Current Macroeconomic Environment And Policy Of Australia Economics Essay

Current Macroeconomic Environment And Policy Of Australia Economics Essay A strong economy displays characteristics of maximizing growth as well as internal and external balance whilst minimising inflation, foreign debts and liabilities. There are various policies in Australia governing the macroeconomics including Fiscal and Monetary policies. Both these policies influence the economy through altering aggregate demand. In the last three years, since the onset of Global Financial Crisis, Australia has applied both expansionary monetary and fiscal policies to increase aggregate demand. There seems to be a general agreement amongst the economists with regards to the success of the monetary policy implemented. However the only general consensus with regards to the effectiveness of the fiscal policy is that there is no consensus. Key macroeconomic indicators Australias macroeconomic health same as the rest of the world is governed by factors of Gross Domestic Product(GDP),unemployment, price fluctuations, total nations income per year, interest rates, inflation, government spending, tax system, exchange rates, Consumer Price Index(CPI), consumer credit, foreign trades and value of currency. As oppose to Microeconomics, Macroeconomics deals with totals or aggregates. Gross Domestic Product Gross Domestic Product (GDP), is the single best measure of a nations economic wellbeing. It measures the total value of goods and services produced in a country in one single year (Liu,EC 5103 lecture notes,2009). GDP = Consumption + Investment + Government Spending + Net export. There are three approaches to calculating GDP Expenditure approach calculates the final spending on goods and services. Product approach calculates the market value of goods and services. Income approach sums the income received by all producers in the country. Problems with using GDP alone as a measure of economic wellbeing is that by itself, GDP does not give any information on income distribution in the country nor takes into account the effect of negative externalities on economic growth such as pollution or the effect of positive externalities such as health and education( Trading Economist, n.d). Taxes and interest rates influence GDP over time. Non economical factors influencing GDP include war, drought, natural and man made disasters. Figure 1. Australia GDP growth rate- Period 2006-2010 Source: http://www.tradingeconomics.com/Economics/GDPGrowth.aspx?Symbol=AUD#ixzz0i0dpV4ucConf_2009.htm Consumer Price Index The best price index measure is the Consumer Price Index (CPI). CPI is used to calculate the inflation rate and is also a measure of the change in cost of living over time. Business Cycle Fluctuations in economic activity over a period of time are reflected in the business cycle. Figure 2: Business Cycle Different stages of economy over a period of time Source: http://www.thebluecollarinvestor.com/blog/wpcontent/uploads/2008/11/business-cycle-graph-better.jpg The growth rate of Real Gross Domestic Product is used for measuring the fluctuations in the business cycle. Economists argue that higher interest rates can motivate the households for savings, and supply more loanable funds in the market, in form of bank deposits. Increased savings results in reducing foreign dependence which in turn accelerates economic growth due to higher investments. McKinnon (1973) and Shaw (1973) cited in Shrestha, M. B., Chowdhury, K. 2005, further assert that higher real interest rate also helps channel the capital to the most efficient industries and help development and technological advancement leading to economic growth. The aforementioned reiterates the fact that both fiscal and monetary policies are used to smooth out the business cycle. Commodity Prices and Trade One of the key contributors to Australias economic condition is the international economic activities in particular the commodity prices which is reflected in the Terms of Trade i.e. ratio of exports to imports prices (White, 1994). Since Australias export of commodities is large and the import is relatively stable, the world economy trades more with Australia hence strong Term of Trade is one of the key reasons for an increase in standard of living in Australia. The recent rise in global commodity prices due to increase demand in China and a drop in the price of imports mainly from China has allowed Australia to achieve a higher Term of Trade above its average. In 2005 Australia entered into an agreement with the US on Free Trade (Australian US free Trade Agreement- AUSFTA). Other countries that have FTA with Australia include New Zealand, Singapore, China, Japan, Malaysia and South Korea (Travel Document System, n.d). Farm output Farm output also appears to be a key determinant of the economic activity of Australia. This is influenced by factors such as drought. For instance, the major drought of 1980s was one of the key contributors to the disparities between the growth in the Organisation for Economic Co-operation and Development (OECD) countries and Australia (White, 1994). Government spending Government spending in infrastructure such as water, transport, telecommunication, education and health are aimed to expand Australias supply capacity such as plans to improve irrigation infrastructure and buy back unused water allocation along the Murray-Darling river. Environment: climate change Climate change must also be mentioned in this context. A report commissioned by the former Howard government recommended a domestic carbon emission scheme emphasizing that Australia should have an active role in developing a global carbon emissions trading scheme. The Rudd government aims to introduce a carbon trading system by 2011 and reduce emissions by 5% by 2020 (from 2000 levels). Interest Rates Interest rate is defined as the percentage