Corporate Finance and Governance

Corporate Finance and Governance

Title: Corporate Finance and Governance. Merger refers to the legal act of combining of two preexisting corporations to form a new company. Acquisition is the absorption of one company by another through the purchase of its assets. Bankruptcy, on the other hand, refers to an entity’s legal status of being unable to service the debts it owes to creditors (Boone, 2002). It occurs when the debtor files a petition with the bankruptcy courts. The petition can be filed by an individual or a corporation.

The Birds Limited Company, it can adopt various approaches to avoid the scenarios above. The business can avoid merger by reducing costs by consolidating departments within the firm. Streamlining and departments and responsibilities can help cut costs and prevent a possible merger. The company can avoid a potential acquisition by using the staggered board of directors’ approach (Clayman, Fridson, & Troughton, 2011). A group of directors is elected at different times for multiyear terms which can delay a possible takeover. The business can negotiate with its creditors to delay filing for bankruptcy and come up with a plan to settle their debts.

Business failure is caused by a range of factors that emanate from either the macro or the microenvironment. Bankruptcy is one cause of business failure. The fact that a business is unable to service its debts leads to the insolvent liquidation. A company cannot access financial assistance from the banks if declared bankrupt. Bankruptcy can seriously derail a company’s credibility.

Poor management can lead to business failure. Enterprises that are poorly managed suffer from mismanagement of funds. Issuing credit services to such corporations is hard, and the businesses end up closing down. The banks refrain from issuing credit services to such companies, and this has a telling effect on the banking sector. Operating a business in an industry that is not profitable can lead to business failure. High-profit businesses benefit the banking sector as much as the companies benefit from the banks. Such companies can boost the banking sector since they make up part of the key stakeholders in the industry.

Unprofitable businesses cannot have the spending power or the ability to acquire massive loans from the banks. The inability to acquire and service loans stagnates the development of the banking sector.

Corporate Finance and Dividend Policy

The dividend policy contains a set of guidelines a company applies to decide on the amount to pay the shareholders. Clayman et al.  (2011) acknowledge that the business has to consider a range of factors before settling on the appropriate approach when formulating dividend and capital structure policies. Business risk is one of the fundamental risks that put a company’s operations in jeopardy. The optimum debt ratio is lower in firms with a greater risk level. For instance, the risk level in a retail apparel company is much higher than that of a utility company. Therefore, the retail apparel company would have a lower optimal debt, a strategy to make the business attractive to the investors.

The company’s tax exposure is a determining factor in the formulation of the dividend policy. Debt payments are taxable. If a company’s tax rate is high, financing projects using debts is attractive because the tax deductibility of the debt payments helps the business shield some of the income from taxes (Clayman et al., 2011). Market conditions also impact the company’s capital structure condition. In a struggling market, investors may limit the company’s access to capital due to market concerns. The interest rates may be higher, and it would be advisable to wait until the market conditions return to a more normal state.

Corporate Finance Dissertation Titles
Corporate Finance Dissertation Titles

Financial flexibility is the company’s ability to raise capital in bad times. When raising capital in good times, a company must remain prudent to keep the debt level low. The lower the company’s debt level is, the more the financial flexibility it has. The growth rate also determines the approach the business uses (James Sunday, 2014). Growing businesses finance that growth through debts, their revenues are unstable and unproven. High debt loads are usually not appropriate. Established companies need less debt to finance their growth, and their incomes are stable. The established companies generate cash flow that can fund projects whenever they arise.

The board of directors is critical to the corporate finance governance and leadership in organizations. The BOD is the highest governing authority in the management structure at all publicly traded companies (Anand, 2008). The board of directors directs the company’s business. Good corporate governance is primarily based on the board’s leadership structure, board size, composition, director ownership and the roles and responsibilities. The board oversees the governance and the management of the business and to monitor the senior management’s performance closely. The BOD evaluates and approves the suitable compensation for the company’s CEO and approves the attractiveness of the dividends.

Among other core responsibilities of the board, it selects individuals to board membership and assess the performance of the board, board committees and other directors. The board reviews and approves the corporate finance and governance actions. The board also reviews and approves financial statement and financial reporting of the company (Anand, 2008).

It monitors the corporate performance and evaluates the outcomes by comparing them with the strategic plans and other long-term goals. The BOD controls the implementation of the management’s strategic plans. The Board reviews and updates the corporate finance practices to cater for developments within the micro and the macro environment. The BOD ensures that the business complies with internationally recognized governance standards. This has the implication that the BOD must be committed to upholding the best practices in corporate governance.

References

Anand, S. (2008). Essentials of corporate finance governance. Hoboken, N.J.: John Wiley & Sons.

Boone, A. (2002). Corporate finance policy. North Chelmsford, Mass.: CEO Press.

Clayman, M., Fridson, M., & Troughton, G. (2011). Corporate Finance. Hoboken: John Wiley & Sons, Inc.

James Sunday, K. (2014). Capital Structure and Survival Dynamic of Business Organisation: The Dividend Approach. JFA2(2), 20.

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FDI Policy – Foreign Direct Investment

FDI Policy – Foreign Direct Investment in the Mining Industry

FDI policy in the mining industry – Foreign Direct Investment (FDI) in economic terms refers to the investment that an investor makes in a foreign country in which the investor has a significant control of the business or company invested in. It applies in many sectors of the economy, including the mining industry. Different governments have varied policies that seek to govern and regulate the application of foreign direct investment in their respective countries. This exploration evaluates the situation of FDI in the mining industries in Nigeria and Argentina. In the analysis, the paper incorporates the Dickens’ framework to evaluate the impact that foreign direct investment has on the mining industry and determine whether the adopted FDI policies in the two countries, that is, Argentina and Nigeria serve in the best interest of the investors.

