Framework of Best Financing Options for a Company

Introduction

The impact of the investment in the company is essential for it can help the foundation and improvement of the business. Most of the companies are utilizing the other financial sources to help additional needs for resources. The combination of the investment and the investment are common actions of the company which are sometimes called as the working capital.

Background of the Study and Problem Statement

Investments are needed to establish the kind of business that will help the economy to regulate it financial stability. Investments may come in different sources but the most popular source came from the debtors who are willing to support the firm’s production or selling activities. In the study, the main topic comprises the best financing option/s for the company.

Research Objectives

The objectives of the study are divided into two. First is to determine the best financing option for a company which is in line to the company’s goal and positioning in the market. And second, which is related to the first objective, is to determine the duration of the collaboration or the relationship in medium or long terms.

Research Questions

The study recognized the different factors that might affect its completion and therefore, the questions are presented to help study meet the objectives.

1. What are the reasons of the financial sources in helping the company?

2. What are the common objectives of the financial sources which are also facets of the objectives of the company?

3. What are the opportunities available for the collaboration of the companies and the financial sources?

Literature Review

Corporate financing is a product of market decisions that was blended with the pure investment and debt financing. The impact of corporate debt financing will be seen competitive outcomes. In studies, the firms with low debt ratios is actually their debt capacity, firms will experience stronger product market performance than their highly indebted rivals. Specifically, cash is not the same as negative debt when reducing debt and does not guarantee the ability to access similar debt conditions in the future when debt capacity diminishes. When a firm has a saturated debt capacity when it faces financial constraints and when its investment opportunities tend to arrive when cash flows are low when hedging needs are high (Fresard, 2009). Issuing debt in a capital structure has a wide-ranging in terms of costs and benefits. In an overview, the capital structure depends on the specific circumstances of the firm and overall development of the capital market infrastructure. In different industry, the high leverage can reflect poor corporate governance that exerted too much control over firms. The more focus on size and market share while downplaying return on investment (Haksar and Kongsamut, 2003). The more likely to use debt financing as opposed to raising equity and diminishes the control on the ownership. And with this scheme of high leverage is the main symptom in making the sense of governance weaker. When there is a presence of the large shareholder that will dominate the ownership of companies, the pursuance in financing policy has characterized the equity and dominating the companies in their respective industries. The usual strategy in company’s expansion projects is also expanding their investments in using borrowed funds although the returns on those investments are declining (Saldaña, 1999). It is because larger companies that have superior access in debt financing is used to apply this kind of strategy, that results in further concentration in industry sales.

Methodology

The applied methodology of the study is the use of comparative case study which emphasizes the use of past literatures in meeting the analysis of the study. The applied method allowed the study to assess the different insights of the authors. As being part of the analysis, the study identified that the financial constraint of the firm is based on their asset size and assign to the quartile of the size distribution. It is said that the strong market effectiveness of the firm is usually depends on how strong the positive debt against the negative debt, that can support the continuous financial cycle. In this event, the best framework or position that the company needs relies on the control of the business in utilizing the sources as well as adopting the knowledge of working capital.

Conclusion

The company that can realize the benefit more than the costs of the financial support can reflect on building the strategic goals and market position. Organizational leaders should understand the consequences of their actions. If they allowed too much financial support, they might end in losses. Therefore, the partnership should be build between them.

References:

Fresard, L., 2009. Financial Strength and Product Market behavior: The Real Effects of Corporate Cash Holdings. Journal of Finance [Online] Available at: http://www.afajof.org/afa/forthcoming/6386p.pdf. [Accessed 11 Feb 2010].

Haksar, V., & Kongsamut, P., 2003. Dynamics of Corporate Performance in Thailand. International Monetary Fund [Online] Available at: http://www.imf.org/external/pubs/ft/wp/2003/wp03214.pdf. [Accessed 11 Feb 2010].

Saldaña, C., 1999. Conference on Corporate Governance in Asia: A Comparative Perspective. Philippine Corporate Governance Environment and Policy and their Impact on Corporate Performance. [Online] Available at: http://www.oecd.org/dataoecd/7/55/1931508.pdf. [Accessed 11 Feb 2010].