rate per annum that a borrower pays to the lender or the cash rate which is the rate charged on overnight loans between the financial intermediaries. Interest rate has a negative effect on the money demand as shown below. Australia is a price-taker in global capital markets, so the Australian interest rates move with the global financial market trends. Interest rates are generally higher in Australia and New Zealand compared to the international standards largely due to strong fiscal policies relative to other developed countries (Kirchner, 2007, p. 11-15). In Australia, the Reserve Bank (RBA) determines the interest rate. It does so by changing the amount of money supplied, in other words by altering the equilibrium quantity of money supplied and money demanded. Australias interest rate is currently at 4.0 percent according to the data published by the Trading Economics in March 2010. Table 1. As at 31.03.2010, Australia has the highest interest rate amongst developed countries. The Reserve Bank of Australia 4% Bank of Canada 0.25% Bank of England 0.5% Bank of Japan 0.1% European Central Bank 1% Federal Reserve 0.25% Swiss National Bank 0.25% Source: http://www.fxstreet.com/fundamental/interest-rates-table/ Figure 3. A graphical demonstration of the effect of change in money supply on the interest rate. Source: Source: (Liu, EC 5103 supplementary notes, 2009) Figure 4. Australias Interest Rate- Period 2000-2010 Source: http://www.tradingeconomics.com/Economics/Unemploymentrate.aspx?Symbol=AUD#ixzz0i0ejiErm Unemployment rate Unemployment rate refers to the % labour force that are unemployed and actively pursuing a job. The unemployment rate is negatively related to the real GDP i.e. falling GDP results in an increase in unemployment and vice versa. As at January 2010 based on data published by Trading Economics the unemployment rate is 5.30 percent. Figure 5. Australia unemployment rate Source: http://www.tradingeconomics.com/Economics/Unemploymentrate.aspx?Symbol=AUD#ixzz0i0ejiErm Inflation rate Inflation rate refers to the % rate of increase in the average level of prices measured against a standard level of purchasing in the economy. According to the latest figures published by the Trading Economics the Inflation rate was 2.10 percent in December 2009. Inflation rate is best reflected in the CPI or the GDP deflator. Figure 6. Australia Inflation rate based on CPI- Period 2008-2010 Source: http://www.tradingeconomics.com/Economics/InflationCPI.aspx?Symbol=AUD#ixzz0i0eRh6VH Consumer Credit One of the major contributing factors that led to the recent Global Financial Crisis was the lack of regulation with relation to consumer credit originating in the United States. Money for institutions to borrow and lend was easily accessible which eventuated in sub-prime mortgages and what has come to be known as NINJA loans (No Income No Job or Assets). This toxic debt was then sold globally through various hedge funds. Although affected by the rest of the world through the freezing of credit markets, Australia has managed to remain in relatively stable position in comparison to the rest of the major economies. This, in part, can be attributed to the regulations enforced through the Consumer Credit Code (Appendix 1). Constant reviews and amendments of macroeconomic policy in relation to consumer credit regulation have contributed to Australias robust financial system in comparison to the majority of other developed nations  [1]  . Gold and Foreign Currency reserves The Reserve bank of Australia (RBA) has the responsibility of owning and managing the foreign currency and reserves for Australia  [2]  . On average, countries hold 10 per cent of their reserves in gold, although the proportion varies widely from one country to another. The Reserve Bank of Australia holds just 80 tones of gold, or 6 per cent of its total foreign reserves. The bank sold down its gold holdings in 1997 and its reserves are now largely held in US Treasuries and other government bonds. The reserves are used, when required, to keep the Australian dollar steady in times of volatility. (Bourlioufas,N. 2008). Several reasons exist for the reduction in gold holdings for Australia such as: Lack of income that it produces The cost of storage/security Inability to put value behind the Australian Dollar. Appendix 2 displays the RBAs current reserve holdings for 2009/2010. The amounts are displayed in Australian dollars and are subject to movement based on current exchange rates. Taxation (GST) One of the many aspects in taxation is the Goods and Services Tax (GST), which is a value added tax on the supply of goods and services in Australia. Until the introduction of the GST, Australia operated a Wholesale Sales Tax (WST), which imposed a tax on wholesale of goods. The GST was introduced to bridge the unfair tax gaps between service based businesses and suppliers of goods (GST Australia, 2009). In Australia the GST is levied at a flat 10%, which is collected from the buyer, which shifts the demand curve downward by the size of the tax, which effectively means both buyers and sellers share the burden of the tax (Mankiw, 2008). National income and output Measures of national income and output are used as an estimate of total economic activity by including Gross domestic profit, gross national product, and net national income. Each of these aspects is in relation with the total amount of goods and services within a country. The National income and output values are of importance for a variety of users such as the Reserve bank, academics, and private as well as the Australian government to allow the government to make interventions into the economy based off current and accurate information, as well. (Australia Bureau of Statistics, 2008) Macroeconomic Policies in Australia The goals of economic policy makers are: Maintaining real GDP growth constant and positive