have applied Create Lift Chart to two models; the neural network and the decision tree using accuracy criterion. The target class is Bad, because lenders do not want to lose their money.

Figure 2-20 Compare ROCs and Create Lift Chart for evaluating two models

Firstly, let’s consider the neural network. In the case of the confidence for Bad from 0.87 (87%) to 1 (100%), RapidMiner predicts Bad credit risk with 100%. When the confidence goes down to 0.01 (1%), the false positive rate is only about 16%. However, it does not influence overall true positive rate. As we see the figure 2-16, the accuracy rate for this model is 95.41%.
Figure 2-21 Lift Chart for Credit_Risk = Bad of the neural network

In the case of the decision tree with accuracy criterion, it is simpler to analyze. When confidence for Bad is 1 (100%), 209 out of 209 are predicted accurately. Considered the overall accuracy is 97.93%, it is natural. When we see the two lift charts, it is essential to choose the decision tree for our prediction of credit risk.
The ROC chart is similar to the gain or lift charts in that they provide a means of comparison between classification models. The ROC chart shows false positive rate (1-specificity) on X-axis, the probability of target=1 when its true value is 0, against true positive rate (sensitivity) on Y-axis, the probability of target=1 when its true value is 1. Ideally, the curve will climb quickly toward the top-left meaning the model correctly predicted the cases (Sayad, 2011). The AUC (Area Under the Curve) is almost 1, because the overall accuracy is 97.93% and 95.41% for the decision tree and neural network, respectively. The graph demonstrated that the decision tree is more accurate than the neural network.
In the previous evaluation stage, we proved that the decision tree is better. Especially, accuracy criterion has overall 97.93% accuracy. Moreover, it reduced the predictor variables from seven to four. Now we has the decision tree that shows credit institutions which attributes matter most in predicting the credit risk. However, we need to keep in mind that the deployment phase can be as simple as generating a report or as complex as implementing a repeatable data mining process. Whenever business needs change or predictor variables added or modified, we have to recycle the CRISP-DM processes.

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International finance
A) Compare and contrast the fixed, freely floating, and managed float exchange rate
systems. (6 marks)
B) Suppose you have £1,000,000 to invest and assume the following information:
Quoted Price
Value of Canadian dollar in British pounds £0.60
Value of New Zealand dollar in British pounds £0.20
Value of Canadian dollar in New Zealand dollars NZ$3.02
i) Explain the concept of triangular arbitrage (3 marks)
a) Given this information, is triangular arbitrage possible? If so, explain the steps
that would reflect triangular arbitrage, and compute the profit from this strategy
using the £1,000,000 you have. (6 marks)
b) What market forces would occur to eliminate any further possibilities of
triangular arbitrage? (3 marks)
C) Assume that the annual US interest rate (continuous compounded) is currently
8% and Germany’s annual interest rate (continuous compounded) is currently
9%. The euro’s one-year forward rate currently exhibits a discount of 2%.
a) Does interest rate parity exist in this case? (4 marks)
b) Can a US firm benefit from investing funds in Germany using covered interest
arbitrage? Explain. (3 marks)
c) Can a German subsidiary of a US firm benefit by investing funds in the United
States through covered interest arbitrage? (3 marks)

Question 6
A) Compare and contrast transaction exposure and economic exposure. (4 marks)
B) Remington ltd exports products from Australia to the US. It obtains supplies and
borrows funds in Australia. How would the appreciation of the dollar be likely to
affect its net cash flows? Explain. (6 marks)
C) Assume that Johnson ltd needs £3 million for a one-year period. Within one year,
it will generate enough Sterling Pounds to pay off the loan. It is considering three
options:
(1) borrowing Pounds at an annual interest rate (continuous compounded) of 6%,
(2) borrowing Japanese yen at an annual interest rate (continuous compounded)
of 3%, or
(3) borrowing Canadian dollars at an annual interest rate (continuous
compounded) of 4%.
Johnson expects that the Japanese yen will appreciate by 1% over the next year
and that the Canadian dollar will appreciate by 3%.
a) What is the expected “effective” financing rate for each of the three options?
(6 marks)
b) Which option appears to be most feasible? Explain. (4 marks)
c) Why might Johnson not necessarily choose the option reflecting the lowest
effective financing rate? Explain (5 marks)

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Cost Accounting and Decision Making

1Using the following methods, apply overhead from the service departments to the
production departments and calculate the total budgeted overhead cost of each
production department after the allocation.
a. Direct method
b. Step-down method
i. If Info. Systems goes first
ii. If Facilities goes first
2. Rather than allocate costs, how might Delaware better assign the service departments’
costs?