FDI policies in Mining

It is very important to consider a deeper understanding of the effects that mining activities will have in the country, both social, economic, political and environmental impacts before developing policy to regulate FDI in the mining sector. With the advent of globalization, each country tries as much as possible to engage in trade and allow trade in within their borders. This has led to global competition and the growth of Multinational Enterprises (MNE) and the Transnational Corporations (TNC). Many countries, especially the mineral rich countries have business opportunities within their borders to exploit their resources, but do not have the financial muscle to invest in such explorations. Due to the need for exploitation of the business opportunities within the borders amid limited resources to exploit them, governments enact policies that either encourage or restrict foreign direct investment in their respective countries (Johnson 2005, p. 15).

One aspect of the FDI policies that is very critical is the aspect of quality. The term quality in this regard refers to the foreign direct investment’s ability to enhance the welfare of the host country’s citizens in terms of social, economic, political and environmental wellbeing. Based on this requirement, governments, therefore, have to assess the impact of allowing FDI in the mining industry to take place within their countries and to device mechanism of mitigating the possible negative impacts of FDI policy, for the benefit of the citizens’ welfare (Vazquez-Brust et al. 2013, p. 2).

The impact of mining activities and the subsequent social conflicts depend on an array of factors, including the type of mineral mined. Some minerals when mined leave more devastating effect on the environment than other minerals. Secondly, is the technology, the technology used will determine the extent of destruction the extraction of minerals will have to the environment. Thirdly, the level of involvement by the MNCs in the mining activities will determine the impact it has on the economy. The fourth condition is the strategies of the mining companies; some companies involved in the mining business may want to optimize profit at the expense of the host country’s economic development. Finally, the culture of the host nation and its level of economic development among other conditions may also lead to conflict in the mining activities (Stiglitz 2007, p. 134).

In this respect, therefore, it is incumbent upon both the host nation and the international agencies to collectively evaluate these aspects of conflict and make decisions that are desirable and specific to every mineral extracted and the respective location of extraction. On the same breath, the researchers too have a responsibility to choose a theoretical framework, which encompasses all the conditions necessary for evaluation in order to address all research concerns (Gibson 2006, p. 19).

FDI policy in Argentina

Considering the FDI policies in Argentina, since the year 2001, Argentina has been encouraging huge foreign direct investment, especially in the mining industry. This policy followed the massive reforms that the country made in the mining code. Argentina is a developing economy having a substantial amount of mineral resources. At present, Argentina’s third most significant product for export is Gold. Gold has attracted many investors from outside the country to come and exploit the opportunity.

Nevertheless, since the government put these policies in place in 2001, with the government encouraging foreign direct investment, the mining reforms in Argentina have not fallen short of challenges. In many parts of the country, there has been an uprising resistance to the mining activities. Those who persistently resist FDI policy claim they are doing so based on the social and environmental factors. Today, about six provinces have succumbed to this public pressure to introduce legal bans on open-pit mining within their provincial zones. This public resistance has been growing and rapidly spreading manifesting lack of consensus between the government and the public on the mining policies (Auty 2001, p. 36).  

This conflict between the Multinational enterprises and the public in Argentina is a clear manifestation of varied perception about the quality of FDI policy, especially in the mining sector. Whereas the companies consider boosting the local economy as an improvement of the welfare of the citizens, citizens, on the other hand, consider the effect mining activities have on their environment and the subsequent effects these negative externalities to the environment extend to affect the society. Even though there is a need for the alignment of quality of FDI between the local community, the government and the respective MNEs, it is not easy to reach a common ground on the quality of FDI, which is a relative measure that depends on other aspects of the prevailing welfare standard. This is also because, the perceptions of welfare of the citizens vary from time to time and from individual to individual depending on their expectations, level of knowledge they possess and the overriding cultural values of the community (Ali 2003, p. 70).  

One case in point that supports the gap in perception of citizens about the quality of FDI policy is the Esquel case. In this case, Meridian Gold, which is a Canadian multinational corporation, secured rights to mine a gold deposit in Esquel, a town in the province of Chubut at a cost of investment of over 200 million US dollars. The provincial government approved all the standards and environmental impact assessment reports for a potential mine. The provincial government gave the project a green light terming it as a high quality FDI, being environmentally friendly and useful economic development in the province.

Nevertheless, the community had a completely different perception. According to the community, the project was low quality FDI, dangerous to the environment, economically weak and if implemented would divide the society. The subsequent social unrest that followed compelled the provincial government to organize a referendum in 2002 in which, 80% of the citizens overwhelmingly voted against the mining activities. In the year 2003, as the social pressure continued to pile against mining activities, a judge ruled against any mining project in the province, forcing the Meridian Gold to drop the project (Mutti et al. 2012).

FDI policy in Nigeria

 Similarly, the FDI policy in Nigeria as well has had a long journey. Before the year 1988, the Nigerian government was still skeptical about allowing FDI into Nigeria on grounds that it deemed FDI as a scheme for economic and political control. In 1972, the government outlined a regulatory policy on FDI by establishing the Nigeria Enterprise promotion Decree (NEPD). This declaration was meant to regulate rather than promote the foreign direct investment in Nigeria by limiting foreign equity participation in some sectors to a minimum of 60 percent. By the year 1977, the government again made a declaration further limiting the participation of foreign equity to 40 percent in Nigeria’s business. These declarations implied that Nigeria had a restrictive FDI policy between 1972 and 1995. By the year 1988, the Nigerian government made some structural reforms that initiated the beginning of eliminating the restrictive policy on FDI. The government established the Industrial Development Coordination Committee to act as an agency responsible for the facilitation and the attraction of the flow of foreign investment (UNCTAD 2009, p. 89).

Subsequently, in the year 1995, the government repealed the restrictive NEPD and made a new one known as the Nigerian Investment Promotion Commission, with an aim to encourage foreign investors to come to Nigeria and set up businesses, which they could have 100 percent control. The only condition was to provide relevant documents and the NIPC would approve the application for a business permit within fourteen days. Other declarations followed thereafter promoting and encouraging FDI into Nigeria with some having free regulations on dividends accrued from foreign investment. In addition, the Nigerian government adopted an Export Processing Zone to enable interested investors establish businesses and industries within certain zones (Ayanwale 2007, p. 24).