Maintaining unemployment rate low Minimising inflation The most important contributor to the economic growth is aggregate demand (effecting GDP). Both monetary and fiscal policies effect aggregate demand. How is this game being played? Should RBA consider a looser fiscal policy when determining interest rates? Or should the government consider the possibility of a rate cut when deciding on fiscal stimulus? Aggregate Demand (AD= C+I+G+NX) is effected by factors such as: Capital investment boom Rise/fall of exchange rate Consumer boom in a country that Australia has trade agreement with A boom in housing market A share price slump Unexpected cut/rise in interest rate Monetary policy Monetary Policy through the effect of the exchange rate influences the economy. Exchange rates also influence the inflation which in turn affects the trade (export and import). Exchange rates are influenced by factors such as commodity prices and interest rates. This reiterates how the determinants of macroeconomics are intertwined. Monetary policy is set by the Reserve Bank of Australia (RBA) to influence the supply (availability) of money and credit within the economy in an effort to stimulate growth and stabilise the financial system. Monetary policy influences the interest rates through purchasing and selling of government bonds. When RBA purchases government bonds to increase liquidity, it results a lower interest rate and lower unemployment. During the periods of high inflation, RBA sells government bonds resulting in an increase in interest rates. Effects of monetary policies are: In short term, a tight monetary policy results in a decrease in the prices of Goods and Services as well as higher disposable incomes hence an increase in the households demands. In long term, household demands decrease due to reduced income and increased unemployment. Reserve Bank Act 1959 establishes the objectives of the monetary policies  [3]  . Fiscal Policy: Fiscal policy targets both consumption and capital spending. It influences economic activities through government budget. The budget is announced yearly in May stating the government Revenue (T) and Expenditure (G). By varying the amount of spending, a fiscal policy may achieve one of the following: Fiscal surplus- when G Fiscal deficit- when T Balanced budget- when T=G When government wishes to stimulate economic growth, it applies an expansionary fiscal policy through increase in government spending and tax cuts which in turn increase consumption and investment. On the contrary, if government decides to slow down the economy, it applies a contractionary fiscal policy. Global Financial Crisis and Australias Response Deteriorating housing market in the US was the trigger to the onset of GFC in the world. Banks tightened lending policies; credit became more expensive and this led to a restrained aggregate demand resulting in weakness in world economic activity. The policies of governments around the world in response to GFC were aimed to address these weaknesses. Since the onset of GFC in 2007 Australia has responded by conducting monetary and fiscal policies. Both Short term and long term implications of these policies have to be considered to determine their effectiveness Analysis of Australias Monetary Policy in response to GFC During the GFC, expansionary monetary policies were implemented in Australia in response to the contraction in aggregate demand. RBA increased liquidity through multiple purchases of government bonds resulting in a decrease in interest rate through shifting the LM curve down and IS curve left. Figure 7. Shifts in LM and IS curve reflecting on the interest rate Source: http://www.rba.gov.au/econ-compet/2009/pdf/second-prize.pdf The lower interest rate led to a decrease in cost of borrowing which resulted in lower incentive for saving and ultimately led to an increase in consumption which resulted in the aggregate demand curve to shift to the right (figure 8). Figure 8. Expansionary Monetary Policy and its effect on Aggregate Demand Source: http://www.wcc.hawaii.edu/facstaff/briggsp/Macroeconomics/Chap_34_MonetaryFiscal.pdf Analysis of Australias Fiscal Policy in response to GFC The $42 billion economic stimulus plan of Rudd government between December 2008 and February 2009was intended to stimulate aggregate demand (Treasury, 2009). The focus of this package was mostly on investment in infrastructure which was predicted to have a larger effect on the economy in long run than in short run (Australian Government, 2010). It also provided incentives to housing as well as cash bonuses to stimulate consumption in short run. The inherent weakness of such cash bonuses is where people save their bonuses instead of spending it. Figures published by ABS demonstrate that immediately after the stimulus payments were made, there was a massive hit on spending by Australians households but this slowed down after 3 months (Insider retailing, 2010). According to the latest figures published by Trading Economics on 03.03.2010 and ABS, Australias economy grew at the fastest pace in the last quarter in almost 2 years. Table 2 demonstrates some of these figures published in this report. Table2: Australias economic figures March 2010. Percent Increase/Decrease % Comparison Period GDP à ¢Ã¢â‚¬  Ã¢â‚¬Ëœ 0.9 Last Quarter Growth à ¢Ã¢â‚¬  Ã¢â‚¬Ëœ 2.7 Last Year Current Account à ¢Ã¢â‚¬  Ã¢â‚¬Ëœ 19 to $17,459 b at December 2009 September 2009 Machinery Equipment spending à ¢Ã¢â‚¬  Ã¢â‚¬Ëœ 10.9 Last Quarter Households spending à ¢Ã¢â‚¬  Ã¢â‚¬Ëœ1.8 Last Quarter Unemployment rate à ¢Ã¢â‚¬  Ã¢â‚¬Å" to 5.3 Last 11 months Australian Dollar à ¢Ã¢â‚¬  Ã¢â‚¬Ëœ against $US and  £ British 25 year high against  £ British Interest rate à ¢Ã¢â‚¬  Ã¢â‚¬Ëœ by 0.25 Source: http://www.tradingeconomics.com/Economics/GDPGrowth.aspx?Symbol=AUD#ixzz0i0diuCw6 Also http://abs.gov.au/AUSSTATS/[emailprotected]/mf/5302.0/ Economists believe that the underlying reason for Australias Economic performance is Rudds Government stimulus package as well as increase in export however the widened account deficit of 19% in December 2009 figures is mainly due to an increase in imports. One of the consequences of this is expected to be a 1.3% decrease in Australias GDP therefore the recovery period is going to be weak (Market watch, 2010). Figure 9.Effect of fiscal stimulus on real GDP (forecasts from May 2009 Budget) Source: http://www.treasury.gov.au/documents/1686/HTML/docshell.asp?URL=Australian_Business_Economists_Annual_Forecasting_Conf_2009.htm The unemployment rate has dropped by 5.3% and the number of people employed has increased by 52700. This will put more pressure on RBA to increase interest (The Australian, n.d). Figure10. Effect of fiscal stimulus on the unemployment rate (forecasts from May 2009 Budget) Source: http://www.treasury.gov.au/documents/1686/HTML/docshell.asp?URL=Australian_Business_Economists_Annual_Forecasting Treasury secretary Ken Henry warns of the adverse shocks to financial markets despite the fact that GFC seems to have passed. Further more he explains that fiscal circumstances improve as the economy strengthens. As the economy strengthens, other things being equal, there is increasing upward pressure on prices and monetary responses to that (The Australian, n.d). In his book The Great Crash of 2008, the economic advisor Ross Garnaut, warns Kevin Rudd of hard times ahead in terms of lower living standards and economic wellbeing as a result of stimulus response to GFC (The Australian, October2009). Garnauts point of view is also shared by many other economists who consider the stimulus package a dangerous revival of a discredited Keynesianism which focuses on the short term aggregate spending as the source of growth in the economy. Some point out that fiscal policies result in an interest rate rise which has a crowding out effect on the expansion due to export and import. Hence they argue the ineffectiveness of Australias fiscal policy. The supporters of Stimulus package on the other hand argue that the spending avoided further economic contraction at the right time boosting consumers and businesss confidence and hence avoiding a recession. They also argue back with regards to trade issue pointed above, in the sense that Australias trade share is 47% of GDP which is less than the 60% quoted in previous studies as a benchmark of ineffectiveness of fiscal stimulus. They therefore argue that because of the lower trade share the fiscal stimulus has been effective in Australia (The Australian, n.d). Irving Fischer, the renowned American economist contributed to the economics in many ways one of which is his theory of Inter-Temporal Choice, which describes that through time savings, interest rates and investments are related(The Australian, n.d.). His theory highlights that present economic decisions have to have the future in mind  [4]  . Discussion There has been increasing concern amongst the economists in Australia about the sustainability of the fiscal policy in particular with regards to a solution for the current government deficit of $17.459 billion (Table 1). Australia has had challenging times in maintaining a stable economic condition. The recent Global Financial Crisis (GFC) that started in 2007 imposed great pressure on the economy. Nevertheless implementation of the fiscal and monetary policies achieved a better than expected performance by the economy (Budget, 2009-10), with forecasts of stronger growth and lower unemployment. Rudds Stimulus package through its fiscal expansionary characteristics seems to have been an appropriate response to the GFC in stabilizing the output levels however there is great concerns regarding the future of the economy. Did our politicians throw in a Keynesian based fiscal stimulus package without consideration of future consequences of it? Was there any vote buying elements incorporated in the design of it? There is a general consensus amongst the economists on the effectiveness of lowering interest rates as a monetary response to GFC by RBA which was also assisted by a depreciated exchange rate. On the other hand the fiscal policy has generated a lot of debate amongst the economists with no consensus on its effectiveness in sight. This is mainly due to the long lasting effect of the fiscal stimulus as oppose to short term, temporary and more reversible effect of the monetary stimulus. Kevin Rudds Fiscal stimulation concentrated on aggregate spending in short term to boost economic growth as per the Keynesian model. This has been proven to be the case in Australia however the unproductiveness of this large scale spending and the deficit resulting from it is far from a perfect economic condition. Does Kevin Rudd share the thought with John Maynard Keynes of in the long run we are all dead? If so are we, the Australian people supposed to suffer the consequences of his 17 billion dollars debt through our taxes, higher interest rates and higher inflation? If Irving Fisher was alive and if he was with Kevin Rudd when he was signing on the stimulus package, perhaps he would have reminded the prime minister that although his short term fiscal stimulus policy would increase public spending, it would show no regards to achieving long term high standard of living for Australian people. The side effects of the fiscal cash out include: Increasing future taxes to pay for the debts Higher interest Likelihood of inflation (as history shows us that the easiest way out of public debt has traditionally involved money creation). So was Kevin Rudds big night out worth the next days hangover of a budget deficit that adds to public debts which would further drain the economy? Or has the government designed an appropriate fiscal rebalancing strategy that it hasnt shared with Australian public yet?

