StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Financial Markets and Bank Management - Assignment Example

Summary
The paper "Financial Markets and Bank Management" discusses that the current earnings per month that Shao earns compared to current expenses and expected school fees payment per term of his younger son demonstrates he is unlikely to keep positive cash flow in the future. …
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER95.2% of users find it useful
Financial Markets and Bank Management
Read Text Preview

Extract of sample "Financial Markets and Bank Management"

Financial Markets and Bank Management Question a) Under the current estimated balanced sheet amounts of the business, the workingcapital of the business will be as calculated below. Working capital = current assets – current liabilities (Brigham & Houston, 2009) Current assets = £559,000 Current liabilities = £400,000 Working capital = £559,000 - £400,000 = £159,000 Similarly, the working capital is likely to change if the proposed amendments individually and all together are undertaken as reflected in the computations below. (1) Debtors estimated at 20% of projected sales Projected sales = £1,550,000 Debtors = £1,550,000 * 20% = £310,000 Working Capital = £661,000 - £400,000 = £261,000 (2) New equipment purchased at £25,000 Cash = £40,000 - £25,000 = £25,000 Working capital = £159,000 - £25,000 = £134,000 (3) Creditor estimated to be 15% of projected sales Projected purchases = 15% * £900,000 = £135,000 Working capital = £159,000 - £135,000 = £24,000 (4) All together Current assets = £311,000 + £310,000 + £25,000 = £646,000 Current liabilities = £135,000 + £200,000 = £335,000 Working capital = £646,000 - £335,000 = £311,000 Accordingly, the working capital of the business will increase if the proposed amendments are realized. (b) The working capital and the financial ratios provided for the business in the last four financial years provide a vital base of responding to the client’s request. Accordingly, the financial ratio of gearing ratio under financial structure depicts the debt level of the firm is improving from previous financial year. This is because the 94% of gearing ratio 2014 implies the level debt finance is 94% of equity finance while in 2013 it stood at 104%. This indicates that less assets are attached to debt finance compared to equity finance that is instrumental in ensuring the firm is not financially constrained in future in servicing the bank loan using its assets (Suresh & Paul, 2010). In addition, the amount of profit that to sales indicates that the firm has enhanced management of costs that is vital in enabling the increase from 1.6% to 2.4% in 2013 and 2014 respectively. Thus, the firm has potential of building adequate retained earnings in future to service the bank loan and interests when they fall due (Brigham & Houston, 2009). However, the times of interest cover reflected in the calculated financial ratios for 2014 and 2013 financial years reflect that the ability of the firm in settling interest obligations when they fall due using earnings before interest and taxes is reducing. This has the potential of causing the firm to default servicing the interest financial obligation when they fall due in future (Sornette, Ivliev, & Woodard, 2012). However, the ability of settling the interest obligation by two times using earnings before interest and taxes is positive signal the firm has financial strength of settling interest obligations when they fall due in future. Another aspect of the firm in obeying its obligation in servicing the extended bank loan is profitability ratios attached. Even though the profitability of the firm has remained positive in the last four years as reflected by the financial ratios, the profitability strength of the firm has been reducing as reflected in the previous financial year’s gross and net margin ratios. Thus, the potential of the business in facing financial difficulties in settling the bank loan using generated profit is likely to arise under the given trend (Suresh & Paul, 2010). Furthermore, current and acid ratios that measure the ability of a firm to service current financial obligations using current assets depicts the liquidity strength of the firm are declining. Thus, the potential of the firm in failing to settle interest and principal amount in future is likely to arise in future that might cause the bank to incur losses (Fabozzi & Drake, 2009). Owing to the financial position reflected on the firm by the financial ratios, the loan should not be extended. Question 2 Extending an overdraft to a client should be informed by the liquidity strength of the client’s financial trend. This implies the ability of the client in maintaining positive cash flow trend and been able to offset cash financial obligations when they fall due. The ability of a client in maintaining a positive cash flow and offsetting cash obligations ensures that the client is able to service the overdraft interests and principal amount when they fall due (Fabozzi & Drake, 2009). Accordingly, the decision to offer Shao the requested overdraft should be informed by the extent of him been able to settle the cash financial demand in future promptly as agreed in the agreement. An intensive analysis on the current and potential future financial position of Shao demonstrates that the overdraft request should not be granted. One of the aspects that demonstrate if Shao is capable of servicing the overdraft amount and interests accrued is his spending rationale. The spending behavior of Shao depicts that he has the potential of consuming more than he generates due to his unplanned spending. This has the potential of hindering a positive cash flow in future that is essential in enabling one to service an overdraft obligation and interest when they fall due (Sornette, Ivliev, & Woodard, 2012). Thus, Shao has high potential of causing Shao to default the overdraft obligations in future that will cause loss of revenue for the bank. In addition, the overdraft growth trend that Shao is facing depicts that he is likely to face financial difficulties in future to settle financial obligations. The overdraft amount that Shao is facing has been rising steadily that means granting an overdraft worth £10,000 will heavily in debt him in future financial obligations. Consequently, the potential of Shao to face financial constrains in meeting the high financial obligations will be higher. Furthermore, the current earnings per month that Shao earns compared to current expenses and expected school fees payment per term of his younger son demonstrates he is unlikely to keep positive cash flow in future. This is because the earnings per month are less compared to the fixed expenses that Shao will be facing in future (Fabozzi & Drake, 2009). Thus, Shao will be unable to service the financial obligations of overdraft loan granted in future due to financial constraints. Consequently, it is irrational to extend the overdraft request by Shao since it has the potential of causing the bank to suffer losses in future due to his high default risk. References Brigham, E. F., & Houston, J. F. (2009). Fundamentals of financial management. Mason, OH: Thomson/South-Western. Fabozzi, F. J., & Drake, P. P. (2009). Finance: Financial Markets, Business Finance, and Asset Management. Boston, OH: John Wiley & Sons Inc. Sornette, D., Ivliev, S., & Woodard, H. (2012). Market risk and financial markets modeling. Berlin: Springer. Suresh, P., & Paul, J. (2010). Management of banking and financial services. Noida: Pearson. Read More