The FDI friendly policies adopted by the government of Nigeria saw a steady rise in the foreign direct investment flow into Nigeria since 1995 in different sectors. There was also a rise in the foreign direct investment in the mining industry in Nigeria, which followed the putting up for sale of the Nigerian national petroleum corporation together with its branches. The civilian administration that began in 1999 also inspired the deregulation of the oil industry, subsequently opening up the mining sector for more FDI inflows (Albaladejo 2003, p. 43).

The Dickens’ Framework

Having looked at both the Nigerian and Argentina’s policies on FDI, it is evident that both countries have had their challenges in the implementation of these policies. Considering the Dickens’ framework, the manifestation of conflicting interests and perception between citizens and the Multinational in the execution of mining projects is a confirmation of a dynamic collaboration and conflict between TNCs and the government agencies. According to Dickens (2003, p. 275), in the foreign direct investments both the TNCs and the host government need each other.

However, they admit that the ultimate objectives of the host government and the MNEs significantly differ. For example, the aim of a host government is to ensure an increase in the gross domestic product (GDP), while the MNCs principal aim is to maximize profits and increase the value of shareholders in the investment. In his framework, Dickens admits that in the foreign direct investments, multinational enterprises can have both positive and negative impacts on the host country’s social, economic, political and environmental conditions. They may exploit or expand national economies, distort or improve economic development, create employment opportunities or destroy jobs, introduce and spread new technology or prevent the wider use of new technology. The MNEs can also contribute to the destruction of the environment through pollution and destruction of the landscape through mining activities, or participate in the reconstruction and the creation of a sustainable environment through initiatives aimed at sustaining the environment (Dickens 2003, p. 277).    

According to Dickens (2003, p. 278), there are six major areas in the host country’s business environment that MNEs may have an impact on, and these include the area of technology, employment and labor related issues, industrial structure, capital and finance, trade and linkages and the environment. In the area of environment, the impact could be increased soil, water and air pollution, effects on urban settlement, change the extent of natural resources use among other impacts. On the trade and linkages, the effects may include changes in the propensity to export and import resources and changes in the use of local suppliers.

On the employment and labor issues, the effects could include changes in the volume of employment, type of employment in terms of skills and gender, wages and recruitment levels, labor relations and affect the stability of the labor market. On capital and finance, the impact could include changes in the initial inflow of capital, changes in the capital raised locally, profits retained locally and transfer pricing among other impacts. In the industrial structure area, the impact could be effects on the industry concentration, changes in the competitiveness of the local companies and impact on the creation of new local companies. Finally, in the area of technology, the impact could affect the extent of technological transfer, determination of appropriate technology and may lead to additional cost on the host nation (Yakovleva 2005, p. 45).

FDI Policy Dissertation

Dickens’ framework also has a mechanism for assessing the extent of impact of MNEs activities in the host nation’s economy. In assessing the impact of MNEs, Dickens looks at the level of control that MNEs have on the host, the increase or decrease in the general welfare, the overall macroeconomic conditions, receptivity, cultural, social and political conditions, capital mobility technology and stage development, and the extent of natural resources availability among other factors (Gibson 2006, p. 18).

The framework as elucidated by Dickens is quite relevant to the two scenarios presented both in Argentina and in Nigeria regarding FDI policies. In Dickens’ assumptions are in three perspectives, first, he assumes that in FDI deals, the government always represents the community and mediates the relationships between the MNEs and the Citizens. However, in most developing economies, this might not be the case because the community always are directly involved in the affairs deemed to directly affect their livelihood and environment (Epstein 2008, p. 113).

Several environmental studies reveal that the conflict arising when FDI deals are negotiated is because of the adamant tendency by the state and the MNEs to ignore the role played by the communities in this process. This leads to a direct involvement between the government and the MNEs, which most of the time leads to environmental and social inequalities (Martinez 2002, p. 19). In order to eliminate any conflict arising from the community, it is imperative for all the stakeholders to engage collectively in the assessment of the quality of the FDI policy in terms of scientific, MNEs, Community and government assessment. Any gap that continues to exist between the projects’ evaluation will make conflict resolution among these parties very difficult.  

The second assumption by Dickens is that the ultimate objective of the MNEs is to maximize their profit and increase the value of shareholders. This assumption overrules the fact that some firms may also aim at strategic and ethical undertakings to do more proactive activities with the aim of maximizing their profits, as well as reaping benefits to the community and the environment (Vazquez-Brust et al. 2013, p. 7).

To bridge the gap between the divergent interests of the parties involved in the FDI arrangements, the government together with other stakeholders can develop a code of ethics to govern the conduct and activities of the MNEs. Similarly, the MNEs have a good avenue of mitigating the ill perception of the community by participating in the corporate social responsibility practices to give confidence to the community that their interests are considered. Corporate social responsibility is a very significant tool that firm can use to develop the businesses in the host country. By taking part in solving the societal problems, firms will not only build the confidence of the local people, but also create a sustainable environment in which they guarantee and secure the future of their businesses (Elliot & Cummings 2006, p. 87).

The third assumption Dickens is making in his framework is the existence of two variables that depend on each other, that is, the truncation effects and the increase/decrease in welfare. Truncation effects refer to cultural, economic and institutional aspects of the FDI policies that negatively affect the host country. The international economic analysis indicates that it is possible to reconceptualize truncation effects as institutional effects of the foreign direct investment, which contain robust effects on the welfare of the host country. They should be considered as influencing the welfare too rather than being treated separately from factors that increase or decrease the welfare (Stieglitz 2007, p. 43).