Kuleshov Effect Essay

Montage is one of the three important steps in cinematographic creation, with pre-production and shooting. Technically, it is the action of cutting, pasting and putting together shots. It helps creating rhythm, meaning and order to the story. Montage is an art form : with the same shots, you can express thousands of different feelings and visions according to the montage used. Kuleshov, a Russian filmmaker in the 1920’s, is the first one to write about this theory, now known as the ‘Kuleshov Effect’. This theory is used everywhere now (advertisement, news paper†¦). The Kuleshov Effect theory is that every shot depends on the context, of what happened before and what will happen after. Kuleshov discovered that the viewer creates his own interpretation of what he sees on the screen. For example, with the shot of a man with no expression on his face, he can create the impression of hunger when putting a shot with food right after, or of sadness with a shot of a dead person, or of kindness with the shot of a little girl playing. This theory can be summarized with the formula A + B = C ; ‘A’ being the first shot, ‘B’ the second one, and ‘C’ the meaning the viewer’s mind creates by putting those two shots together. So the Kuleshov Effect is very powerful. When we had to work on a project using the Kuleshov Effect, with my teammates, Giovanna and Christian, we first decided to create a funny story. So we decided to do a funny final twist for our first work. The first shot, the ‘A’, was a boy running in the hallway, as if he was in a hurry to go to some very important place. The second shot was him looking desperately to something, and then the camera moved to the student store’s sign saying : ‘Closed’. So the emotion the viewer has when he sees the whole video is disappointment, because he was waiting for something very important to happen. But if we had used the same first shot with another ‘B’ shot, for example a policeman running, or someone dying in a hospital bed, the emotion would not have been the same. For our second work, we chose to do something more typical, like what Kuleshov did for his own experiment. So we shot the face of a boy, with no expression, for the ‘A’ shot. Then we shot three different situations : a vending machine (B1), a Tic tac toe (B2), and a girl walking in the hallway (B3). The idea was to show that with the same ‘A’ shot, put with different ‘B’ shots, a different emotion could be created ; A+B1 shows hunger, A+B2 shows focusing, and A+B3 shows attraction. To have the best shots as possible, we learned how to white balance a camera, which was not very easy since we had to do it manually ! When we started shooting, we had a very good time looking for how we should put the camera to have the greatest shot as possible ; it was very fun because we felt like real filmmakers. For example for our shot of the boy running in the hallway, we first wanted to use a pan and follow the boy running, but then we realized that the result was not as powerful as we would expect it to be, so we chose to use a steady shot instead, with an eye-level angle and a long shot to see the whole movement. Then another interesting shot in my opinion was the one of the ‘CLOSED’ placard ; we decided to use a tilt movement of the camera down to up, which was a smart choice I think because it seemed that the boy who was squat on the floor after running was looking up to the sign. For the second part of the work, we only used steady shots because we thought it would be more powerful for the experiment of the Kuleshov Effect. The face of the boy with no expression is a Close Up and Eye Level shot, because we learned that a close up was the best way to show the expressions of someone, and the goal of this shot was for the viewer to create his own emotion for that particular shot. But shooting is not the easiest thing of the world, most of the time we had to do the shots twice because the angle was not good, or the camera not white balanced enough. For the montage with FinalCutProX, we discovered that we could cut some of the shot we had, to reduce their length. That was a very effective feature for us because some of our shots tended to be too long for their purpose, for example to create suspense. Another really important feature of the software, of course, is that it allows you to place your shots as you want, and not especially in the order you shot them, which was great because sometimes we did not film our shots in the order we wanted them to appear in the final video. So montage is really a key step in the process of filmmaking.

