- Types of Debt, their valuation and rating
- Economic and Political Climate of financial service industry (using Keynesian economics)
- Micro-economic principles of debt and equity market
- Statistical Ratios used in financial service industry
- Application of financial modelling techniques
- Asset and debt pricing model
- Source of financial service information
- Best option regarding capital raising
- Current Economic Trends
Types of Debt, their valuation and rating
Bonds – These debt instrument have fixed period of time for maturity and carry an interest rate which is fixed or either variable. Bonds of the companies are rated by the credit rating agencies which give the trust and confidence to the investors against the risk associated with these instruments.
Bills- Bills are the bonds which matures in less than a year. These are generally issued by the government in order to decrease the money supply in the economy.
Notes- Notes are also debt instruments which are generally issued by the government in order to finance any new project. These are very highly rated by the investors as it is backed by the government and hence there is no default risk.
Short-term- Short term debts are generally issued by companies for raising money for new ventures. These are backed by the interest which the companies pay from its profits.
Long-term- Long term debts span for longer period of more than five years and cannot be diluted before the period. However, discounting can be done in informal market for lower returns.
• Ordinary Shares – These are the most ordinary shares with no special rights to the shareholder in terms of dividend. Though these shares have voting rights which is not given to the preference shareholders.
• Deferred Ordinary Shares- These types of shares would be paid dividend once all other class of shares have been paid with a minimum dividend.
• Non-voting Ordinary Shares- These shares have no voting rights in the general meetings
• Redeemable Shares- In this type of shares, the company has right to buy back in future but this can be only from the profits earned by the company or from the proceeds of the issuance of new shares.
• Preference Shares – This type of share has right to a fixed dividend every year and need to paid before any other type of shareholders are paid from the profits of the company.
• Cumulative Preference Shares – This type of shareholders will be receive all the dividends which were missed or was short the previous year.
• Redeemable Preference Shares- Redeemable preference share has the characteristic of both redeemable shares and the preference shares. These shares can be redeemed by the company prior to the fixed period and if not redeemed these shareholders are eligible for dividends before any other shareholders are paid from the profits of the company.
Economic and Political Climate of financial service industry (using Keynesian economics)
• Interest rate outlook- The rate of interest in a Keynesian model is the cost of borrowing money.
• Unemployment outlook- Keynesian economy establishes that there cannot be a situation of full employment in the economy and there would be some unemployment at the current wage rate.
• Inflationary outlook- According to Keynes, inflation is positively related to the amount of money supply in the economy.
Place Order For A Top Grade Assignment Now
We have some amazing discount offers running for the studentsPlace Your Order
Micro-economic principles of debt and equity market
Return on Debt = Net Income / Long term debt
Return from Equity = Net Income / Shareholders Equity
Statistical Ratios used in financial service industry
Leverage Ratio- This ratio analyses the capability of the company to meet its long and short term debts. For companies who are financed by both debt and equity capital, it becomes important for investors to know the proportion of debt and equity. Too much of debt financing would indicate that the company is using its profits to pay-off the loans instead of investing in the company for earning future profits.
Working Capital Ratio- It indicates the ratio of current assets to current liabilities and how well the company can pay of its current liabilities with its current assets. This indicates the liquidity of the organization.
Debt-Equity ratio- This ratio is similar to leverage ratio and indicates about the proportion of debt and equity in the financial structure of the company.
Interest Coverage Ratio- This ratio indicates the ability of an organization to pay interest expenses on its debts. In case of solvency, this ratio provides the quick view of the return to shareholders.
Application of financial modelling techniques
• Yield curves- The yield curve shows the yield over a period of time through the economic expansion or depression. This financial modelling technique
• Rate of return – The internal rate of return helps in estimating the profit potential of a business venture and also considers the time value of money. A high internal rate of return would mean the particular business venture is highly profitable and should be undertaken by the company. Ethical Trading Group should use this method for determining whether they should undertake the new business venture of sustainable manufacturing business.
Asset and debt pricing model
Valuing equity- Valuation of equity securities is slightly complex than the debt securities. Some of the technique used for its valuation is top-down approach. This approach first analyses the economy in which the company is operating. Then the investor analyses the performance of the industry in that economy. Then the equity is compared with the equities of the other companies operating in the sector. Based on this analysis a relative valuation is done which help the investors take decision about the investment.
Source of financial service information
Apart from this, Ethical Trading Group need to adhere to the statutory requirements of Australia where it would start the operations. These might include obtaining various certificates like certificate of inception and commencement. Other legal formalities and paper work also need to be completed and compiled with in order to successfully start operations.
Best option regarding capital raising
where, E= Equity Value
D = Debt Value
Re = Cost of Equity
Rd = Cost of debt
Tx = Tax rate
This is widely used by managers in companies to take important decisions and understand the proportion of debt and equity which would be suitable to the company needs. If for any company, the rate of return is less than the WACC, then it indicates it’s better to invest in some other project. One of the major drawback of this methodology is the cost of equity capital which is dependent on a number of factor and hence may vary. But if all source of information for such metrics is reliable, then companies can appropriately estimate the viability of a project.
Current Economic Trends
Gurvits, V. (2004). Practical guide to financing a new or small business. [Boston, MA]: MCLE.
North, G. (2013). Company disclosure in Australia. Pyrmont, N.S.W.: Thomson Reuters (Professional) Australia Limited.
Why Australia Prospered. (2012). Princeton University Press.
Smales, L. (2012). Non-Scheduled News Arrival and High-Frequency Stock Market Dynamics: Evidence from the Australian Securities Exchange. SSRN Electronic Journal.
Trading ASX CFDs, options & warrants. (2008). Milton, Qld.: John Wiley & Sons Australia.
Australian equity market structure. (2010). [Melbourne]: Australian Securities & Investments Commission.
Armitage, S. (2005). The cost of capital. New York: Cambridge University Press.
Bhattacharyya, N. (1990). Interpreting internal rate of return. Calcutta: Indian Institute of Management.
McMillan, M. (2011). Investments. Hoboken, N.J.: Wiley