A Study of Portfolio Returns on the Nairobi Stock Exchange Based on the P/B and P/E Ratios

Introduction

Investors can have an idea in the efficiency of the stock market when they realized their gain from the performed active management strategies. In addition, the investors’ attempts to beat the market through the reduction of the returns due to the costs incurred in the management, transaction, taxation, and other related market operations.

Background of the Study and Problem Statement

In the Nairobi Stock Exchange, the investors follow the passive investment strategies to make it possible in beating the market. The importance of the role of the portfolio management is highly anticipated in choosing the right investment that can react on the risk profiles (Clarke, Jandik, and Mandelker, 2002; Ernst & Young, 2008). As the main topic of the research paper, on what ways did the investors realize the portfolio returns and achievement of the market efficiency in the Nairobi Stock Exchange?

Research Objectives

The first objective of the study is to determine the portfolio returns for the investors which are based on the price-to-book ratio and price-to-earning ratios. Second is to determine the efficiency market hypothesis in the accordance of the returns of investments among the investors.

Research Questions

The study recognized the difficulty in analyzing the Nairobi Stock Exchange and thus it provided several questions that can serve as the guidelines in the completion of the study. Moreover, the questions are pertained in the activities or transactions in the investment settings that are suitable to the determination of the study objectives.

1. What are the common activities of the portfolio manager?

2. How can a portfolio manager achieve the optimal portfolio?

3. In the recognition of the portfolio, how can the efficiency in the market as well as the returns be achieved giving the value to the price-to-book and price-to-earnings ratios?

Literature Review

Efficient market hypothesis or (EMH) is identified as the proposition of the current stock prices that can be reflected on the available information about the firms and this enables the firm to earn profit through the utilization of the given information (Clarke, Jandik, and Mandelker, 2002). In this way, the investors cannot make an excess on returns (Aga and Kocaman, 2008). The change of the price of the securities took great effects such as how the changes in the market took place. Most of the business analysts stated that through the value strategies, the market can be outperformed consistently. Through the price-to-book ratios, the stocks can be bought on low prices which are relative on its book values, dividends or historical prices. The results may represent a strong return which might be in contrast on the EMH (Clarke, Jandik, and Mandelker, 2002). But most of the studies identified that in the long-run, the investors can make it possible to acquire the said excess of returns. The investment strategies may result to the excess return in accordance to the diversified portfolios that is entirely based on the price-to-earnings ratio. The long-term investment in the P/E is more effective and can carry-out much of the values (Aga and Kocaman, 2008; Ernst & Young, 2008). The portfolio returns can be achieved through the optimization through the portfolio diversification and asset allocation. The aid of the minimization of investment costs and taxes can make the returns be possible. Portfolio management should have appropriate mixture of the securities should be in accordance of the investor’s age, goals, tax bracket, employment, and the perspective towards the risks. In an efficient market, the competition will cause the full effects of new information on the intrinsic values that are soon being reflected in the actual prices.

Methodology

The applied method of the study is the use of the comparative case study method. The aid of the past literatures and case studies are sought by the study to meet its objectives. Furthermore, the comparative case study method enables the study to examine, observe, compare, and measure the different transactions within the Nairobi Stock Market. Through the extensive support from the past case studies, the research come up on its own analysis and concluded the other related ideas that will benefit both of the stock market and the investors.

Conclusion

Based on the study, the efficiency market hypothesis limits the information on the investors where they can gain the return but with no excess. However, through the use of the P/B and P/E strategies, the portfolio managers experience the great returns. The excess in returns are said to be anomalous for some of the economists because it contradicts the limitations in the efficiency market hypothesis.

References:

Aga, M., & Kocaman, B., 2008. Efficient Market Hypothesis and Emerging Capital Markets: Empirical Evidence from Istanbul Stock Market. International Research Journal of Finance and Economics. [Online] Available at: http://www.eurojournals.com/IRJFE%20ISSUE13%20mehmet.pdf. [Accessed 11 Feb 2010].