According to Mold (2004), the truncation effects can have an impact on the host country in two forms, that is, governance and social cohesion. Wealth and income distribution is one area where MNEs have a potential to bring social cohesion because research indicates that there is a strong connection between MNEs activities and the increase in the inequalities. This understanding of the inequalities has informed the engagement between the governments of Argentina and Nigeria and the MNEs in the FDI projects, in order to boost economic development and reduce the adverse effects of social and economic inequalities in their countries.

This analysis reveals remarkable undertakings of both Argentina and Nigerian government in trying to facilitate foreign direct investment in their respective countries. The policies the two countries encourage FDI in their mining industries with a view of exploiting the opportunities available and bringing in capital to their economies to the benefit of their citizens. However, there is still need to involve the citizens in the decision-making process and in the evaluation of the quality of the FDI in order to reduce the conflict arising from the community. The FDI projects could be good for the economic growth and development and may be well intended for the public, but failure to involve them in the evaluation of such projects is a recipe for misconception of the projects leading to resistance (Ali 2003, p. 72).

The mining industry is a very delicate industry in that its activities directly affect the natural environment before such activities benefit the society. This calls for a delicate balance between approval of mining projects and the execution of the same considering the need for a sustainable environment that will accommodate the citizens and the business for posterity. The bottom line of every government as representative of its citizens is to protect their interest of its citizens, which is what the government of Argentina and Nigeria is doing in their FDI policies.

Conclusion

The global economy is becoming more competitive and every nation intends to have a competitive edge in the market. Emerging economies such as that of Argentina and Nigeria with the massive endowment of the natural resources, but no capital to invest in exploitation have a responsibility to create an enabling environment. The enabling environment includes developing policies that encourage foreign direct investment to bring in foreign capital and help exploit the natural resources for economic development.

Similarly, in order to have a successful FDI policy, all the stakeholders affected by such policies such as the community, the government and the MNEs need to engage collectively in trying to develop a common perception of the impact of any project before its implementation. By doing so, conflict of interest and varied perception on the quality of FDI will definitely be resolved. The MNEs too have a responsibility to embrace corporate social responsibility in order to protect the environment for a sustainable business.

References

Albaladejo M 2003, Industrial realities in Nigeria: from bad to worse. QEH Working Paper, Number 102, Queen Elizabeth House, London.

Ali, S.H 2003, Mining, the Environment and Indigenous Development Conflicts. The University of Arizona Press, United States

Ayanwale A.B 2007, FDI Policy and Economic Growth: Evidence from Nigeria. AERC.

Auty, R.M. (2001). Resource Abundance and Economic Development. Oxford University Press, Oxford.

Dicken, P 2003, Global Shift: reshaping the global economic map in the 21st century, 4th ed., Sage Publication, London.

Elliot, M., & Cummings, G 2006, Exploring the risks: attitudes to risk in the global mining sector. Ernst & Young.

Epstein, M.J & Buhovac, A 2008, Making Sustainability Work: Best Practices in Managing and Measuring Corporate Social, Environmental and Economic Impacts.

Gibson, R 2006, Sustainability assessment and conflict resolution: reaching agreement to precede with the Voisey’s Bay nickel mine. Journal of Cleaner Production , vol. 14, no.3-4, p. 334-348.

Johnson, A 2005, Host Country Effects of Foreign Direct Investment. The Case of Developing and Transition Economies. JIBS Dissertation series

Mold, A 2004, “FDI Policy and Poverty Reduction: A critical reappraisal of the arguments,” Région et développement, vol. 20, p. 92-120.

Mutti D., Yakovleva N., Vazquez-Brust D., & Di Marco M.H 2012, “Corporate social responsibility in the mining industry: Perspectives from stakeholder groups in Argentina.” Resources Policy, vol. 37, no. 2, p. 212-222.

Stiglitz, J 2007, Making globalization Work, Sage, London

UNCTAD 2009, Investment policy review Nigeria. United Nations: New York and Geneva.

Vazquez-Brust D., Yakovleva, N., & Mutti D 2013, Mining FDI in Argentina: perceptions and challenges to sustainable development. University of Manchester, England.

Yakovleva, N 2005, Corporate Social Responsibility in the Mining Industries. Corporate Social Responsibility Series. Ashgate Publishing Limited . England.

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2007-2008 Financial Crisis Essay

The 2007-2008 Financial Crisis

According to Saylor Academy (2012), a financial crisis happens when many financial markets function inefficiently or stop functioning completely; when one or few of the financial markets stop functioning the crisis that result is nonsystematic Saylor Academy (2012). The 2007 financial crisis started with subprime mortgages and in 2008 it turned severe systematic after major financial institutions failed.  The 2007-2008 Financial Crisis was a combination of many things, including: Monetary policy easing, banks taking excessive risks, consumers borrowing more than they could afford, the eventual US Housing Market Crash, stocks and poor risk pricing, the federal budget deficit, excessive leveraging by banks, predator lending, poor underwriting practices and the Federal Budget Deficit. This paper explores how the 2007-2008 Financial Crisis financial happened, what markets were impacted and how it was dealt with.

Monetary policy easing – Deregulating policies that were placed in placed to repeat historic failures is like playing Jenga, eventually everything will fall. According to (Market Oracle Ltd, 2009), the first block of deregulation happened in 1980 with the Depository Institutions and Monetary Control Act of 1980 – this was the first thing the banking system was being let a bit loose after the regulations that were put into place after the Great Depression.

The act accomplished the following: required less reserved from the banks, it created a committee to get rid of federal interest rate caps, increased insurance of Federal deposits, allowed banks to get credit advances from the Federal Reserve Discount Window and finally, it overstepped over state laws that restricted lenders by putting a ceiling on the interest rates they could charge from mortgage loans.

The second piece of monetary easing happened when the government and their great wisdom or greed decided to pick apart key pieces of the Banking Act of 1933 (Glass-Steagall Act of 1933). The act was in place to prevent banks from gambling with people’s savings, it separated commercial banks from investment banks – this was very important because investment banks could not take huge risks with people’s money.

