Diverse Markets and Their Roles in the Context of the Nations Capital Markets - Assignment Example

Questions Assignment Name Institution Questions Assignment Question 1: Domestic and International Capital Markets The purpose of this section is to describe and discuss diverse markets and the functions or roles in the context of the nation’s capital markets. Equity Market Equity market refers to the market or platform, which enables companies and business entities to raise the essential or required capital while giving investors the opportunity to gain through allowing the companies’ stock shares to undergo transactions or trading activities. From this illustration, equity market is a market for the issuance and trading of the shares through exchanges, as well as over-the-counter markets. In most cases, business and economic practitioners refer to equity market as the stock market. The equity market comes out as one of the most essential aspects or facets of the economy. This is through provision of accessibility to the companies in relation to capital. Moreover, investors have the opportunity to gain a slice of ownership in the trading companies with the potentiality of realizing gains under the influence of the future performance of the business entity. The development of the equity market is one of the significant determinants of corporate financing choices, as well as the long-run economic growth of the nation of interest (Roxburgh, Lund, & Piotrowski, 2011). This is through the essence of liquidity, which acts as the focal channel aiding accumulation of capital and allocation. The equity market contributes to the GDP of the nation while offering substantive employment positions, thus increase in the economic growth. Corporate Debt Market Corporate debt refers to the non-government debt securities. From this perspective, corporate debt market refers to the platform or marketing structure for the issuance and trading of the non-government debt securities. In the short-term, it is vital to issue corporate debt as commercial paper, which differs from the long-term debt in the form of bonds. The corporate debt market focuses on the provision of the platform for the trading (issue and trading) of the debt instruments (Roxburgh, Lund, & Piotrowski, 2011). The debt instruments relate to the assets, which demand or require a fixed payment to the holder of the instrument. In most cases, the fixed payment must also integrate interest. The issuance of the bond has the tendency to increase the debt burden in relation to the bond issuer because of the payment of the contractual interest. The primary and secondary markets in relation to the corporate debt market tend to link the relevant corporate issuers and investors effectively and efficiently. The domestic, as well as international corporate debt markets are critical in the provision of diverse or different needs in accordance with the economic policies and expectations. This market is valuable in the course of generating, as well as sustaining enterprise, economic growth, and business investment, thus massive contributions to the GDP of the nation of interest. Government Debt Market This refers to the environment, which facilitates issuance and trading of the debt securities. Nevertheless, only the issuance and trading of the government-issued securities occur in this market. In most cases, the trading occurs over-the-counter under the influence of the organized electronic trading networks, thus the platform for the primary and secondary markets. In the primary market, the issuance and trading of the debt securities remain the obligation of the borrowers to lenders (Carluccio & Fally, 2012). On the other hand, secondary market enables investors to procure and trade the previously issued debt securities amongst themselves. Government debt or bond security refers to the debt obligation or a bond issued by a government authority under the promise of repayment upon maturity backed by the government in question. It is possible for the government or any other agency of the government to issue a government security. According to economic and business practitioners, these securities are low-risk because of the backing from the taxing power of the government in the course of raising substantive revenues. In most cases, governments have the responsibility and tendency to use the securities to aid the economic growth and development, thus improvement of the societal welfare. Foreign Exchange Market Foreign exchange market refers to the global market, which provides the platform for trading of the convertible currencies, as well as determination of the conversion rates of such currencies. Foreign exchange market has the obligation of offering physical, as well as the institutional structures to facilitate exchange of currencies for that of another nation. In addition, the market is ideal in the determination of the rate of exchange between currencies. Similarly, the market provides the structures for the physical completion of the foreign exchange transactions (Roxburgh, Lund, & Piotrowski, 2011). It is vital to illustrate the concept of the foreign exchange transaction. Foreign exchange transaction refers to the agreement or contractual obligation