The Earth Charter - 2229 Words

Stoyanov, Alex Contemporary Poli Thought Final Paper The Earth Charter is a radical document that tries to offer solutions to help the world and all of mankind to try and find a level of sustainability. Through Jean Paul Sartre’s theories and ideologies, I try and find my own voice and ideals of how I personally feel about the Earth Charter. Many people have tried to figure out what they could do, with little success, to fix the Earth and save it from ourselves. Though it is a start, the Earth Charter simply does not have a clear and concise plan of what needs to be done. Jean Paul Sartre’s conceptualizations of justice and power and how power should be organized make the Earth Charter an unjust document. Question 1 Nietzsche†¦show more content†¦French historian and philosopher Michel Foucault conceptualized justice as an ever changing product of man. He uses the example of the regicide trial of Robert-Francois Dameins as a prime example of how justice is ever changing.3 In the year of 1757 Damiens was publicly executed by drawing and quartering, a form of execution in which Convicts were fastened to a hurdle, or wooden panel, and drawn by horse to the place of execution, where they were hanged (almost to the point of death), emasculated, disemboweled, beheaded and chopped into four pieces. Foucault mentions this because of the fact that less than a 100 years later the first modern prisons are created and rules for them are identified. It shows the huge change that has happened with justice, when in which hanging and quartering at a time was found to be a just form of capital punishment, now it is considered inhumane and cruel. Justice must always question itself,† Foucault argues, â€Å"just as society can exist only by means of the work it does on itself and on its institutions4. 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The Vital Role Behind Financial Management Finance Essay - Free Essay Example

Sample details Pages: 9 Words: 2729 Downloads: 2 Date added: 2017/06/26 Category Finance Essay Type Research paper Did you like this example? A business needs money for their day to day business and other expenses. Businesses have to find ways to finance the business. For that there are so many sources of Finance. Also there are different classifications of sources of finance. The main classification is external and internal. Sources of Finance Internal Sources of Finance External Sources of Finance Personal Savings Share Capitals Retained Earnings Preferential Share capital Working Capital Management Ordinary Share Capital Sales of Assets Debentures Bonds Overdraft Facilities Hire Purchase Leasing Don’t waste time! Our writers will create an original "The Vital Role Behind Financial Management Finance Essay" essay for you Create order Internal Sources: Personal Savings In very lament terms personal savings means the money that the proprietor or the business owner disposal. If he has invested that money then that money categorized under personal savings. He can reinvested that money either his own or in any other business. Retained Earnings The total earning that the company retained at their disposal without paying to the share holders as dividend. Most companies invest that retained earnings in their own. Retained earnings are recorded in the Balance Sheet. Working Capital Management Working Capital is how much a company has liquid assets in order to develop its business. And the working capital management is a managerial strategy in order to manage current liabilities and current assets of the organization. Sales of Assets An organization can make funds with the proceeds of sale of an asset. Although it is not a recommended source of finance still the business can make fund. External Sources: Share Capital This is a very common fund raising method of a company. Company issues common or preferential shares to the public. Buyers of the Share capital become owners of the company and they have the right over the companys operation up to certain limits. This is also known as Equity Financing. There are two main aspects in Share capital Preferential Share Capital Preferential Share holders also get the ownership to the company and they have the privilege of dividend. Ordinary Share Capital Ordinary share holders get the equity ownership to the company and these are the most common shares in business world. These ordinary share holders have the right to vote at the companys Annual General Meeting. But they are the people who get their shares at last at the time of liquidation of a company. Therefore in that manner ordinary share holders falls under high risk category. Debentures Debentures are unsecured debt instrument. That means it has not been secured by collateral or any other physical asset. These debentures are categorized under medium and long term liabilities. Debenture holders have no right in voting and they are entitled for a debenture interest. Bonds Bonds are commonly known as securities and those are fixed income securities. Bonds are just like loans and bonds provide the borrowers with external funds to invest in the long term investments. Bonds must be repaid. Overdraft Facilities An overdraft is a short term source of finance. Overdraft is a facility provided by a bank for the company under their company current account. Banks allow the business to pay an agreed sum certain excess amount through their account. Usually banks charge high interest rate on overdrafts and they consider several things before granting facility. The business has to go under an credit risk evaluation process to get the overdraft facility approved. Hire Purchase Goods can be purchased under a fixed period installment loan. The purchased item is kept on under lien and it is the only security has over the loan. During the installment period the buyer has the possession of the item where only can use it but not the ownership. Leasing Leasing is a some sort of a contract. This can be used to obtain some fixed assets. There are mainly two parties involved. In a contract its lesser and Lessee. In a tenancy its tenant and landlord. The consideration to a lease is rent. b). Advantages Disadvantages Personal Savings Reliance on external unforeseen events is very less. There are restricted source of capital Retained Earnings Easy and direct access. There is no requirement of repaying as in debts. No operating cost involved as in other sources of finance. It takes long time to generate funds. Reduces the liquidity of the company. -There is an opportunity cost involved. Working Capital