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ERIC Number: ED347875
Record Type: Non-Journal
Publication Date: 1991
Pages: 45
Abstractor: N/A
Reference Count: N/A
Assessment of Alternative Financial Theories.
Jenkins, Sarah
This publication presents an assessment of various methods applicable for measurement of lender profitability with particular emphasis on net present value (NPV) in order to determine whether the Department of Education's current method for determining lender profitability within the Stafford Student Loan program is the best. The introduction points out that the NPV method of capital budgeting is currently accepted by economists and the financial community as the best of several methods within capital budgeting theory as it is easy to implement and determines the investment that maximizes the value of the firm. The body of the paper describes NPV in detail with the first subsection treating criteria for selection of this model. The second subsection describes NPV analysis by financial institutions covering revenues, expenses, cost of funds, and discount rate. A section on the weaknesses of this approach lists three drawbacks: errors in cash flow and discount rate if data are not carefully estimated, the same discount rate across loans and time periods implying that rates are not going to change over time; and difficulties accounting for every cost and benefit of student loans. Detailed appendixes treat ratio analysis, capital budgeting, portfolio theory, the capital asset pricing model, and the option pricing model. Included are 10 endnotes and a 27-item bibliography. (JB)
Publication Type: Information Analyses; Reports - Evaluative
Education Level: N/A
Audience: Policymakers
Language: English
Sponsor: Department of Education, Washington, DC. Office of Planning, Budget, and Evaluation.
Authoring Institution: Westat, Inc., Rockville, MD.
Identifiers - Laws, Policies, & Programs: Stafford Student Loan Program