Types of Financial Institutions - Assignment Example

Finance Assignment Student’s Name Institutional Affiliation Question 1 A. Types of Financial Institutions It is important to note that an efficient and modern financial system is composed of financial institutions, markets and instruments. It is mainly used to avail necessary platform for which central banks as well as notable regulators can directly impact on the immediate operations of a financial system as a whole (Roberts, 2008). Some of the notable types of financial institutions are discussed as follows; Depository Financial Institutions; deal with substantial amounts of deposits that emanate from savings made in such popular accounts as demand and term deposits accounts. Most of the depository institutions use these savings to provide short term loans to both people and other small business structures at a negotiable interest rate levels (Roberts, 2008). Some of the interest rates acquired are shared with certain depository accounts as agreed with the customer. Investment & Merchant Banks-are mainly involved with direct provision of advices to both corporate and government-based customers on different matters related to investment options viable within the market any given moment in time (Roberts, 2008). Some of the most popular matters addressed in this relationship include; aspects related to possible mergers and acquisition, portfolio restructuring and so much more. Contractual Savings Institutions- require that their customers ensure to affect periodic payments to an institution for a specified timeframe upon which the firm will reciprocate and pay the client these funds in the event that the agreement matures (Roberts, 2008). Some of the most known firms engaged in these forms of dealings include; life insurances, general insurers as well as notable superannuation funds. It is crucial to note that the funds collected s a result of the agreement is accumulated and invested in order to ensure that the clients expectations is fulfilled on a timely and agreed manner. Finance Firms: mainly accumulate their cash resources by way of placing financial instruments in both money and capital markets across the different world platforms (Roberts, 2008). These raised cash resources aid with operations as the entity uses it to effect loans and lease finance agreements to the customers at hand. Unit Trust: Is another form of financial institutions that are constituted under a trust agreement. The entity is overseen and controlled by an experienced trustee person of entity. Potential investors are allowed to purchase these units incorporated within the overall trust as the accumulated fund is later put onto major investments by the fund manager in different and specific assets-categories. B. Classes Of Financial Instruments Financial instruments are legally prepared reports that portray the contractual level of agreements between two parties that include; the provider and user of finances. In most cases, financial instruments are deemed to be financial securities since it fosters a future commitment of imminent cash flows. The main classes of financial instruments include; Equity: is a component that shows ownership interest within certain classes of assets. In most business entities, the aspect of equity is defined by the ownership of shares within a company. It can be noted that these forms of share ownership might take the form of common or ordinary shares. It might also incorporate hybrid security, which is basically a component that possess the attributes of both equity and debt finance structures. Debt Financing: is a form of loan provided to an entity that is subject to repayment within certain specified periods. These loans are always repaid with interest expenses. It is crucial to ascertain the fact that the holder of a debt instrument is fully engulfed with the borrower’s income stream levels basically ahead of the equity holders. Some of the most known forms of debt include; secured debt structures, which allows a lender the capacity to assume possession of the assets placed as a form of collateral in the event that the borrowers default payments. The negotiable debt instruments mainly involves financial debt instruments that allows free trading of ownership capacities held by different borrowers. Derivatives Instruments; refers to a distinctive form of instrument that derives its immediate value from a totally different form of instrument. In most entities, the acquisition of derivates is affected as a way of reducing or even speculates the level of risk-related exposures within a given period (Roberts, 2008). There are different forms of derivatives offered within the derivatives markets and they include; forward, future, option and swap contracts. C. Retail and Wholesale Markets & Money and Capital Markets Retail and Wholesale Markets There are different forms of differences that can be related to these markets and they are discussed as below; Retail markets involve transaction of a rather smaller quantity of cash resources and mostly, they are executed by individual persons as well as through small and medium sized