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Corporate Finance Cash Bbalance Plan

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Question:

Discuss about the Corporate Finance Cash Bbalance Plan.
 
 

Answer:

Introduction:

Cash converter was charged with breaching laws being the biggest pay lender in Australia. It was claimed by the customers of Cash converter that they were charged exorbitant level of interest on personal loans. The settlement of the class action was on behalf of around customers of New South Wales. The amount charged by the federal court amounts to $ 23 million. The settlement was subjected to the approval of the Federal court. The company did not comply with the legislative lending practice and it was alleged of breaching the customers by practicing small amount if credit contracts. Company was alleged of charging substantial higher interest rate of 633% on short-term loans and higher fees on debt provided to customers (Slade, 2015). It took the advantage of vulnerable people and compelling them to pay substantial higher amount of brokerage fees and changing their business model in response to changes in the legislation.

Discussion:

The company accounted the higher brokerage fees and higher interest rate charged on short-term loans provided as interest income under the heading short term loans. Annual report of cash converted does not take into account brokerage fees charged by appointing the brokers. Amount of brokerage fees charged would have appeared under other income heads such as income that is received from franchise services. Company in their financial statements charged charges and other upfront fees for advancing the loan. Such amount was charged in the statement of profit and loss under the heading of short-term loans. Some of the other charges that included was upfront fees and brokerage fees and this amount would have been shown separately and charged under the head income from services. Nonetheless, the brokerage fees charged was not against legislative principle framed at that time. The main response was the transformation of the business model that made the customers paying substantial higher fees. Annual report had all the financial statements depicting over working by charging interest rate at rate of 633%, despite the laws made the restriction of interest rate of 48% on payday loan that also included upfront fees (Johnston et al., 2012).

The issues faced by cash converter concerning the lending system is explained using the two ethical principle that is justice ethical theories of practice and deontological theory. According to the justice ethical theories, an organization should take those actions that is considered fair for its people whether they are employees or clients. It has been found from the evidence provided in the annual report that Cash converter did not adhere to the justice ethical practice. They have ben duping the customers and have taken the advantage of the vulnerable customers and granting the loan without following due care and diligence in their lending practice (Hillier et al., 2014). All this evidence suggest that the Cash converter was not ethical and did not follow justice ethical practice.

It is required by the organization to undertake the decision making process by adhering to obligations and duties as per the deontological theory. Companies not adhering the lending practice that complies with the law are under the threat of penalty. Lending practice of Cash converter is not responsible and is regarded as unethical because customer were deceived by buying loan at higher interest rate and paying substantial amount of brokerage fees. Organization adhering to such ethical theories is very consistent in their decision-making process and such decisions would be based on the set duties and obligation of individual (Bruce-Briggs, 2012).

The growth of business of Cash converter was regressive post the practice of charging higher interest rate lending practice. In the year 2009, there was huge growth in revenue resulting from the loan establishment fees of $ 5.2 million. Year 2010 recorded a net profit of $ 21.6 million and all the high amount of profits was disclosed by company in its annual report. In financial year 2012, there was growth in the personal loan book of $ 67.6 million. On the other hand, after the launching if class action by federal court against Cash lender, the personal loan book witnessed a fall in the year 2016 at $ 113036461 as compared to loan book amount of $ 119448669. However, the amount of loan advanced to customers increased by 34% due to increase in the online loan advances. The total amount of loan book faced downtrend in the year 2015 and the amount stood at $ 107.4 million compared to its peak point in the previous year at $ 115.7 million (Morabito & Ekstein, 2016). There was enough provision of cash flow and had flexibility to meet the expenses related to the settlement of class actions. For the financial year, the forecasted amount of revenue stood at $ 55 million.

The introduction of deferred establishment fees was not within the limit of interest rate cap of 49% as set by the law. One month and seven-month advance cash loan was impacted by the higher amount of fess charged. Annual interest rate charged on seven-month advance loan was up at 145% and that on one month advance loan it was 633%. Year 2015 recorded a loss of $ 21.5 million as compared to profit generation of amount $24.2 million in the year 2014. Personal loan book value also fell $ 104.5 million (Morabito & Ekstein, 2016).

 


The share price of Cash converter witnessed a downtrend post the class action. In the financial year 2014, the share price of the company was trading in the range of $ 0.80 to $ 1.88 and in year 2015, the share price was trading at half the price because of the class action and legal cases against the company. On the other hand, in the year 2015, the share price of company had a jump and the shares were trading at 7.6% higher in the year 2016. The cash flow of company was impacted by the change in the share price (Ehrhardt & Brigham, 2016).