Management a ready source of quick funds adverse effect on the cash flow Sales of Assets less operational fee and cost would be incur many losses Share Capital No fixed interest responsibility Easily available in initial stages of business In case of small businesses good advice can be obtained from equity share holders Dilution of Control Some (IOP) initial public offering are expensive to administer Debentures Maintain ownership Tax Deduction Lower Effective Interest Rate Repayment even in difficu lt business situation Even after tax advantage interest rates can still be inflated Impacts on credit rating due to undue debt Bonds Bond holders get interest and are paid principal on a fixed date Some bonds dont get interest as an alternative they are issued at a discount and redeemed at par They are normally issued by underwriters Overdraft Facilities In case of a loan interest is paid on the total amount weather utilised or not, however in the case of an overdraft it is limited only to the amount really used Flexible- accessible when you want it facilitates keep up cash flow speedy source to increase finance immediate recall by banks (if terms and conditions apply) in case borrower fail to pay, bank amends plan or there is a break of condition by the borrower require to sheltered against business assets Hire Purchase extend the cost of finance so companies dont have to take big loans for investments free of charge credit Higher approval rates because of present of a guarantee protection clients can get benefits of a sale or discount still with inadequate funds Put extra monthly debt weight on clients No ownership title till last payment is paid Needs credit checks which can reject some clients from benefitting The seller can retrieve goods if less than 1/3rd has been paid. Seller be also able to take court consent for those goods on which more than 1/3rd has been paid to reclaim them Leasing No massive investment Less extra guarantee needed Tax compensation Its trouble-free to budget a steady amount paid towards a lease then to funds a lump sum amount No right to the goods No long term cost Accountable for any maintenance expenses Ms.Raman Grewals lecture notes c). Constructing a high way in Sudan is a vast project which the company will have to spend a lot of money in that. There for the company may be given to seek for necessary financial support from others. That mean the company should be financed by third party financial institutions or companies. In this case should not use any short term financial sources like band overdrafts and shout term loans. Because the company will get the proceeds and benefit of construction the highway in Sudan only after some times. Therefore if the companies go for a short term financial method the company may run out or money and they might face many difficulties to paying it back. There for company should always go for long term financing methods such as venture capital, grants, loads, retained earnings, hire purchase (Long term) and share holders capital. Venture capital: This would be categorized under the best method of financial the company for the project. In this case a wealthy Entrepreneurial company or an individual would invest on the project. This large company normally well experienced and wealthy companies. Since our company is new to the trade and this is our first international project we can seek for venture capitalists help in order to proceed with the project Getting networking opportunities and helping in getting initial public offering would be advantages to the company. But most of the venture capitalists are more expensive and very hard to effort such amount at the initial stages. Grants: Grants could be getting from local or national governments. Since this and international project government could be able to finance on this. They can provide the command with large monetary rewords. Also if the company would make grants available from the governments other private sources would be willing the reward the company with financial supports. But most of the time governments are reluctant to finance on these type of projects and there is a very lengthy procedures. Also government would come out with some predefined rules and regulations when hard to meet with. Loans: Getting a loan from bank for this type of project would be hard. Because in this case you will have to provide collateral in order to get the loan granted. Also Sudan is categorized under high risk country and based on the country risk bands may not willing to grant the company on the project. But the company may seek opportunities to get a loan from a organization like world bank or from any (NGO) Non Government Organization. Hire Purchase (Long Term): Company may go for long term hire purchasing in buying machinery and equipments for the construction project. All those machineries are heavy and big machineries and sometimes they will have to look for foreign hire purchases in order to fulfill their requirements. Rather buying those complex and big equipments and machineries company may hire those from another constructing company which proceed these type of vast projects would be a best method of acquiring equipments. Also this would be a good method in monetary terms. :: QUESTION 2 a). Source of finance Cost to the Company share capital Dividend Company may have to pay dividend from their earnings or profits to the ordinary share holders and preferential share holders Retained earnings/Personal savings Opportunity cost There will be an opportunity cost of retained earnings. In most of the cases retained earnings are in the mean of bank money or invested in any other means. So there will be a debit tax or withdrawal tax on that amount Loans/ Long term loans/ Bank OD/ Short term loans/ Debentures/ Bonds Interest The company has to pay an interest to the bank/ mortgage company or financial institution for the facility that they have obtained Leasing Monthly installment Company will have to pay a predetermined fixed monthly installment covering the principal amount and the interest component b). A company is basically done financial planning before the financial year starts. In every year they allocate some funds fo r expenses and invest money in different money generating financial sources in order to produce more money by looking at the last financial years profits and expenses. Basically most companies prepare cash budget in order to monitor their income and expenses. In other words to monitor their cash inflows and cash outflows. If the company is keen to do proper financial planning at