entities through such important parties as the intermediaries. In essence, the SMEs sometimes have indirect level of access to wholesale markets through such notable components as the unit trusts. On the contrary, the wholesales markets involve substantial levels of transactions that might happen between institutional investors as well as borrowers (Roberts, 2008). These transactions are deemed to be significant in nature since they involve substantial quantities of cash resources. Money and Capital Markets Money markets are used by institutional investors that possess excess level of finances since these types of markets promotes efficient aspect of liquidity as well as a secondary market trading position. In consequence, funds within these markets are borrowed for specified short periods, which in most cases fall below one year (Roberts, 2008). In contrast, the capital markets are involved with stock options as well as form intermediate and long term debt structures that exceed a year. Question 2 Primary Roles and Functions Efficient & Well-Organised Stock Exchange It is important to ascertain that the primary roles and functions of such stock exchange as the Australian Stock Exchange (ASX) rest with trading. Efficient trading within this market involves the immediate transactions of outstanding and additional shares of fairly established public-owned companies and, also through initial public placements by private-based companies through the IPO market (Roberts, 2008). Through the IPO companies place stocks in order to access a form of capital that they might to execute future expansion programs. Notably, the stock exchange further facilitates the formulation and implementation of markets within a distinctive degree of financial securities. It thus means that any potential investor might access different forms of securities being offered at the exchange platform within any given moment. Subsequently, the well-organised stock exchange engages in information dissemination especially to the different stakeholders present in the system (Roberts, 2008). For instance, the market analysts are able to access important information related to the future of the company in comparison to the current undertakings and thus, provide necessary advice accordingly. Potential investors will also benefit from the information especially while trying to make effective and rational decisions pertaining to which forms of financial securities to include their respective trading portfolios (Roberts, 2008). Consequently, the stock exchange platform allows for immediate self-regulation processess in regards to how market behaves within certain periods. For instance, cases of high demand and supply are all noted and rectified in due time to avoid possible collapsing of the entire financial system. A primary market role happens whenever the companies require raising additional level of equity level capital within certain specified operational periods. The raising of additional capital might take the form of rights issues, share purchases plans as well as placements (Roberts, 2008). For instance, in the Australian Stock Exchange (ASX), apart from the equity securities in place there has been also high demand for debt instruments that pushed the market capitalisation to surpass a $1265B mark in 2009. It also foresaw the imminent increase in the number of listed entities to more than 2100 companies. These figures increased tremendously in 2014 especially because there was greater participation of entities within this platform. In contrast, a secondary role of the stock exchange platform rest with the purchasing and selling of underlying financial securities. In most cases, the procedure involves a shareholder issuing a potential sale to a given stockbroker who then ensures to place the order into the existing stock exchange securities trading platform (Roberts, 2008). Significantly, there will be an additional stockbroker that is expected to enter a purchase order in place of a different customer. At the end, the stock exchange securities will then be expected to complete the process by ensuring to match these orders and thus, guarantee sale of shares, transfer of possible ownership and immediate payments effected on the purchase at hand. Given that the secondary market roles provides a deep and liquid share market; entities are positioned fairly to reduce the level of incurred costs hence allow underlying investors to enjoy exposures of possible imminent risks. B. Listing and Flotation (IPO) Of A Business In the Australian market, the process goes as follows i) Identification and hiring of a banking institution: mostly underwriter bank that will provide advice on the level of amount needed as well as match it with the financial needs of the company. ii) Present Documents to ASIC; a corporate regulator of stock trading that also protects potential investors iii) Presenting Preliminary Prospectus Document: especially to identify potential investors and, it lists the estimates of prices for a share. iv) Going on Road Shows: where management seeks to garner interests to its stock offerings. In the course of this