Gramm-Leach-Bliley Financial Services Modernization Act was the drop that spilled the cup or the final straw that broke the camel’s back. This law, removed the last protective barrier that Glass-Steagall Act provided and allowed banks to do whatever they wanted; for example, Travelers investment bank was able to buy Citibank…Remember the law wanted to keep investment banks from using people savings? Well, this last act allowed investment banks to play with other people’s money (Market Oracle Ltd, 2009). Monetary policy easing removed all roadblocks that annoyed banks, but kept people’s savings intact and save; additionally, it gave birth to Subprime lending which later would be a major player in the Housing Market crash.

Banks taking excessive risks: According to (The Economist, 2013) Senator Phil Gramm once was quoted as saying “I look at subprime lending and I see the American Dream in action”. Due to the economy doing so well and low inflation, banks and investors were willing to take more risks in order to get a piece of the action. Banks were being irresponsible with mortgage lending and lower standards with subprime lending, borrowers who should not have gotten loans were able to get into houses they could not afford.

In order for banks to lessen or mitigate the risks, they played the numbers games, they gathered a many high-risk loan and put them together in groups (pooling), depending on the probability of defaults – in theory, this would decrease the risk because what were the probabilities that all borrowers in that pool could default on their loans? (The Economist, 2013)

Consumers borrowing more than they could afford – This comes back to subprime mortgages and just the timing of what was happening with the economy and the housing market. According to (John V. Duca, 2013) – traditionally, borrowers have to have good credit, good income and good debt to income ration in order to be the proud owners of a house with a white picket fence – those borrowers who did to meet the requirements above, would historically not qualify for any loans to buy a house. The ability of more people qualifying for mortgages they could not afford, lead to an increase in the housing market because the economy was experiencing more first-time home buyers.

The increase in demand created an increase in housing prices and it required more money to be borrowed by the people who were already stretched thin on the amount of money they were borrowing (John V. Duca, 2013). Up to this point, banks and consumers were lending and borrowing money banking on best case scenario and not planning for the worst. Added to the situation was the fact that the government had mandated Fannie Mae and Freddie Mac to increase home ownership, so both Fannie Mae and Freddie Mac had purchased lots of subprime mortgages (John V. Duca, 2013).

Secured Lending - 2007-2008 Financial Crisis
Secured Lending – 2007-2008 Financial Crisis

US Housing Market Crash – In the famous quote from Isaac Newton “What goes up must come down”.  Once housing market reached its plateau, mortgage financing and home selling became less attractive and that is when they began to drop in price, lenders and investors started losing money. The first casualty of subprime mortgages happened in April 2007, New Century Financial Corps filed for bankruptcy – after that, all the pooling that was done by experts to mitigate default risk was downgraded to high risk and many small subprime lenders went out of business.  Lenders stopped issuing loans, specially the high interest rate ones (subprime) – this resulted in less people getting loans after that and as a result, less houses being purchased by consumers.

Low demand for houses led to a drop-in price, the famous law of supply and demand had kicked in. Prices dropped so much that borrowers who were trying to sell them could not send them at the price they owed in their loans. Remember that government told Fannie Mae and Freddie Mac to increase home ownership? Well, as a result, Fannie Mae and Freddie Mac suffer major losses an all subprime mortgages they had purchased and insured (John V. Duca, 2013). The housing market was flooded by banks selling their foreclosed/repossessed homes, people trying to sell their houses because they get foreclosed, people doing short-sales and in addition the market was getting the normal number of houses being sold the usual sellers (new construction, people moving, etc.).

US House Prices - 2007-2008 Financial Crisis
US House Prices – 2007-2008 Financial Crisis

Stocks and poor risk pricing – Prior to the economic crisis, investors were unable to get the exact value of risk they would be bearing when taking up stocks or financial assets from the traders. Risk pricing or the cost of risk is implied in the rate of interest charged and the investors, with poor risk profile of certain assets in the market, would not know the value of the risk assumed when buying stocks or the value of risk exchanged when selling stocks (Amadeo, 2010; Williams, 2010). The market participants were thus inaccurate in their risk analysis due to the complex financial system and innovations among other factors such as ignorance and deceit from the traders themselves.

JP Morgan is quoted as selling and quoting the risk price of CDOs at a price way lower than the market price due to lacking accuracy or information as is contrasted to stable prices in a perfect market, where market information is publicly available, as per the Basel accords. In a similar risk pricing error and crisis, the AIG had to be taken over by the American government, settling about 180 billion US dollars from the tax payers’ money because AIG had taken premium guarantees to pay several CDS obligations to many lenders of small and global parties, whose risk profile was then uncertain to the lender and insurer and plunged the institution into near bankruptcy (Amadeo, 2010).

There was then no clear model of ascertaining the level of risk assumed by a guarantor or a borrower given the dynamic and complex financial innovations of the time and the slowly growing financial academia, practice and experience within a span of two years, that is, between 2007 and 2008 (Jickling, 2009).

The Role of The Federal Reserve in the 2007-2008 Financial Crisis

The Federal Reserve and liquidity – The Federal Reserve is the lender of last result to banks and thus, is the only last savior in a financial crisis. However, the reserve faced inadequate cash to lend to banks with the rapid mortgage and loan processing witnessed alongside booming borrowing and house financing by banks and financial institutions. Commercial banks couldn’t afford adequate liquidity to finance their obligations and the large sizes of mortgages they were buying.

In the same time, the price of commodities and especially minerals such as oil and copper were growing at an unsustainable rate, with most of the minerals being imported from outside. The rise would give the impression to traders that it was an opportunity to invest in the appreciating metals and thus, there was a general cash outflow from the US in exchange for metals and gems, which saw increased trading lead to a decline in the prices thereof and a general loss of cash from the American economy to oil producing and mining countries such as the middle east nations. The cash inflow into the US was less than the cash outflow and commercial  banks would earn less than they were paying as cost of leveraging. This Federal Reserve with less inject into the economy to facilitate liquidity among the commercial banks (Jickling, 2009).