between a seller and a buyer relating to the delivery of a specified amount of one currency at a particular rate for some other currency. From the above illustration, it is critical to note that the foreign exchange market operates as the technique to facilitate the transfer of purchasing power from one nation to another. In addition, individuals and firms have the ability and potentiality to utilize this market to obtain or offer credit for the international trade transactions while minimizing the exposure to the various foreign exchange risks. These activities lead to the increase or growth in the GDP of the nations, which continues to engage in exportation trading practices. Derivatives Market Derivative refers to the security whose price depends upon one or more underlying assets. This relates to a contract between two or more parties relating to the asset or assets where determination of the value incorporates fluctuations within the underlying assets. Some of the common underlying assets in this market include currencies, interest rates, bonds, stocks, commodities, and market indexes. From the above illustration, it is critical to note that derivatives come out as financial instruments with the potentiality of transferring risks from one party to another (Carluccio & Fally, 2012). The name emanates from the fact that such instruments derive their value from the value of something else with reference to underlying interest, right, and asset inclusive of the loans, as well as loans. These underlying rights and interests have the tendency of relating to the interest rate, currency risks, equities, and credit issues. These transactions are ideal towards aiding the growth and development of the economy through increased investments and trading within the derivatives market. Question 2: Corporation A corporation comes out as a legal entity under the Corporations Law of a nation, as well as listings on the stock exchange. A publicly listed corporation has the tendency of relying on capital markets towards the achievement of the long-term financial resources and demands. There are various equity and debt funding alternatives at the disposal of a corporation. The purpose of this section of the research paper is to identify and explain various funding alternatives, as well as techniques, which are available at the disposal of a corporation. Secondly, the paper will describe and discuss in detail two equity-funding strategies and one debt-funding strategy, which might be effective and efficient in addressing the long-term financing needs of a corporation (Covas & Den, 2012). Corporations have the opportunity to integrate equity and debt funding mechanisms in the course of addressing their short-term, as well as long-term financial requirements. In the first instance, equity capital tends to represent the personal investment of the owner (s) within the corporation. In most cases, such aspect of capital is a risk capital because of the need for the investors to assume the risk of losing their financial in case the business activity fails. There are various strategies for the equity funding in addressing the financial requirements of the corporations in the long-term context. In the first instance, it is appropriate to consider the usage of the personal savings, which is the most common approach or source of equity funding for starting a corporation. In most cases, outside investors, as well as lenders expect business owners and entrepreneurs to put some of their capital into the corporation prior to investing theirs. Secondly, it is also possible to obtain diverse financial resources from friends and family members as an approach to equity funding (Covas & Den, 2012). Corporations might also address their financial requirements through the usage of the private investors aiming at backing emerging entrepreneurial entities with their financial resources. Similarly, corporations might seek to incorporate the corporate venture approach as an element of the equity funding to handle the financial requirements of the business or legal entity. It is essential to note that 30 percent of all venture capital investments come from corporations. Most venture capital companies tend to look for competent management, competitive advantage, viable exit strategy, and intangibles. Organizations might also address their financial requirements through the IPO (Initial Public Offering) or going public. This is through deciding to raise capital through selling shares of its stock to the public for the first time (Mande, Park, & Son, 2012). On the other hand, corporations might consider adoption and integration of debt funding approaches such as loans from commercial banks, trade credit, asset-based lenders, equipment suppliers, saving, and commercial finance companies. There attributes are ideal in the course of aiding execution of the financial resources of the corporation in the long-term context. Initial Public Offer According to business and economic practitioners, IPO comes out as the stock market. This approach focuses on floating on the stock market, which involves publicly offering of the shares towards raising substantive capital to address the financial demands and expectations of the corporations in