event, the management will ensure to formulate effective live presentations to all potential investors that might also include large institutional investors. v) Finalisation of IPO: happens after the show so that ASIC can provide effective registration for commencement of share purchases. vi) Distribution of IPO Shares; is the last phase and it involves the underwriters and others engaging in decision of determining the amount of shares that each investor whether institutional or individual will be able to purchase. C. Equity Funding Alternatives Available To Newly & Established Listed Firms Equity Funding Alternatives Available To Newly Listed Firms Immediately after an entity has engaged in IPO it is deemed to be newly listed and it has access to the following forms of equity funding alternatives; First, they may choose to participate in the issuing of additional ordinary shares: is easily effected because the firm is now operating within the stock exchange market and thus, might decide to float excess ordinary shares that might also attract dividend pay-outs within specified periods. Furthermore, they might embrace the floating of preference shares, which have a predetermined rate of dividend pay-out that is conducted before dividends are paid to ordinary shareholders. Equity Funding Alternatives Available To Established Listed Firms Established firms have more sources of equity funding alternative that include; rights issue. Rights issue allow established companies to raise additional share capital amounts by way of offering existing shareholders with new shares that fairly complements the proportion of their underlying share holdings. The established firm can also offer share purchase plans to its existing shareholders, which enables them purchase a specified amount of dollar amounts of additional shares regardless of the proportion of the number of shares they currently hold within that company. Subsequently, through a dividend reinvestment scheme; an established entity is guaranteed of additional fund capital. Dividend reinvestment plans allow the existing shareholders to invest their respective dividend income amounts in the immediate share levels of the company for that matter. D. Bond Market And The Structure And Issue Of Debentures The bond market is made of different form of bond issuance among them the corporate and treasury-based bonds. Corporate bonds are placed by different institutions that not owned by the government but might involve listed entities. It pays periodic coupon rates and payments at maturity while treasury-based bonds are issued by the government and paid at specific periods. Corporate bonds are categorised as debentures whenever it is secured by fixed charge rate over the issuing company’s unpledged assets. The entity that is responsible for debentures will present a fixed charge rate over its permanent level assets so that they are not sold until they have been repaid in all costs. debentures are issued through; public issues, private issues especially to distinctive associated parties holding a company’s security and, also private placements of institutions that engage in regular dealings with securities or other institutional investors like fund managers. Question 3 Ratio Calculations Current Ratio: current assets/ current liabilities 4,330,843/2,983,670 = 1.45 Quick Ratio = (Current Assets- Inventory) ÷Current Liabilities (4,330,843-1,709,180)/2,983,670 = 0.88 Total asset turnover = Sales ÷ Total assets 27,706,260/ 21,326,481 = 1.30 Inventory turnover = Cost of goods sold ÷ Inventory 20, 697,300/ 1,709,180 = 12.1 Receivables Turnover= sales/ accounts receivables 27,706,260 /2,117,858 = 13.08 Total Debt ratio = Total liabilities ÷ Total assets 8,262,170/21,326,481 =0.38 Debt-to-equity ratio= total debt/total equity 1,996,032+5,278,500/ 13,064,311 =0.56 Equity multiplier=total assets/total equity 21,326,481/13,064,311 =1.63 Times interest earned ratio = EBIT ÷ Interest 2,794,440/499,560 = 5.59 Cash coverage ratio = EBIT+ Depreciation /Interest 2,794,440+903,900/499,560 = 7.4 Profit Margin = Net Income÷ Sales 1,376,928/27,706,260 =0.05*100%, 5% Return on Assets (ROA) = Net Income ÷ Total assets 1,376,928/21,326,481 =0.06*100%, 6% Return on Equity (ROE) = Net Income ÷ Total Equity 1,376,928/13,064,311 =0.11*100%, 11% Analysis Kiwi Yachts current ratio for the period ended December 2015 stands at 1.45. The ratio is deemed to be much favourable in comparison to the industry’s average of 1.43. The ratio stipulates that for every any 1 current liability held, the firm has at least 1.45 assets to cover for them in case of meeting its obligations and thus, it means that the firm is able to meet most of its short term commitments as and whenever the fall due. The company’s quick ratio for the period stands at 0.88. The figure is positioned fairly above the industry average of 0.38 within the same period. Thus, it can be noted that the ratio indicates a favourable company position since it can now pay off its short term obligations without necessarily depending on the sale of existing inventories. The company’s current assets in exclusion of inventories are