Excessive leveraging by banks – Before the 2007-2008 financial crisis struck the market, banks and other institutions in the mortgage and finance sector had used massive leveraging, that is, using credits and other derivatives to acquire assets. Leveraging shifts the risk of lending to the leveraging institution, thus removes the risk adverseness of a financial institution. They trade with appetite for risky investments which they perceive are most productive. The state of affairs with the highly leveraged financial institutions, therefore, led to risky deals which ultimately led to high rates of defaulting. Also, a major contributor to the 2007-2008 financial crisis.

The high level of leveraging, also, exposed the banks to massive risk impact should a financial downturn result and when it did with the bursting housing prices balloon, the financial institutions came crumbling down, leading to a global and all-sector financial crisis with little identity as to which institutions were in bankruptcy (Amadeo, 2010). This was as a result of a complex system of financial derivatives and contracts that were difficult to determine given the limited financial information then available (Jickling, 2009).

Predator lending – Another factor that contributed greatly and grossly to the financial crisis of the time was the deceitful predatory lending by financial institutions. The institutions would entice borrowers or mortgage buyers with appealing interest rates and have them commit to the mortgages even when such a commitment had hidden charges or adjustments (The Economist, 2010). A common practice involved the use of very low interest rates to hook up people after financing. Upon the completion of the mortgage, the client would realize later that the mortgage was an adjustable one with rates rising gradually to almost double the value they borrowed.

Many would end up unable to pay back the commitments and have their mortgages seized or have to deal with a negative amortization mortgage (McLean & Nocera, 2010).  In one case, the California attorney sued Countrywide Financial for fraudulently enticing borrowers in to a bait-and-switch conman mortgage with expensive mortgage payments (The Economist, 2010). With the falling housing prices, the home owners with outstanding mortgages were demotivated to pay their dues against the devalued prices of their mortgages, leading to massive defaulting and a financial crisis in the industry (Jickling, 2009).

Poor underwriting practices – Another factor that led to the ultimate onset and peaking of the financial crisis was the poor underwriting practices by intermediaries, banks and even insurers. Regulations require that a loaning process should follow the loaning institutions documentation guidelines and the underwriting process ought to be understood in depth to avoid unforeseen difficulties or illegalities. However, the pre-crisis period was characterized by rapid underwriting processes with little or no attention to the lender’s procedures and rules of engagements.

Loans and mortgages would be processed with little or no official documentation completed as per the issuers rules of engagement, which would lead to borrowers being subjected to terms they didn’t sign for or they were unaware of, high defaulting rate by loan holders and selling of loans without full disclosure as to the terms attached to such loans (Greenberg & Hansen, 2009; Amadeo, 2010). At the end, the victims would be realized as unable to honor their commitment due to the inflated loans, some of which would never be recovered.

In this saga, about 1600 mortgages bought by the mortgage firm Citi from mortgage dealers were found to be defective and unenforceable while the mortgages had been passed on from the dealers to the banker. The poor and fraudulent underwriting process therefore contributed immensely to the financial crisis in which banks couldn’t provide financing as they had too many commitments to honor, alongside the housing crisis (Jickling, 2009).

2007-2008 Financial Crisis, in conclusion, this paper asserts the academic and scholarly authority that the largest and longest financial crisis witnessed post the great depression era was as a result of structural factors such as the easing on monetary policies, excess risk assumed by banks, excessive borrowing of cheap but risky loans by consumers, the fall of the US Housing Market, poor risk profile on stocks, the federal budget deficit, over leveraging by banks, predatory lending, poor underwriting and the Federal Budget Deficit. These factors made many banks and institutions to collapse.

References

Amadeo, K. (2010). “2008 Financial Crisis: The Causes and Costs of the Worst Financial Crisis Ever Since the Great Depression.” The Balance.

Greenberg, R., & Hansen, C. (2009). “If you had a pulse, we gave you a loan.” NBC news.

Jickling, M. (2009). Causes of the 2007-2008 Financial Crisis.

McLean, B., & Nocera, J. (2010). All the devils are here: unmasking the men who bankrupted the world. Penguin UK.

The Economist (2010). “Predatory lending: let’s not pretend we don’t understand how it worked.”

Williams, M.T (2010). Uncontrolled risk: the lessons of Lehman Brothers and how systemic risk can still bring down the world financial system. McGraw-Hill.

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Strategic Finance Management

Strategic finance management refers to the procedures, systems, and practices established by an institution to aid in reaching its goals, such as expansion, stakeholder’s wealth maximization, and corporate social responsibility. The executives develop insights from business activities, its capabilities, stakeholder expectations, as well as the available opportunities. Hence, the strategies have to be based on a well-formulated game-plan, which has a clear vision (Deloitte, 2019).

An appropriate strategic finance management scenario defines an elaborate picture of the organization’s target, lays down the courses of action to lead the entity there, brings work satisfaction and morale, as well as brings together finance officials through fast communication, and timely decision making (Deloitte, 2019).

Ratio Computation and Analysis for Redding and Neaves Companies – Using Strategic Finance Management Techniques

1. Profitability Ratios

This refers to financial computations that investors and business advisers apply while determining an institution’s revenue (Clear Tax, 2018). To get the profit realized, the metrics asses the difference between the receipt and payments made within a particular financial period, such as a year. For the two competing manufacturers, returns on investment and returns on capital employed are used.

a. Return on Investment

It is a ratio used to compute the gains of an investor concerning the amount of their investment. A high ratio, the more the benefits to be earned by the investor (Schmidt, 2019). With this ratio, investors can eliminate the projects promising low profits and focus on those that have a likelihood of raising higher returns.

Return on Investment Redding Co. = Revenue after Tax  × 100

Capital Employed 

ROI = 49 × 100 = 40.49%

121

ROI Neaves Co.