Clarke, J., Jandik, T., and Mandelker, G., 2002. The Efficient Markets Hypothesis. [Online] Available at: http://comp.uark.edu/~tjandik/papers/emh.pdf. [Accessed 11 Feb 2010].

Ernst & Young, 2008. Kenya Commercial Bank Limited. [Online] Available at: http://www.kcbbankgroup.com/ke/images/stories/rightsissue.pdf. [Accessed 11 Feb 2010].

Factors Involving in the Fluctuations in Derivatives Market

Introduction: Background of the Study and Problem Statement

Derivative is a financial instrument that came from something else such as the financial instrument or an index or measurement. The term can be applied in the value from a set of the investors’ beliefs and sentiments about fundamentals in a stock market trades (AMS, 2003). The derivatives in the market are subject for a change; therefore there are factors that involved in the fluctuations which is the main topic.

Research Objectives

The objectives of the research are composed of the two main compositions. The first objective is to identify the factors involved in the fluctuations in the market derivative. The second objective is based on the first objective which is to push the right strategy to place an advantage in the appearance of the fluctuations in the market.

Research Questions

There are research questions that serve as the engine of the study. All of the questions are related to the main topic of the research and it will help the research for its completion.

1. What are the market derivatives?

2. What are the inefficiencies in the market?

3. What are the current strategies that applied by the organizations to avoid the inefficiencies?

Literature Review

Derivatives can e affected by different risks that are associated with the movements such as the borrowing, inflation, economic performance. An exposure of the derivative in the hedging requirements is suggested that can lead to losses and limiting the genuine investment transactions. The efficiency of derivatives market depends on the development of a liquid and efficient market for underlying securities and also on the suitable and acceptable benchmarks. It is also affected or carries the risk on account of fluctuations in the foreign exchange rates (Santoshmatre, 2006). Investors can use their powerful tool as an advantage to thrive the products in the pursuance of the investment strategies (Green and Luytjes, 1996).

These inefficiencies can take many forms. Counter-party risk in the physical market which described as the producer who is keen to sell forward a certain quantity of its commodity may be unable to find a buyer with satisfactory credit standing. Under a centrally cleared exchange environment, this is not a problem if the producer sells a futures contract. Counter-party “inflexibility” which is the same producer – if he had not used the futures market – may have difficulty getting out of the delivery obligation if he decided he did not wish to deliver. He may not be able to persuade the buyer to cancel the contract on reasonable terms. In a liquid futures market, he can simply buy back the position at a “fair” market price. Complexity of trade execution is in some underlying markets are simply not capable of providing efficient execution. The most common example is index futures. In most markets, an investor who wishes to track a benchmark index may find it impossible to immediately buy or sell the full set of constituent index stocks in the right proportion. An index futures contract satisfies this requirement very well. Stifling trading rules where many markets have trading rules that limits investors’ ability to act. The most common example is a ban or restriction on short selling. A futures or an options contract can be used to take short positions when this is prohibited, or hard to do, in the main underlying market. Excessive taxes appeared if the underlying market is subject to taxation that increases the cost of trading, a derivatives market can provide some relief (see page 5, Transactions Taxes & Fees for an example). Barriers to trade happens if exchange controls or other trade barriers are erected – for example by a government wanting to protect its own commodity producers – a derivatives exchange within that “protected” territory can flourish where it might otherwise be traded (AMS, 2003).

Methodology

The applied methodology of the research is the comparative case study which is very effective to measure the factors involving in the fluctuations of the derivative markets. Through the past studies the requirements as much as the questions can be identified. The comparative case study method can provide the current study to fill the gaps in the literature. Furthermore, the case study method is applied to invite the researchers to answer the main topic.

Conclusion

Through the examination of the past literatures and case studies, there are attitudes in derivatives. The obstacles to achieve the success in a new derivatives market can be on the interests included. The existing competition makes an impact in the fluctuations. The warrants and other structured products, margin trading, and foreign competition are the other factors that can affect the fluctuations in the derivative of the market.

References:

AMS, 2003. Derivatives Market Development, Key Success Factors in Building a New Derivatives Market. Alberta Market Solutions Ltd. [Online] Available at: http://www.albertasolutions.com/dmd.pdf. [Accessed 02 Feb 2010].