sufficient enough to meet any possible short term commitment that might come due. The firm’s total asset turnover ratio stands at 1.30 in the financial year that ended December 2015. The figure sits above the industry average of 0.85, which postulates a favourable position in regards to operations. It thus means that Kiwi Yacht is fairly positioned in terms of its capacity to generate sales with the underlying level of assets. The owner must have devised efficient ways to ensure that equipments in place are fairly working to ensure the posting of enough sales revenues. There is a high possibility that the owner has put up efficient measures to reduce or even eliminate management and production issues that might arise in the course of operations. The entity’s inventory turnover ratio of the company stands at 12.1 in the period ended December 2015. The ratio is fairly positioned above the industry average of 6.15, which is an indication that Kiwi Yacht’s operations are good. The high ratio indicates that the company does not engage in overspending through purchasing of substantial amounts inventory and thereafter waste useful resources through storage of non-saleable inventories. It also postulates that the entity can sufficiently sell most if not all of its underlying inventories it purchases. Potential investors will likely use it to showcase the liquidity capacity of the entity as a whole. Kiwi Yacht’s receivables turnover ratio stands at13.08 in the period ending 2015, which sits above the industry average of 9.82. The higher ratio is a good indication for the company since it means that efficiency measures have been put in place by the management to execute efficient collection of outstanding sales. In fact, it shows that Kiwi Yacht has improved on its process of collecting cash on those boats it sold on credit terms. Kiwi Yacht’s total debt ratio for the period ending December 2015 stands at 0.38. The ratio is positioned below the industry average of 0.52, which indicate a favourable position and good operations for that matter. The lowly-placed ratio indicates that Kiwi Yacht has ensured to fund a significant portion of its assets using equity as opposed to debt funds. Subsequently, it indicates that the entity is fairly position to eliminate risks associated with poor pay of imminent expenses whenever they fall due. Kiwi Yacht’s debt-to-equity ratio stands at 0.56 in the period that ended December 2015. The ratio sits below the industry average within the period of 1.08, which indicates a favourable position and good operations. The lowly-placed ratio indicates that the owner of the company has made stringent efforts to fund most of the operational projects using equity funds as opposed to debt funds. The efforts are especially necessary because it facilitates a reduction in the level of risks that emanates from paying off debt finance especially interest rate payments. In fact, the owner has taken stride to ensure that he can control most, if not all, of the company’s operations without any form of external influence that might arise from borrowings. The company’s equity multiplier within the same period stood at 1.63. The ratio figure sits ways below the industry average of 2.08, which is a good indication altogether. It basically means most of the company’s asset level is financed through equity funds as opposed to debt mode of financing. Given that Kiwi Yacht funds most of its asset using equity it then means that it enjoys unconditional control over its operations. Kiwi Yacht times interest earned ratio stands at 5.59 within the operational year 2015. This is way below the industry average of 8.06 within the same period, which does not postulate a favourable and good condition. It means that the company has slugged behind in its immediate capacity to repay any loans it has in place. The company’s cash coverage ratio stands at 7.4 within the period that ended in 2015. This is way below the industry average of the same period that stands at 8.43. The lowly-placed ratio does not depict a favourable position of the form since it means that its capacity to meet its current liabilities using only cash and cash equivalents is inefficient. Kiwi Yacht’s profit margin stands at 5% in comparison to industry average of 6.98%. This indicates an unfavourable position of operation as it means that the company sales and marketing strategies does not allow for significant revenues. It can also be attributed to the high cost of goods sold within the period. The Company’s ROA is stated at 6%, which positioned below the industry average of 10.53%. This does not postulate a good performance since it means that Kiwi Yacht posts insignificant revenues from the underlying asset-base necessary for posting enough profits. Its ROE stands at 11%, which sits below the industry of 16.56% hence indicating an unfavourable position. It means that the company has not devised effective strategies of utilising its equity base to make enough profits. References Roberts, R. (2008). Chapter 3: Financial markets and instruments. In , City, 2nd Edition (pp. 69-104). EIU: Economist Intelligence Unit Read More