= 379 × 100 = 65.34%

580

Conclusion: Neaves has a higher ROI, hence is earning more revenue compared to Redding by 24.84%. Thus, Neaves is more appealing to an investor.

b. Return on Capital Employed

It is a ratio that is used in determining a company’s profitability due to its efficiency in capital utilization. A company with a higher ROCE means that it had a more economical use of capital that realized maximum gains (Daniel, 2018).            

ROCE = Earnings before Interest and Tax × 100

Capital Employed

Redding: =      80   × 100 = 66.11%.

121      

Neaves ROCE = 503 × 100 = 104.79%

480

Conclusion: both organizations have a significant amount of returns on the capital they have put to use. However, with Neaves having a higher return, investors can prefer it as their investment of choice because it will utilize their funds better.

2. Efficiency Ratios Strategic Finance Management

They are financial metrics that inform on a company’s ability to utilize its assets while keeping an eye on its liabilities in both the short and long terms (Peavler, 2019). It is the efficiency ratios that ensure an organization is not experiencing over investment or under investments. Fixed assets turnover and inventory turnover are the ratios to be used in this analysis.

a. Fixed Assets Turnover

It looks into how a form utilizes the available fixed assets like plants and equipment to increase sales. A firm that has a low number of fixed assets turnover in under utilizing its assets and should work towards optimizing the usage of fixed assets (Peavler, 2019). 

Fixed Assets Turnover = (Sales ÷ Fixed Assets)

Redding Co.

FAT = (195 ÷ 255) = 0.764

Neaves Co.

FAT = (1050 ÷ 1026) = 1.033

Conclusion: Neaves Company has a higher fixed assets turnover, meaning that it utilizes its fixed assets in making sales, better compared to Redding Company.

b. Inventory Turnover

Also known as stock turnover, inventor turnover is a financial metric that is used in determining the number of times that a business has ordered a new batch of inventory after selling a previous batch (Nicasio, 2019). It is computed on pre-determined periods such as semiannually, annually, monthly, or weekly.  

Inventory Turnover = Cost of Sales.

Average Stock 

Redding Co. = 78 = 5.2 Times

15

Neaves Co. = 273 = 8.03 Times  

34

Conclusion: Neaves Co. has a higher inventory turnover ratio than Redding Co. it implies that Neaves has more sales; hence, more promising returns or revenue.

Strategic-Finance-Management
Strategic-Finance-Management

3. Liquidity Ratios

They are ratios used in measuring the ability of an organization to settle its short-term liabilities when they are due without necessarily having to raise capital from lenders (Kenton, and Hayes, 2019). The quick ratio and Current ratio are used in this analysis and commonly found in strategic finance management.

a. Quick Ratio

It is a financial ratio used in determining the ability of an entity to meet its current liabilities using its liquid assets only. In this case, the stock is eliminated from the liquid assets category because it is time-consuming to convert it into cash (Eliodor 2014, P. 5). A company that is at optimal performance should have a quick ratio of 1:1, which shows its ability to pay for the liabilities due using its liquid assets. 

Quick ratio = Current Assets – Stock

   Current Liabilities  

Redding Co. = 65 – 15 = 1.67

  30

Neaves Co. = 198 – 34 = 1.07

153

Conclusion: Since the optimal quick ratio should be 1:1, and both have a quick ratio of more than 1, they can readily service their obligations when due. However, Redding Co has a higher quick ratio and is, therefore, better positioned to convert its liquid assets faster compared to Neaves Co.

c. Current Ratio

It is a liquidity ratio, which is used in measuring an entity’s ability to pay for its short-term liabilities that is the debts due within a year. It informs the investors about how well a company realizes optimal benefits from its current assets so that it can meet its current debts and other payables (Kenton, 2019).  The optimal current ratio should be 2:1 that is two current assets for one current liability

Current Ratio = Current Assets

Current Liabilities

Redding Co.

Current Ratio = 65 = 2.167

30

Neaves Co.

Current Ratio= 198 = 1.294

153

Comparison: Redding Company has a higher current ratio of 2.17:1, while Neave’s Company’s current ratio is 1.29:1. It implies that Redding can quickly pay for its current liabilities while Neaves is going to experience challenges paying for the obligations because it has not met the optimal current ratio.

4. Gearing Ratios.

It is a business assessment ratio that is concerned with the business’s capital structure. The ratio determines the amount and impacts of financing contributed by the stakeholders compared to external funding, such as the use of debt (Bragg, 2019). If a company has a high gearing ratio, it implies that the company has used more of debt capital and less of equity capital. Besides, low gearing means that the company has employed more equity and less of debt in its capital. A highly leveraged/geared company uses debt capital to meet daily obligations, which poses a threat of bankruptcy to the organization (Bragg, 2019). In this comparison, the equity ratio and debt ratio will be used to assess the gearing of the two companies.

a. Equity Ratio/ Net worth to total assets ratio

It is a financial arithmetic that indicates the relative amount of equity that is used in paying for a company’s assets. It informs shareholders about their funds compared to the institution’s total assets, thereby showing the businesses’ solvency position in the future (Ready ratios, 2013).  

Equity ratio = Equity ÷ Total Assets

Redding Co.

Equity ratio = 121 ÷ 320 = 0.378 or 37.8 %.

Neaves Co.

Equity ratio = 480 ÷ 1214 = 0.395 or 39.5 %

Comparison: both companies have an equity ratio of less than 51%. It means that their equity has funded a low amount of their assets, while a significant amount is funded using borrowed funds. The two companies are leveraged and are going to pay a significant amount of interest on the borrowed funds.

b. Debt Ratio

It is a financial leverage arithmetic that is used to measure the amount of a company’s assets that have been purchased using debt capital. If a company has a debt ratio of more than 1, it implies that it has a higher number of liabilities compared to its assets. Conversely, a ratio that is less than 1 indicates that the company has a high proportion of its assets purchased using equity (Investors answers, 2019).

