1. Subprime mortgage crisis is an example of a financial crisis that affected global markets worldwide. Give another example of a financial crisis in your discussions below.
â— Discuss the possible causes of the financial crisis.
â— Discuss the impact of the financial crisis on financial institutions and businesses elsewhere including your own country.
â— Explain how the financial crisis affected the economies of different countries.
2. NAB Ltd current share price is $30 and it has just paid a $1.50 dividend. Dividends of NAB are expected to grow at the rate of 5% per year.
3. What is an estimated return that shareholders of NAB expect to earn?
4. NAB Ltd also has preference share outstanding that pays fixed dividend of $2.30 per share. If preference stock is currently priced at $25, what is the return that preference share holders expect to earn?
5. Five years ago NAB Ltd issued 15 year bond with face value of $1000 and coupon rate of 9%. The price of these bonds is currently is $950. What is NAB’s pre-tax and after-tax cost of debt?
6. NAB Ltd has 5000,000 ordinary shares outstanding and 1,500,000 preference shares outstanding, and its equity has a total book value of $50,000,000. Its liability has a book value of $25,000,000. If NAB’s ordinary and preference shares are priced as in parts (A) and (B) above, what is the market value of NAB’s assets?
7. What is weighted average cost of capital (WACC)
8. If NAB’s liability increase by 100%. How the increase in liability will affect WACC of NAB. Explain.
Financial Crisis is the major issue faced by all the countries throughout the world. All the countries have been affected by such financial crisis. Indian Economy also gets influenced by such financial crisis badly. Even Reserve bank of India was continuously raising the interest rate with the object of reducing the gross domestic product growth rate which have crossed the rate of potential output growth leading to the heavy rise in inflation.
The possible causes of financial crisis are as follows:
Leverage means borrowing to financial investments. Leverage lets to potential returns from investment but also creates a risk of bankruptcy. The average degree of leverage in the economy comes into picture prior to financial crisis.
• Asset-liability mismatch:
Asset-liability mismatch is the factor which causes to financial crisis, a situation where a risk is linked with institution debts and assets are not appropriately arranged.
• Credit rating agencies also plays a very important role in creating artificial sense of security through grading ,but due to use of poor statistical models by these companies contributed a major part in creating financial mess.
Derivatives are the financial instrument which is used to reduce the financial risk and they are also used for hedging the various risks .There are some positive features of derivatives but in case if they are not properly understood, it may create complication which may lead to financial crisis.
Similar to leverage, liquidity mismatch is also an important cause of financial crisis. A proper balance should maintain between borrowing and lending.
• Regulatory failures:
Excessive regulation is also another factor that causes financial crisis. Basel II Accord gives instructions to bank to increase their capital when risk increases, this might cause them to decrease lending, this scarcity in capital creates financial crisis.
• Basics of Banking:
Bank borrow short and lend long, this create inherent fragility. No problem happen when people have confidence but when confidence disappears.
• Taxes and Subsidies:
Tax policy has a significant role to play in the cost and flow of capital. We need such a tax policy which discourage short-term speculation and encourage real long-term investment.
Non-democratic governance is also a big factor which causes financial crisis.
The above causes lead to various financial crises such as:• Recession• Depression• Bank run2.
Global Financial Crisis is one of the greatest financial challenges to the world economy. This has first originated in United States of America.Same is being later on witnessed by all the major economies in the world. Many countries are facing drop in Gross domestic product rate, growing unemployment levels and overall decrease in the pace of investment activity.3.
India is among one of the fasted growing developing economy in the world. In the beginning the effect of crisis on the Indian economy was not significant. The challenges faced by the Indian economy is further categorized in two parts-the challenges short-term in nature, of monetary and fiscal policy and the medium-term challenge of attaining and sustaining high rates of economic growth. The first one covers issues such as the trade-off between inflation and growth, the use of monetary policy includes use of fiscal policy, their relative effectiveness and coordination between the two. The next category includes the gap/difference between short and long-term fiscal policy, the immediate longer term need of monetary policy and institutional reforms necessary for restoring high growth.4.
The global slowdown has also impacted the business climate within India and the growth rate of various industries. Due to global crisis, the Indian economy in terms of stock market prices, exchange rates and inflation levels has experienced extreme volatility during a short duration leading to reversal of policy to deal with the emergent situations.5.
As result of economic downturn, the world is facing a credit crisis. Value of real estate is declining; defaulter’s rates on loans are responsible for credit crisis, which is leading to problem for businesses. Due to this, companies cannot urge for the loans and credit for growing and expanding their businesses. The global credit crunch has caused the management to make decisions that lead to costs cut off.a) Lack of cash flow:
Many businesses are facing a lack of cash flows from business operations. Majorly this is on account of two reasons -Firstly, Demands of the product are going down due to recession and secondly the small companies are not getting sufficient credit from the suppliers.b) Layoffs and unemployment:
In order to manage the cost, some businesses houses had to cut back on their employees. This has lead to unemployment.6.
For years, housing served as the back rest of economic growth and as an investment opportunity. But the financial crisis has impacted the real estate market and ruined the same.7.
The financial crisis started in developed countries, but due to declining foreign direct investment and slowdown in the demand of imports of commodities, it started impacting economies of developing countries also. The extent of effect is depends on the capital inflows and importance of export in their economies. In South Asian countries, for example export of goods and services average 22% of GDP while in Latin America it is 26%.For the large developing countries, export as a proportion of GDP vary from 15% in Brazil to 23% in India. Countries that depend on export of primary commodities other than oil have also been greatly affected because of sharp decline in the prices of commodities.8.
The level of the living conditions of the population is also affected due to the financial crisis because financial crisis gives a situation of unemployment. The low income countries are also adversely affected. For some people in the poorest economies this has been disastrous. Lower employment rate and a lack of social safety net means poverty are higher than it would otherwise have been around.
1. Stijn Claessens, M. Ayhan Kose, Luc Laeven, and Fabián Valencia, 2012, “Understanding Financial Crisis: Causes, Consequences, and policy responses”; Available at: https://www.imf.org/external/np/seminars/eng/2012/fincrises/pdf/ck.pdf
2. Greg Ferro, 2008, “The Financial Crisis’ Impact on Small Business”; Available at: https://www.insightcommunity.com/case.php?iid=1259
3. Susan Woodward and Robert Hall, 2009, “Financial Crisis and Recession”; Available at: https://woodwardhall.wordpress.com/
4. Muthukumar, T., M. Sirajudeen, S. Tamilenthi, 2012, “Global Financial Crisis and Its Impact on Indian Economy-an analysis and Perception”, International Journal of Current Research,, Volume 4, Issue 05, pp. 202-205; Available at: https://www.journalcra.com/sites/default/files/2168.pdf
5. International Labour Office, Geneva, 2009, “Impact of the Financial Crisis on Finance Sector Workers”; Available at: https://www.google.co.in/url?sa=t&rct=j&q=&edata-src=s&source=web&cd=1&ved=0CBwQFjAA&url=http%3A%2F%2Fwww.ilo.org%2Fwcmsp5%2Fgroups%2Fpublic%2F%40dgreports%2F%40dcomm%2Fdocuments%2Fmeetingdocument%2Fwcms_103263.pdf&ei=f_O8VLzcCMK_mAXTzYLIAQ&usg=AFQjCNGcD75z4w6Apa8Yn0U6uX-s32dtaw&sig2=Tr33ceyvNjMrC4HWpg1c_Q