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Captive Finance Model

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A model to represent the captive finance

Published in: Business, Economy & Finance
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Captive Finance Model

  1. 1. Captive Finance Companies
  2. 2. What is captive finance? <ul><li>Provides loans to consumers and dealers </li></ul><ul><li>Is a subsidiary of a parent company </li></ul><ul><li>Purpose is to enable sales of parent company products </li></ul><ul><li>Used widely in the automotive industry </li></ul>
  3. 3. Why do we need a model? <ul><li>Periodic review of company’s stability </li></ul><ul><li>Develop a healthier company </li></ul><ul><li>Fill a need </li></ul><ul><ul><li>Review of journals indicate no prior studies </li></ul></ul>
  4. 4. What is the model? <ul><li>F represents funding available to the company </li></ul><ul><ul><li>Investment banks </li></ul></ul><ul><ul><li>Federal loans </li></ul></ul><ul><ul><li>Corporate industry banks </li></ul></ul><ul><li>R represents the accounts receivable </li></ul><ul><ul><li>Dealers </li></ul></ul><ul><ul><li>Consumers </li></ul></ul><ul><li>P represents the accounts payable </li></ul><ul><ul><li>Repayment to banks </li></ul></ul><ul><ul><li>Operating expenses </li></ul></ul>
  5. 5. What are the constants? <ul><li>k 1 - the percentage of loans collected from the existing outstanding loan amount (portfolio) </li></ul><ul><li>k 2 - the percentage of available funding provided as new loans </li></ul><ul><li>k 3 - the percentage of total receivables spent on overhead costs, in addition to the fixed operational costs for the company </li></ul><ul><li>k 4 - the percentage of collected loans paid towards accounts payable </li></ul><ul><li>k 5 - the percentage of loans written off as operating losses due to bankruptcy, delinquency and credit losses </li></ul><ul><li>k 6 - the percentage of current funding that can be obtained as new funding </li></ul>
  6. 6. What do we do with all these variables and constants? <ul><li>Funding: </li></ul><ul><li>F n+1 = F n + k 1 R n – k 2 F n – k 3 R n – k 4 k 1 R n + k 6 F n </li></ul><ul><li>= (1 – k 2 + k 6 )F n + (k 1 – k 3 – k 4 k 1 )R n </li></ul><ul><li>Payables: </li></ul><ul><li>P n+1 = P n – k 4 k 1 R n </li></ul><ul><li>Receivables: </li></ul><ul><li>R n+1 = R n – k 1 R n + k 2 F n – k 5 R n = k 2 F n + (1 – k 1 – k 5 )R n </li></ul><ul><li>Profit: </li></ul><ul><li>Profit = F n + R n - P n </li></ul>
  7. 7. What do we do with all this now? <ul><li>Put it into a matrix, of course: </li></ul>
  8. 8. How does the matrix help us? <ul><li>Ran data using different values for all constants and variables </li></ul><ul><li>Produced tables showing current funding, payables and receivables </li></ul><ul><li>Graphed information </li></ul>
  9. 9. Would you like to see what happened? <ul><li>G&A costs are greater than or equal to 1% of the accounts receivable. </li></ul><ul><li>For this scenario, operating costs are too high for the company to ever make a profit. </li></ul>
  10. 10. Would you like to see what happened? <ul><li>Operating losses are greater than or equal to 1% of the accounts receivable. </li></ul><ul><li>In this scenario, there are similar results. If the amount written off due to delinquencies and other losses is too high, the company will not be able to recover and achieve any profitable status. </li></ul>
  11. 11. Would you like to see what happened? <ul><li>Accounts payable are repaid aggressively, rather than as necessary. </li></ul><ul><li>This is actually a very profitable way to do business whenever possible. It creates a situation where the accounts receivable value is greater than the value of accounts payable in the long-term behavior of the model. </li></ul>
  12. 12. Would you like to see what happened? <ul><li>The company is already in good financial standing. </li></ul><ul><li>This scenario represents a business that would be profitable from the start. If the owner of such a company decided to sell, it would be a great investment for a buyer. </li></ul>
  13. 13. What are the general results? <ul><li>Not very sensitive to change in initial values </li></ul><ul><li>Not very sensitive to change in constant values (except k 6 ) </li></ul><ul><li>Sensitive to relationships between variables and constants </li></ul><ul><li>Funding always levels off to a small percentage of the initial value. </li></ul>
  14. 14. What would make it more realistic? <ul><li>Breaking down sub-models </li></ul><ul><ul><li>Funding into different sources and interest rates </li></ul></ul><ul><ul><li>Receivables into dealer/consumer receivables </li></ul></ul><ul><ul><li>Payables into loan repayment, operating expenses and operating losses </li></ul></ul><ul><ul><li>Receivables and payables into principle and interest </li></ul></ul><ul><ul><li>Operating costs into fixed and variable costs </li></ul></ul><ul><li>Obtain better approximations for constants </li></ul><ul><li>Let the constants vary or be functions </li></ul><ul><li>TEST and REFINE the model!!!! </li></ul>
  15. 15. What can be determined from this model? <ul><li>When is stability achieved? </li></ul><ul><li>What happens when the economy tanks and funding dries up? </li></ul><ul><li>How do you know when it is time to cash in? </li></ul><ul><li>What initial amount of funding must be available to earn a certain profit in a given time period? </li></ul>
  16. 16. How can the calculations be simplified? <ul><li>Diagonalizing the matrix makes the computations easier by hand and on a computer </li></ul><ul><li>Diagonalizing the matrix will also make it possible to solve the system explicitly </li></ul>

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