Debt Ratio = Debt

Total Assets

Redding Co.

Debt ratio = 199 = 0.62 or 62%

320

Neaves Co.

Debt ratio = 634 = 0.52 or 52%

1214

Comparison: Redding Co. has a higher debt ratio, meaning that a significant proportion of its assets are acquired using debt capital other than equity. Therefore, Redding Company is more leveraged compared to Neaves Company.

5. Ratios by Investors to Determine Performance

They are financial arithmetic ratios that are used in determining the amount of returns an investor expects if they obtain a company’s stock at the current market prices. The ratio help in determining whether the shares are under priced or overpriced (Peavler, 2019). The ratios to be used are the interest coverage ratio and preference dividend coverage ratio. 

a. Interest Coverage Ratio

It is used in determining the ease of a business in servicing the interest of its borrowed funds from the realized revenue (Ready Ratios, 2013). The higher the ratio, the better the financial stability of an institution. If a company has a ratio of less than 1.0, it is facing challenges in making ales to raise revenue.

Interest Coverage Ratio = Earnings Before Interest and Tax 

Interest Expense

Redding Co.

ICR = 80 ÷ 19 = 4.21

Neaves Co.

ICR = 503 ÷ 29 = 17.34

Comparison: Both companies have an ICR of more than 1. Therefore, they can pay their interest expenses quickly from the revenue realized. Neaves Company is better positioned to pay for interest expenses because it has a higher ICR compared to Redding Co.

b. Preference Dividends Coverage Ratio

It is a financial ratio used in determining the organization’s ability to for its preference dividends.  A company that has issued preference dividends determines its ability to pay the dividends on such shares using this ratio.

Preference dividends coverage ratio = Profits After Tax.

Preference Dividends

Redding Co.

= 49 ÷ 0 = 0

Neaves Co.

379 ÷ 100 = 3.79

Comparison: Redding Company has not issued any preference shares; hence, it doesn’t pay any preference dividends. Neaves Co. has issued preference shares and has a preference dividends coverage ratio of 3.79. The latter company can, therefore, pay for the preference easily when they are due.

References – Strategic Finance Management Essential Reading

Bragg, S. (2019) Gearing ratio, Accounting Tools

Clear tax, (2018) Profitability Ratio Formula with Examples

Daniel, E. (2018) Return on Capital Employed

Deloitte (2019) Finance Strategy solutions

Eliodor, T. (2014)  Financial Statement Analysis, Journal of Knowledge Management, Economics, and IT.

Investing Answers (2019). Debt Ratio

Kenton, W. (2019) Current ratio Analysis – Strategic Finance Management

Kenton, W. (2019)  Strategic Financial Management

Nicasio, F. (2019) Inventory Turnover Definition and How to get it Right

Peavler, R. (2019). Asset Management ratios in Financial Analysis

Ready Radios, (2013) The definition and application of equity ratio – Strategic Finance Management

Schmidt, M. (2019) Returns on Investment Metric for measuring profitability

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Cryptocurrency Financial Operations

Consumer Perception of the Effectiveness of Cryptocurrency in Day To Day Financial Operations – Dissertation

Cryptocurrency has not received that much attention from IS (Information Systems) and as a consequence of this, there is still a gap in the literature with a great potential for research, specifically how the technology fares within the consumer context. Most notably, this dissertation is interested at the traction Cryptocurrency is gaining in today’s economy and how consumers are responding to this innovation. This dissertation will broadly present the evolution of Cryptocurrency, its financial characteristics, and what factors influence its value formation. The focus will then shift at the underlying models that are used both in a practical and academic setting to illustrate the factors that contribute to the acceptance and diffusion of a new technology. The conceptual model will be based on the Innovation Diffusion Theory of Everett Rogers.

Using a specifically designed questionnaire, consumer opinions are quantified in order to ascertain current attitudes and beliefs. Furthermore, after examining specifically designed hypothesis that deal with technology adoption, it was discovered that pivotal factors such as complexity, relative benefits and education play a distinct role in the uptake of Cryptocurrency. This is important because as a new technological instrument, Cryptocurrency opens the door to a number of opportunities for consumers, but only after overcoming a number of challenges and limitations that might prevent it to be accepted.

Cryptocurrency Dissertation
Cryptocurrency Dissertation

Thus, the aim is to investigate the monetary characteristics of a financial innovation in conjunction with the sociological component. This will lead to a better understanding of the constructs that influence the decision to adopt a novel technology by looking at a number of social and psychological factors. An overview of the leading technology adoption theories is provided that will address a number of cognitive, effective and contextual factors. While the study could potentially draw from all these theories, the Innovation Diffusion Theory of Everett Rogers will serve as a foundation, and all the assumptions will be based on this particular model.

Dissertation Objectives

  • What is the consumer response regarding the use of cryptocurrencies in day to day financial operations?
  • The main objective of this dissertation is to determine the level of consumer awareness, perception and degree of utilisation.
  • What are the main factors that influence the consumer intention to adopt cryptocurrencies?

Dissertation Contents

1 – Introduction
Background and Context
The Rationale for the Research
Research Objectives

2 – Literature Review
The Evolution of Cryptocurrency
What Is Cryptocurrency And What Is It Based On?
What Gives Cryptocurrencies Value?
Difference between Cryptocurrency and Traditional FIAT Currency
Cryptocurrency Nomenclature
Advantages and Disadvantages in using Cryptocurrency
Advantages
Disadvantages
Technology Adoption Theories
Hypothesis

3 – Methodology
Research Philosophy
Research Approach
Research Design and Strategy
Sample Size and Population
Ethical Considerations
Data Analysis

4 – Results
Demographics
Familiarity
Adoption Factors

5 – Research Findings and Discussion

6 – Conclusion

References

Appendix
Questionnaire

View This Dissertation Here: Cryptocurrency Dissertation

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