the long-term. This approach can be more expensive, as well as complex option because of the risks of not raising adequate funds relating to poor marketing conditions (Mande, Park, & Son, 2012). One of the benefits of this approach is the potentiality of the corporation to raise large amounts of capital while improving its corporate image and reputation. In addition, the approach provides the opportunity for improved accessibility to the future financing, thus the perfect platform for the corporation to attract, as well as retain the valuable and productive employees. Furthermore, corporations seeking to use this funding mechanism might incorporate stock for acquisitions through the listing on the stock exchange to address long-term financial issues or problems. On the other hand, corporations might experience negative implications through utilization of this approach. This is through increased dilution of the founder’s ownership, loss of control, and loss of privacy. Additionally, such corporations must also encounter issues such as filing expenses, inappropriate timing, and pressure in relation to short-term performance (Mande, Park, & Son, 2012). Finally, IPO associates with increased accountability and transparency issues to the shareholders in the course of addressing financial requirements of the company. Venture Capitalists This is also another form of equity funding, which relates to large corporations with the ability and potentiality to invest large sums in start-up businesses with the objective of gaining high growth, as well as large profit levels. From this perspective, the venture capitalists tend to require a large controlling share of the business while offering management, as well as the industry expertise with the aim of protecting their large investments. This approach has the tendency of enhancing business or corporation enterprise in associating with the capital financing, which is valuable in the decision-making in relation to human resource management and financial management. In addition, venture capitalists tend to enjoy adequate connections within the business community, which might be appropriate for the growth and improvement of the image and reputation of the corporation seeking to address its long-term financial goals (Covas & Den, 2012). On the other hand, such corporations have the responsibility of dealing with issues such as loss of control, as well as minority ownership status depending on the stake of the venture capitalists within the corporation. Financial Institutions Corporations have the opportunity to consider one of the debt funding mechanisms through obtaining loans or financial assistance from the financial institutions. Some of the financial institutions include banks, building societies, and credit unions with the potentiality to offer a range of finance products with short and long-term financial solutions. Some of the products from this funding mechanism include the provision of business loans, lines of credit, invoice financing, asset financing, and overdraft facilities, as well as the equipment leases. This approach tends to have its positive and negative implications in relation to the growth and development of the corporation (Covas & Den, 2012). For instance, corporations have the opportunity to address their long-term financial requirements and demands under the influence of the loans, as well as financial advice in relation to investment. On the other hand, corporations have the obligation of meeting certain criteria to acquire such loans, which they will have to repay with adequate interest amount. Question 3: Tassie Motorhomes Current Ratio Current ratio refers to comparison of a firm’s current assets against its current liabilities. $3,027,211/$1,842,090 = 1.643 Quick Ratio ($3,027,211-$1,450,200)/1,842,090 = 0.856 Cash Ratio Cash Ratio = (Cash + Cash Equivalents)/Total Current Liabilities = $270,011/1,842,090 = 0.147 Total Asset Turnover Asset Turnover = Sales or Revenues / Total Assets = $17,120,000.00 / $13,520,171 = 1.266 Inventory Turnover Inventory Turnover = Sales / Inventories = $17,120,000.00 / $1,450,200 = 11.805 Total Debt Ratio Total Debt Ration = Total Liabilities / Total Assets = $5,101,090 / $13,520,171 = 0.377 Debt-Equity Ratio Debt-Equity Ratio = $5,101,090 / $8,419,081 = 0.606 Equity Multiplier Equity Multiplier = Total Assets / Shareholders Equity = $13,520,171 / $8,419,081 = 1.606 Times Interest Earned Times Interest Earned = EBIT / Total Interest Payable = $ 5,012,500.00 / $ 309,480.00 = 16.197 Cash Coverage Ratio Cash Coverage Ratio = (EBIT + Depreciation) / Interest Expense = ($ 5,012,500.00 + $ 559,000.00) / $ 309,480.00 = 18.003 Profit Margin Profit Margin = Net Income / Revenue (Sales) = $ 2,821,812.00 / $ 17,120,000.00 = 0.165 Return on Assets Return on Assets = Net Income / Total Assets = $ 2,821,812.00 / $13,520,171 = 0.209 Return on Equity Return on Equity = Net Income/Shareholder's Equity = $ 2,821,812.00 / $8,419,081 = 0.335 Ratio Tassie Motorhomes Industry Current Ratio 1.6 0.5 Quick Ratio 0.87 0.21 Cash Ratio 0.15 0.08 Total Asset Turnover 1.27 0.68 Inventory Turnover 11.81 4.89 Total Debt Ratio 0.38 0.44 Debt-Equity Ratio 0.61 0.79 Equity Multiplier 1.61 1.79 Time Interest Earned 16.20 5.18 