Understanding of classical and modern, domestic and global operations of money and capital markets
Introduction
A global financial crisis occurs in the year 2007-08. In simple words global financial crisis means when the borrower globally is unable to pay its debt. This happens due to the reason that the banking sectors were providing loans on huge numbers. This increasing amount of loan increases the quantity of money in the market. With the increase in money supply, the value of money reduces i.e. in other words, the purchasing power of the consumer decreases. This has resulted in an increase in the price of the commodity specifically the price of house property. Now when the time for repayment of loan arrives, the debtors were unable to repay the same. This has resulted in the bank to become bankrupt. Such situation has greatly impacted the economy of the world. And the bank worldwide was refusing to provide a loan to the needed. This has adversely impacted on the growth and sustainability of the economy and thus global financial crisis (Kohn, 2009).
Solution to question: 1
Impact of global financial crisis
Impact on the stability and interconnectedness of international financial markets and economies
Due to global financial crisis, the banking institution worldwide hesitates to provide loans to every borrower. Before providing any loan, they started carrying the in-depth analysis of the credit risk of the borrower, past performance of the borrower, repayment history of other loans, a net worth of the borrower, etc. Thus only big corporates having such history of performance were able to get loans, whereas other small and medium enterprise and individuals were not able to take a loan. Thus global financial crisis had negatively impacted the stability of the international financial market. This is so because, after the financial crisis the government of relevant countries imposes strict control and vigilance over the banking activities. Now to access international market and work there requires huge money and without bank finance, such activity is not possible. Thus the volume of international trade has also reduced to a greater extent as the market participant cannot have to financial assistance from the banking institution (Elio and Massiliano, (2010)).
Impact on the regulatory responses that have been implemented in an attempt to stabilize the financial system
With the occurrence of financial crisis, the financial economy of several countries has impacted much. This has caused a reduction in GDP, and national income of the company as banking institution is an important part of the economy of the country, and thus with the downfall of a banking institution, the economy of the nation is overall impacted. Thus this requires the government of relevant countries to take stringent action firstly for recovery of debt and secondly devising stringent provision for the Bank to provide a loan to the borrowers. The government has also increased the responsibility of apex bank to control the activities of all the banking institution operating in the country (Belka, 2009).
Solution to question: 2
The impact of the global financial crisis on business continuity.
Global financial crisis has resulted in the bank to become bankrupt. And thus has greatly impacted the economy of the world. The banks world-wide were refusing to provide a loan to the borrower. The financial economy of several countries has impacted much. This has caused a reduction in GDP and national income of the company (Ait-Sahalia et. al. 2012).
Business continuity risk management
The objective of the company to operate for an indefinite period without any objective to liquidate within a given period. Thus to survive for a longer period they always carry out their activities prudently in the given economy. With increasing globalization, modernization and business environment complexities, competition has increased much, and the company is required to change their activities as per the changing business environment. These changes are not within the control of the organization, and the company is required to adopt to these changes to survive. Thus it can be said that there is always risk into the continuity of the business. For instance, due to global financial crisis, certain companies were not able to take a loan from the banking institution, and finance being an important resource, without the same the company cannot survive. In such situation, the company should have in place a business continuity risk management strategy to mitigate such risk (Boddy, 2011).
By business continuity risk management, we mean the risk of business continuity by keeping in force an appropriate plan. For instance, if there any natural or man-made disaster occur in one office of the company than the company should have an alternate office in place providing similar service. This will ensure continuity of the business activity and mitigate the risk of business continuity. Thus now a day, business continuity risk management has gained much importance in almost every organization due to uncertainty existing in the current business environment (Racicks and Vasiliauskaite, 2010(.
Core components of a disaster recovery planning process
Disaster recovery plan implies the plan which helps the company to continue its business activities whenever any disaster occurs. In other word is a contingent plan made to ensure the continuity of business activities and reducing the harmful impact of such disaster. Thus these plans should be devised with the active involvement of both top management and employee of the companies to ensure the fruitful use of such plan.
Before determining the core components of a disaster recovery planning process, it is necessary to identify the core activities of the organization, without which the company cannot survive i.e. continue its activities (Zaman, 2009). Thus following can be identified as the core components of a disaster recovery plan:
List of core activities of the companies;
Person responsible for taking initiatives to follow plan for disaster recovery;
Actions to be taken in case disaster occurs;
Details of alternate resources form where core activities will be conducted.
Core components of a disaster recovery response process
Immediate action by the responsible person;
Informing about the disaster to the alternate resources and other required person;
Safety of the employees;
The immediate takeover of the core activities by the alternate resource.