 

1
Cost Accounting and Decision Making (ACC2CAD)

Delaware, a computer software consulting company, has three major functional areas:
computer programming, information systems consulting, and software training. Julie Waltz, a
pricing analyst in the accounting department, has been asked to develop total costs for the
functional areas. These costs will be used as a guide in pricing a new contract. In computing
these costs, Julie is considering two different methods of the departmental allocation approach
to allocate overhead costs: the direct method and the step-down method. She assembled the
following data from the two service departments, information systems and facilities.
This mini case study is designed to encompass the following graduate
skills/capabilities, written communication, critical thinking, team work
and presentation of information/information literacy.
2
Service Departments Production Departments
Info.
Systems Facilities
Computer
programming
Info. Systems
consulting
software
training
Budgeted overhead $80,000 $45,000 $150,000 $190,000 $135,000
Info. Systems (hours)* 200 1,200 600 1,000
Facilities (sq feet)** 200 400 600 800
* Allocated on the basis of hours of computer usage.
** Allocated on the basis of floor space.
REQUIRED:
Assume you were Julie Waltz,
1. Using the following methods, apply overhead from the service departments to the
production departments and calculate the total budgeted overhead cost of each
production department after the allocation.
a. Direct method
b. Step-down method
i. If Info. Systems goes first
ii. If Facilities goes first
2. Rather than allocate costs, how might Delaware better assign the service departments’
costs? Answer to this question limits to 50 words.
Please note:
? This case study MUST be prepared in an Excel format with proper formulas embedded
for the required calculations;
? Use 4 decimal places for your allocation percentage (e.g., 22.2222%) but round the
allocation cost to the nearest dollars (e.g., $12,345) in your calculations.
? Sheet 1 of your Excel file is the cover sheet. Please ensure it includes your team
members’ names and student numbers (refer to p. 3);
? Sheet 2 of your Excel file is for Requirement 1 and 2;
? Use Exhibit 7.13 and Exhibit 7.15 from your textbook as a reference to set up the cost

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International finance
A) Compare and contrast the fixed, freely floating, and managed float exchange rate
systems. (6 marks)
B) Suppose you have £1,000,000 to invest and assume the following information:
Quoted Price
Value of Canadian dollar in British pounds £0.60
Value of New Zealand dollar in British pounds £0.20
Value of Canadian dollar in New Zealand dollars NZ$3.02
i) Explain the concept of triangular arbitrage (3 marks)
a) Given this information, is triangular arbitrage possible? If so, explain the steps
that would reflect triangular arbitrage, and compute the profit from this strategy
using the £1,000,000 you have. (6 marks)
b) What market forces would occur to eliminate any further possibilities of
triangular arbitrage? (3 marks)
C) Assume that the annual US interest rate (continuous compounded) is currently
8% and Germany’s annual interest rate (continuous compounded) is currently
9%. The euro’s one-year forward rate currently exhibits a discount of 2%.
a) Does interest rate parity exist in this case? (4 marks)
b) Can a US firm benefit from investing funds in Germany using covered interest
arbitrage? Explain. (3 marks)
c) Can a German subsidiary of a US firm benefit by investing funds in the United
States through covered interest arbitrage? (3 marks)

Question 6
A) Compare and contrast transaction exposure and economic exposure. (4 marks)
B) Remington ltd exports products from Australia to the US. It obtains supplies and
borrows funds in Australia. How would the appreciation of the dollar be likely to
affect its net cash flows? Explain. (6 marks)
C) Assume that Johnson ltd needs £3 million for a one-year period. Within one year,
it will generate enough Sterling Pounds to pay off the loan. It is considering three
options:
(1) borrowing Pounds at an annual interest rate (continuous compounded) of 6%,
(2) borrowing Japanese yen at an annual interest rate (continuous compounded)
of 3%, or
(3) borrowing Canadian dollars at an annual interest rate (continuous
compounded) of 4%.
Johnson expects that the Japanese yen will appreciate by 1% over the next year
and that the Canadian dollar will appreciate by 3%.
a) What is the expected “effective” financing rate for each of the three options?
(6 marks)
b) Which option appears to be most feasible? Explain. (4 marks)
c) Why might Johnson not necessarily choose the option reflecting the lowest
effective financing rate? Explain (5 marks)

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international banking

What is Eurocurrency and what factors are responsible for the creation of a Eurocurrency? Why are the Eurocurrency deposits time deposits but not demand?

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