Cash Coverage Ratio 18.00 5.84 Profit Margin 16.5% 4.05% Return on Assets 20.9% 6.05 % Return on Equity 33.9% 9.93% Interpretation of ratios within the industry Inventory turnover refers to the cost of goods sold against the average inventory. In this context, the organization’s inventory turnover ratio is 11.81 in comparison to the average industrial ratio of 4.89. This is an indication that the inventory goes at a faster rate signaling effectiveness and efficiency in the inventory management. Moreover, the high inventory turnover rate is an illustration of less company resources tied up in inventory (Banerjee, 2015). In addition, the asset turnover of the company exceeds that of the average company. The objective of the asset turnover is to determine how effectively and efficiently an organization uses its total assets towards generation of revenues or sales. From this perspective, this company is highly efficient in the utilization of the total assets towards generation of the sales at the end of the fiscal period. Current ratio has the obligation of measuring the current assets of an institution against its current liabilities. This is an indication of the ability of an organization to pay off its short-term liabilities in an emergency through liquidating the current assets. From the higher current ratio in this company, it is ideal to note the ability of the business entity to pay current liabilities in the short run, thus high level of liquidity against potentiality of cash squeezing (Banerjee, 2015). Quick ratio has the tendency of comparing cash, account receivable, and marketable securities to the existing or current liabilities. The quick ratio for the company is 0.87, which is higher than the industrial average of 0.21. This indicates that the company has the potentiality of covering 87 percent of the current liabilities under the influence of the cash-on-hand as well as monetization of the receivable accounts (Avkiran, 2011). Cash ratio comes out as the most conservative liquidity ratio within an organization. The cash ratio of the company is 0.15, which is an illustration of the ability of the company to cover 15 percent of the current liabilities under the influence of cash and short-term marketable securities (Avkiran, 2011). This value is higher than the industrial average of 0.08. The total debt ratio of the company is slightly lower than the industrial average from the above calculations. This is an indication of the ability of the company to use minimum amount of the financial advantage, thus massive reduction in relation to the financial risks from the fixed interest payments. Similarly, the debt-equity ratio is slightly lower than the industrial average, which stands at 0.79. This low debt-equity ratio translates to the limited or minimum financial advantage, as well as risk. Moreover, the institution has the opportunity to limit the implications of dilution of ownership. Times interest earned or the interest coverage ratio plays a critical role in measuring the cash flows of the company in comparison to the interest payments. This ratio is extremely higher in comparison to the industrial average, thus an illustration of the potentiality of the company to generate strong earnings in comparison to the interest obligations. The organization’s profit margin is extremely higher in comparison to the industrial average, which standards at 4.05 percent. It is essential to note that for every $1 of the generated revenues, $0.165 remains following deduction of the cost of sales and operational expenses, thus strong position of the company within the industry (Banerjee, 2015). In addition, the calculations demonstrate high ROA and ROE in comparison to the industrial average. The high ratio in relation to ROA is an indication of the ability of the company to generate substantive earnings effectively and efficiently under the influence of the assets (Avkiran, 2011). On the other hand, the high ratio in relation to ROE is an indication of the potentiality of the company to attract high level of income to the shareholders against the level or volume of investment by such entities for the growth and development of the business. The equity multiplier is lower in comparison to the industrial level. This indicates that limited portion of asset financing by the company relates to the usage of debt, which is a lower volume in relation to the average industrial value. References Avkiran, N. K. (2011). Association of DEA super-efficiency estimates with financial ratios: Investigating the case for Chinese banks. Omega, 39(3), 323-334. Banerjee, B. (2015). Fundamentals of financial management. PHI Learning Pvt. Ltd.. Carluccio, J., & Fally, T. (2012). Global sourcing under imperfect capital markets. Review of Economics and Statistics, 94(3), 740-763. Covas, F., & Den Haan, W. J. (2012). The Role of Debt and Equity Finance over the Business Cycle*. The Economic Journal, 122(565), 1262-1286. Mande, V., Park, Y. K., & Son, M. (2012). Equity or debt financing: does good corporate governance matter?. Corporate Governance: An International Review, 20(2), 195- 211. Roxburgh, C., Lund, S., & Piotrowski, J. (2011). Mapping global capital markets 2011. McKinsey Global Institute, 1-38. Read More