Conclusion
From the above discussion, we can conclude that global financial crisis was highly undesirable for the economy and the industry as the whole it has a huge impact on the continuity and stability of the company. For this, the importance of disaster recovery plan has been increased (Mishkin, 2011).
Bottom-up analysis approach focus on the analysis of accounting ratios and other performance measures
Introduction
In the given case the senior investment analysts of an investment advisory firm, apply the bottom-up approach to the fundamental analysis of share prices. Thus here we have to discuss the following question in respect of bottom-up approach. Both top down and bottom up approach are used for performance measurement. The only difference is that this two method had their separate method of performance evaluation.
Solution to question: 1
Bottom-up approach for performance measurement
Reason for the use of bottom-up approach
By bottom up approach, we mean analyzing anything in depth and from the bottom of the aspect. In respect of bottom-up approach for the analysis of share, we mean analyzing the individual share in isolation without considering the economy and the industry in which the company operates. This is because the company may perform well irrespective of the poor condition of economy or industry in which the company operates. If an analyst uses bottom-up approach for the analysis of a share, he will be analyzing the company’s performance, its financial reports, its product and services, the demand for such product and services, etc. In another word, we can say that we have to look at every aspect of the company’s activities which will impact the performance of the company. For this financial position of the company is also reviewed to ensure whether the same is beneficial to the company or not (Boddy, 2011).
Thus we can say that using the bottom-up approach we can look into the company in detail and can take a well-informed investment decision. There is several tools for making bottom up approach, the most important being ratio analysis (Wolfe, et. al. 2013).
Accounting ratios that should be included in a bottom-up approach model
Analyzing the financial performance and position of a company using ratio analysis technique is most common and important approach (Mohammad, 2015). Now the accounting ratios that should be included in a bottom-up approach model are discussed as below:
Current ratio = this is calculated to check the whether the working capital of the company can meet its current obligation or not. This also checks the liquidity of the company. The current ratio is calculated by dividing total assets by total liabilities, thus the greater the ratio, the more it will be beneficial to the company;
Debt-equity ratio: this calculates how much of the company asset is financed by equity and debt. Debt equity ratio = Debt/ equity. Thus the lower the ratio, the more it will be beneficial to the company;
Gross/ net profit ratio: this implies how much profit the company has earned by carrying out its activities. The more efficiently the company carries out its activities, the more will be the company’s profit. Profit increases the net worth of the company (Patel and Gabani, 2012).
Dividend pay-out ratio: this implies the portion of total earnings made by the company distributed to the shareholder and the portion retained for the growth of the company;
Net worth: this implies the actual value of the company at a given point of time. This is calculated by reducing the total equity of the company by un-distributable retained earnings;
Asset turnover ratio: this is calculated as total sales/ total asset of the company.
(Inanga and Ajayi, 2011)
Other performance measures
Apart from ratio analysis, there are several other ways by which the performance of a company can be assessed. Some of these performance measurement tools are at this moment discussed:
Assessing the financial statement of the company along with the notes to accounts of the company. This will give the analyst an insight on the financial performance and position of the company. From analyzing the notes to accounts of the company, we can come to know about the contingent asset and liabilities of the company;
Director’s report: this report also gives a detailed insight into the non-financial aspects of the company having impact on the performance and future aspect of the company;
The credit rating of the company is also a performance measurement parameter in respect of financial standing and credit worthiness of the company.
Solution to question: 2
Top down and bottom up approach for performance measurement
Both top down and bottom up approach are used for performance measurement. The only difference is that these two methods had their separate method of performance evaluation.
Comparison of top-down and bottom-up approach for performance measurement
All these two approaches are used for performance measurement. But the methods are different.
Top down approach is wider approach and looks into the performance of the company after taking into consideration the economic environment and the industry in which it operates. It does not analyze a company and its performance in isolation. Thus while assessing the performance of the company, its results are compared with industry standards and performance, and then only investment decisions are taken. According to this approach, a company’s performance is highly impacted by the performance of the industry to which it belongs. And the company has a direct relationship with the industry and economy conditions.
On the other hand, bottom-up approach implies analyzing the company’s performance in isolation without considering the economy and the industry in which the company operates. This is because the company may perform well irrespective of the poor condition of economy or industry in which the company operates. And in-depth analysis of company’s performance is necessary for appropriate decision making.
From the above discussion, we can conclude that top-down approach is beneficial to small investors where the investors are concerned with dividend and market conditions, whereas bottom-up approach is beneficial for large investors to carry in-depth analysis before making an investment decision.