the beginning of the financial year company can run their business during the whole year without any hazel. Overtrading Means: Performing more business other than the companys working capital be able to usually continue, therefore damages on insolvency, or cash flow will be reduced. Securities trading means extreme buying and selling actions by an agent in an effort to take out more charges or fees from customers. https://www.businessdictionary.com/definition/overtrading.html, date accessed19/07/2010 Also having a proper financial planning would lead the company to have proper cash budge ting and avoid overtrading. c). Information needed for decision makers would be as follows, Gross and net profit of the company Expenses paid out and the pattern of the spending money Liabilities taken from third party companies and individuals Value of assets that the company have under them Total earnings of the company Value of debts and amount paid as dividend for them Retained earnings Investments or the company d). Sources of finance, shows up in the balance sheet Working capital Share capital Sale of assets Debentures Bonds Sources of finance, shows up in profit and loss account Overdrafts Hire purchases :: QUESTION 3 a). Angus Ltd Cash Budget For the period of September to February Figures in pound; Particulars September October November December January February Cash Inflow Cash Sales Credit Sales Tot. Cash inflow Cash Outflow Vehicles Overheads Purchases Tot. Cash outflow Opening Balance Cash Inflow Cash outflow Loan / Deficit 3,000 3,250 4,000 3,250 4,500 3,250 4,500 3,250 0 2,200 0 2,200 6,250 2,200 2,500 7,250 3,500 2,200 2,500 7,750 2,200 2,500 7,750 2,200 2,500 (2,200) 25,000 0 (2,200) (2,200) 22,800 0 (2,200) (4,700) 20,600 6,250 (4,700) (8,200) 22,050 7,250 (8,200) (4,700) 21,100 7,750 (4,700) (4,700) 24,150 7,750 (4,700) 22,800 20,600 22,050 21,100 24,150 27,200 b). Prada Manufacturing Fine Jewelry Per one silver ring Silver 8 grams Cost of Silver pound; 15 per gram Labor time taken 2.5 hours Labor cost pound; 20 per hour Polishing time 40 min Polishing labor cost pound; 8 per hour Total factory direct cost(for 500 rings) pound; 10,000 Direct cost per ring pound; 10,000 / 500 pound; 20 Price to produce one ring Silver cost 8 x 15 = pound;20.00 Labor cost 20 x 2.5 = pound;50.00 Polishing Cost 8 x 40/60 = pound; 5.33 Direct cost 10,000 / 500 = pound; 20.00 pound;195.33 Cost to produce 60 rings 195.33 x 60 = pound; 11,719.80 c). The Sunrise Ltd Year 1 Year 2 Year 3 Year 4 Sales unit SP / Unit Sales Direct Mat cost p/unit 5.75 VC / unit 5 FC / unit 4.5 Total Direct Material Cost Gross Profit Total Variable Cost Total Fixed cost Advertisement Depreciation (750,000/4) Net Profit Tax Net Profit after Tax Depreciation Cash Flow 100,000 30 3,000,000 575,000 2,425,000 500,000 450,000 550,000 187,500 737,500 147,500 590,000 187,500 777,500 80,000 25 2,000,000 460,000 1,540,000 400,000 360,000 230,000 187,500 362,500 725,000 290,000 187,500 477,500 70,000 20 1,400,000 402,500 997,500 350,000 315,000 187,500 145,000 29,000 116,000 187,500 303,500 55,000 15 825,000 316,250 508,750 275,000 247,500 187,500 (201,250) (201,250) 187,500 (13,750) Net presented value for the year 1 for 10%: = 0.909 x 777,500 = 706,747.5 Net presented value for the year 2 for 10%: = 0.909 x 477,500 = 434,047.5 Net presented value for the year 3 for 10%: = 0.909 x 303,500 = 275,881.5 Net presented value for the year 4 for 10%: = 0.909 x (13,750) = (12,498.75) 706,747.5 + 434,047.5 + 275,881.5 + (12,498.75) = 1,404,177.80 If the net presented value is greater than 0 is accepted and if the net presented value is smaller than 0 then the project is a waste and pointless of investing on the project. That means, if NPV gt; 0 , accepted and if NPV lt; 0 rejected. :: QUESTION 4 A). Profit and loss account: Profit and loss account shows an income and expenses for particular financial period. This is also known as income statement or Trading profit and loss account. Ex: for the period of 1st January 2010 to 31st December 2010 Balance Sheet Balance sheet shows the financial position of the business at the particular point of time and it shows exact values of assets and liabilities the company has with their possession. Ex: As at 31st December 2010 Cash flow statement Cash flow statement is an indication of the cash inflow and outflow of the company during a particular period of time. B). Under accrual based financial accountancy system businesses prepare two different types of financial statement. Income statements Balance Sheet And cash flow statements are mostly prepared in a small medium businesses also if they have different type of pay roles then they always temp to prepare cash flow statements for their easy refer ence. C). Current Ratio / working capital ratio: Current ratio is a method of testing of financial power of the company. It computes how many amounts of assets are probable to be changed in to cash inside a year in order to pay debts. 2008 2007 Current Ratio = Current assets / Current Liabilities = 125,000 / 100,000 = 140,000 /70,000 = 5 : 4 = 2 : 1 Gross profit margin: Although this is not an exact guess of the companys costing policies it gives a better understanding of the companys financial stability. Company may find difficulties in paying out of future expenses of the companys day to day operations without a sufficient gross profit margin. 2008 2007 Gross profit margin = Net Sales Cost of sales / annual sales return = 600,000 300,000 / 600,000 = 650,000 400,000/650,000 = 0.5 = 0.38 Generally gross profit margin of a company ought to be constant. If it is fluctuating time to time it will not be a good indication of the pricing or costing strategies adopted by the company. Also this would directly affect for the cost of sales. Equity Turnover : This ration is to calculate the companys capability of creating sales out of total amount of equity invested. Equity means the share holders wealth (basically ordinary and preferential share holders) invested in the business. Owners equity = Share capital + Retained profits + Net profit If the companys equity turnover ratio is 3 that mean the company will generate 3 pounds of sales for each and every pound invested as equity. 2008 2007 Equity Turn over = Net sales / Average total Equity = 600,000 /170,000 = 650,000 / 220,000 = 3.5 = 2.9 Source https://www.investopedia.com/exam-guide/cfa-level-1/financial-ratios/operating-efficiency-ratios.asp, date accessed 21/07/2010 :: Appendices / Reference Lecturer Raman Grewals Notes www.investopedia.com www.googlesearch.com www.businessdictionary.com