CHECK THESE SAMPLES OF Financial Markets and Bank Management

Financial Management of a Company

The paper "Financial management of a Company" highlights that to increase the internal capacity of investment in XX Chemical needs to invest more in this country so that it can achieve high economies of scale in terms of output compared to an increase in input.... his is one of the most recently developed methodologies for international capital investment and it was developed in 2002 by Zenner and Akaydin for leading US investment bank Salomon Smith Barney (Anson, 2011, p....
9 Pages (2250 words) Coursework

Australian Securities Exchange

The paper "financial markets" research to determine the appropriate financing instrument for the company as per the future interest rate condition.... The main aim of the management is to develop a balance between the cost of capital and risk factors.... Before finalizing any decision, the management would be interested to evaluate the future of Australian Interest rates in the coming months.... The global market has undergone a great transitional phase after the onset of the financial crisis of 2008 in the US....
6 Pages (1500 words) Report

Financial Markets and Institutions

The management referred is in terms of mobility, liquidity and risk management factors including sound saving and investment decisions mainly for corporations with controlled information resulting from long term ties between the bank and the corporate manager.... It provides the market with a solution to capital investment within the market along with risk management aspects of control etc.... The author states that the benefit of the financial system for the economy refers to the economic growth being the parameter of contribution level by the financial system while the debate accounted for the comparison of two systems of bank-based versus the market-based financial system....
8 Pages (2000 words) Term Paper

Global Financial Markets

This is basically because of technological advancement that has seen the integration of financial markets and intermediaries globally (Rejendran, 2012).... financial markets can broadly be defined as an aggregate comprising of possible buyers and sellers of financial securities, commodities and other fungible items (Rejendran, 2012).... The paper "Global financial markets" is a great example of a finance and accounting essay.... financial markets can broadly be defined as an aggregate comprising of possible buyers and sellers of financial securities, commodities and other fungible items (Rejendran, 2012)....
8 Pages (2000 words) Essay

Financial Regulation of Netherland Bank

Financial rules are mainly set up for various reasons such as to protect persons or organizations who or decide to invest, enhance stability in the financial markets and ensure there is order in the financial markets.... A bank tax is a tax that banks pay per year on the value of all the debts of the banks in that country including money deposited with them (Knight, 2011).... The financial regulation has been looked at is the bank tax introduced in the Netherlands....
10 Pages (2500 words) Essay

The Dubai Financial Market Focus on Dubai Islamic Bank

The paper 'The Dubai Financial Market Focus on Dubai Islamic bank' is a perfect example of a finance & accounting report.... The paper 'The Dubai Financial Market Focus on Dubai Islamic bank' is a perfect example of a finance & accounting report.... his study will focus on Dubai Islamic bank (DIB) which is listed or is part and puzzle of the DFM.... It was the first Islamic bank in the world that was undisputed in the banking field....
6 Pages (1500 words)

Financial Market Transaction

Capital and Money markets are financial markets that shape the performance and perpetuation of a company or a firm.... Capital and Money markets are financial markets that shape the performance and perpetuation of a company or a firm.... Capital and Money markets are financial markets that shape the performance and perpetuation of a company or a firm.... Although there are many financial markets, the most common ones are capital and money markets....
13 Pages (3250 words) Research Paper

Qatar Financial System

Additionally, the bank has the mandate of monetary policy management in the country (Mansur, A.... atari Central bank ... atari Central bank legal authorization for the national currency issue happened in 1993.... The bank was given a charter to the bank for other banks, as well as, the government.... However, the term markets most of the times refer to exchanges and then parties that facilitate the financial security trade....
10 Pages (2500 words) Case Study
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us