Analyzing top down approach
From the above discussion, we know that top-down approach looks into the performance of the company after taking into consideration the economic environment and the industry in which it operates. This is so because as per top down approach company’s performance is highly impacted by the performance of the industry to which it belongs and has a direct relationship with the industry and economic performance. Thus when these is deflation in the economy, then the company may not perform well. Thus while analysing the performance of a company the analyst also interested in forecasting changes in global and local economies because changes in these economies impact the company’s performance as well. For instance, a global financial crisis has led much company to become bankrupt due to in ability to pay its debt. Similarly, if the government imposes new taxes, then it will reduce the profit of the company.
Conclusion
From the above discussion, we know that top-down approach looks into the performance of the company after taking into consideration the economic environment and the industry in which it operates. On the other hand, bottom-up approach implies analysing the company’s performance in isolation without considering the economy and the industry in which the company operates.
Listing on a stock exchange – requirements, conditions, and cost of listing.
Introduction
In the given case we are required to discuss in respect of a newly formed public company in the process of listing on the Australian Stock Exchange. We know that only a public company is listed on the stock exchange. When a company is listed on a stock exchange the share of such company becomes tradable, and thus any individual or entity can become the shareholder of the company by acquiring the shares of the company from the market. Thus we can observe that the public money is involved in listed companies. To ensure that the public money is not missing utilized, stringent provision is in place for a listing of a company in ASX. There is a requirement of protecting the interest of the shareholders.These listing requirement helps to assess the company its ability to make efficient use of public’s money (Governance Institute, 2014).
Solution to question: 1
Rights, responsibilities, and roles of different stakeholders for seeking to list on the Australian stock exchange
Following are discussed the listing requirement that the stakeholders of Freelance Ltd. are required to follow for listing on the Australian stock exchange:
The company should have at least 300 independent shareholders;
Each of this shareholder should have a minimum investment of A$ 2,000;
The company should have free float of at least 20%;
The company should have either:
Aggregate profit of A$ 10,00,000 or more from its operating activities from the preceding three years and at least A$ 500,000 from the last 12 preceding months; or
The tangible asset of A$ 4 million or greater or market capitalization of A$ 15 million and above.
The company should approve the listing decision be holding a general meeting for its approval by the shareholder of the company;
Other listing requirements:
The company must be carrying on appropriate business;
It must elect a person who is responsible for communicating with ASX;
The company must have the required constitution;
(Business roundtable , 2012)
From the above discussion, it can be said that there are several requirements that the company is required to fulfill before getting listed on ASX. All these requirements seem to be stringent, but such listing provision is necessary to ensure that the public money is in safe hands and optimum utilization of the same should be made.
Solution to question: 2
Necessity of having these listing requirements
We know that only a public company is listed on the stock exchange. When a company is listed on a stock exchange the share of such company becomes tradable, and thus any individual or entity can become the shareholder of the company by acquiring the shares of the company from the market. Thus we can observe that the public money is involved in listed companies. Thus to ensure that the public money is not miss utilized, stringent provision is in place for a listing of a company in ASX (Plessis, 2015). There is a requirement of protecting the interest of the shareholders. Moreover, the company should be carrying on large business and have huge net worth so that they can use the money for the benefit of the stakeholders as a whole.These listing requirement helps to assess the company its ability to make efficient use of public’s money. The necessity of listing requirement is the obvious to control the admission process; otherwise, every company would apply for listing irrespective of their financial standing and nature of business. For instance, the requirement of non-affiliated members, minimum aggregate profit, net worth, reporting requirement, etc. all these help to control the activities of the listed companies and to ensure that the public money is in safe hands Hooghiemstra and Manen, 2004).
Requirement and need for continuous reporting
As per listing requirement, the company is required to report half yearly and annual financial statement to the required regulatory. All these financial statements are required to be audited by the independent auditor of the company. This will ensure that the financial statement reflects a true and fair view of the state of affairs of the company (Wheeler, 2012). Thus apart from an initial listing requirement, the listed company is required to file regular reports as well. As per ASX, the company is required to file half yearly and annual financial with the respected regulatory authority to ensure that the activities of the company are carried on as expected within the regulatory requirements and on prudence basis. In the regard of regular reporting, the company is required to have prepared its financial statement as per the accounting standard issued by ASB. These standards contain the manner in which the different items of the financial statement should be accounted for and presented in the annual report of the company. These are the major source towards the knowledge about the financial position of the company. Every company is required to follow such standard especially the listed one. All these requirements to ensure on an ongoing basis that the company is making proper utilization of fund and is not used for the benefit of any individual. Continuous reporting will ensure continuous check and control over the activities of the company (ASX 2003).
Conclusion
From the above discussion, we can finally conclude that the company is required to follow several requirements before getting its securities listed in stock exchange. This listing requirement helps to assess the company its ability to make efficient use of public’s money. Moreover, to analyze the performance of the company on a continuous basis, there is also half yearly and yearly reporting requirement (Sheenan, 2010).
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