Case 2: Analysis of Alternatives

Student Educational Loan Fund, Inc.

Institution: University Gadjah Mada
Program: Master of Management

Course: Risk Management
Tutor: Mrs. Erni Ekawati, PhD.

Title: Case 2: Analysis of Options
Subtitle: Student Educational Loan Fund, Inc.

Date: November 17, 2008
Place: Yogyakarta

Authors: Martin Koopman Doddy Handaryadi Anindito Prabowo Gumirlang Wicaksono

Introduction

This report describes the situation which Rick Melnick faces in the fall of 1995, when assuming the responsibilities as Associate Director of Financial Management at Harvard Business School (HBS) (Ekawati, 2008). Rick had to oversee the Student Educational Loan fund (SELF), analyze a change of plans and …show more content…

However, if SELF wants to deal with the new loan structure, this advantage has to be kept in mind. If SELF decides to change bank, then this problem may arise.

Due to the changes in the student loan structure (explain in the previous chapter), there will be some additional problems which SELF will have to deal with:

3. Exposure to a gap in income and expenses (fixed versus variable interest payments)

4. Following problem 3, a more volatile Weighted Average Cost of Capital (WACC)

The third problem is created due to the changes in interest charging to students. In the old situation, SELF could adjust the interest rate semi-annually, thus eliminating the fluctuations in income (student payments) and expenses (payments to the bank). However, the new situation does not allow SELF to adjust the interest rate, exposing the organization to interest rate risk (Saunders & Cornett, 2008). To solve this problem, the bank has offered SELF some solutions, which are explained in the next chapter.

The fourth problem is derived from the third problem. In the old situation, the fluctuations in WACC were also present; however, they were not a problem since SELF could simply adjust its income to their WACC. However, the new situation requires SELF to think more thoroughly about their Cost of Capital, since they can only charge a proportion of their income one interest rate for the following 5 years.

Finally, we will elaborate a little bit more on the WACC of SELF. We can