For the welfare of economy, the financial institutions to be socially responsible and sustainable in carrying out their business. For meeting the responsibility concerning sustainability and being socially responsible, financial institution needs to have respect for collective arrangement between social partners and applicable legislation. In order for the institution to meet the objective of being socially responsible, it is essential for enterprise to have a process that is integrating environmental, social, ethical, consumer concerns and human rights into their core strategy and operations of business. Financial sectors requires managing their business activities with due diligence and integrity (Banks et al., 2015).

It requires them to handle the risk in a responsible and realistic manner. Products offered and the operational management of the organization should be transparent to the stakeholders and customers. Activities of financial institution directly influences the sustainability of the society and they would be able to indirectly stimulate the sustainability in the economy by offering sustainable products (Epstein & Buhovac, 2014). The practice of sustainable finance relates with the management of risk and provision of financial capital relating to the financial products offered by them. For ensuring the satisfactory return to the customers and driving the long-term value to the shareholders, it is necessary that financial institution have some strategies and steps in place to protect their financial interests. Some of the financial organizations devote their resources for conducting the research and making the stakeholders aware of various sustainability challenges and issues (Degeling & Legg, 2014).

Reputation and image of the financial institution would be improved incorporating the social and sustainability practice in the business activities. Cash converter was charged of unethical practice of charging exorbitant interest rate and higher fees from their clients. This posed a threat on welfare of social and corporate social responsibility.  It is required by company such as Cash Converter to not engage in such practices as it would hamper the reputation and image of the company and affect their sustainability (Carroll & Buchholtz, 2014). The maximization of profit of company should be done by aligning the business activities to the ethical theories. Therefore, in this context it is the responsibility of Cash converter to protect the financial interest of customers by carrying out their business activities that are in compliance with the legislation and has been done with due diligence.  It becomes utmost important for organization like Cash converter to incorporate the principle of social responsibility in the system of risk management and making use of development method for screening their investment using the set criteria. Sustainability practice in the financial institution is considered as the business opportunity that affects the overall, performance of business (Vernimmen et al., 2014).

Conclusion:

As per the above analysis, it can be concluded that the lending practice of Cash converter is regarded as unethical. Due to poor customer service and unscrupulous lending practice, it is certainly possible that the image of the company would be damaged in the market. It becomes essential for Cash converter to incorporate the practice of social responsibility and sustainability for protecting the financial interest of the customers and thereby promoting their wellbeing. The sustainability challenge faced by cash converter can be done by following the code of ethics and sustainability involvement.

 

Reference:

Banks, M., Marston, G., Russell, R. and Karger, H., 2015. ‘In a perfect world it would be great if they didn't exist’: How Australians experience payday loans. International Journal of Social Welfare, 24(1), pp.37-47.

Bruce-Briggs, B. (Ed.). (2012). The New Class?. Transaction Publishers.

Carroll, A., & Buchholtz, A. (2014). Business and society: Ethics, sustainability, and stakeholder management. Nelson Education.

Degeling, S., & Legg, M. (2014). Fiduciary obligations of lawyers in Australian class actions: Conflicts between duties. UNSWLJ, 37, 914.

Ehrhardt, M. C., & Brigham, E. F. (2016). Corporate finance: A focused approach. Cengage learning.

Epstein, M. J., & Buhovac, A. R. (2014). Making sustainability work: Best practices in managing and measuring corporate social, environmental, and economic impacts. Berrett-Koehler Publishers.

Fracassi, C. (2016). Corporate finance policies and social networks. Management Science.

Hillier, D., Clacher, I., Ross, S., Westerfield, R., & Jordan, B. (2014). Fundamentals of corporate finance. McGraw Hill.

Johnston, K., Hatem, J., & Scott, E. (2012). The cash balance plan as a real option: Financial innovation and implicit contacts. Pensions: An International Journal, 16(1), 39-50.

Morabito, V., & Ekstein, J. (2016). Class Actions Filed for the Benefit of Vulnerable Persons–An Australian Study.

Slade, B. (2015). The social value of class actions. Precedent (Sydney, NSW), (129), 4.

Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y., & Salvi, A. (2014). Corporate finance: theory and practice. John Wiley & Sons.

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