Green, J., & Luytjes, J., 1996. Derivatives, Powerful Tools in a Skilled Crafteperson’s Hands. SMM Secondary Mortgages Market: A Freddie Mac Quarterly, Vol. 13, No. 4. [Online] Available at: http://www.freddiemac.com/finance/smm/dec96/pdfs/grn_luyt.pdf. [Accessed 02 Feb 2010].

Santoshmatre, K., 2006. Equity: Scheme-specific Risk Factors. [Online] Available at: http://sbimf.com/Home/Downloads/scheme-risk-factor.pdf. [Accessed 02 Feb 2010].

Causal Relationship between Saving, Investment and Economic growth

Introduction

A strong economy also holds strong economic factors. The economic growth affects every parts of the industry and can have the opportunity to dictate the market flows. In the developing countries, most of the initiatives are already done to see if there is an economic progress. Clearly, the aim for the economic sustainability is the dream of the leaders. But in the view of the economists, economic progress can be achieved if the country determines the playing variables in the causal relationship.

Background of the Study and Problem Statement

The investigation of the causal relationship between savings, investment and economic growth in the sub-Saharan countries such as Ghana, Kenya, and Nigeria is the main focus of the paper. The sub-Saharan countries are categorized as the developing countries that set different strategies to achieve their country’s full potential for economic growth (Oladipo, 2009). In the integration of different factors such as foreign and domestic resources gave importance to the idea that their economies, particularly in Nigeria, had the evidence of the causal relationship or causality.

Research Objectives

The research identified the two main objectives that will give rise to the importance of the identification of the causal relationship in the developing countries. First is to establish the role of the savings, investments, and economic growth. And second is to demonstrate the efficiency of the relationship which every developing country in their aims to foster their own growth.

Research Questions

Accordingly, the study prepared essential questions that will serve as the engine of the study.

1. What are the importance of savings and investment in the economic growth?

2. What are the options taken by different industries that can contribute to the economic growth?

3. What are the other factors that emphasize the causal relationship particularly in Nigeria?

Literature Review

The relationship between the first event and the second event which is more similar to the cause and effect sequence is called causality or causal relationship. Mostly, causal relationship happens without the consciousness of the person. In the economic activity such as exporting, there is clear vision of relationship of saving, investment and economic growth (Oladipo, 2009). Trading, in particular, serves as one of the wheels of the economy and exporting became the important ingredient for most of the developing countries. Trading industry opens the opportunity of investment with an aid of the higher level of income and saving which consequently leads to economic growth (Afzal, Rehman, and Rehman, 2009). In the relationship, there is also an indication regarding the responsiveness of the economy in the events of inflation, large budget deficits, foreign markets and investments, and the effectiveness of the performing industries. The causal relationship of the can be examined if there is a relative sustainability or growth in the developing economies (Gokal and Hanif, 2004). In addition, there are also developments in the stock market that usually in form of investment that contributes to the economic growth. When allowing for the stock market to enter the regression along with financial development, a strong causal relationship between stock market development and economic growth is found (Caporale, Howells, and Soliman, 2004).

Methodology

The applied method utilized in the study is the comparative case study method. The application of the method enables the recent study to conduct its own investigation regarding the past literatures and therefore, examine and compare the results of the past case studies to help produce the analysis. Through the comparative case study method, all of the evidences will be revealed especially in the sub-Saharan areas particularly in Nigerian Economy.

Conclusion

There is a growing importance in the direction of the causal relationship of savings, investments, and economic growth in Nigeria. As a developing country, the Nigeria should provide the additional aids to help them achieve the success in developing the country. Therefore, they should continue developing the strategies to fully accommodate the savings and investments in the growth of their economy.

References:

Afzal, M., Rehman, H., & Rehman, J., 2009. Causal Nexus between Economic Growth, Export and External Debt Servicing- The Case of Pakistan. [Online] Available at: http://www.pide.org.pk/PSDE/pdf/32.pdf. [Accessed 09 Feb 2010].

Caporale, G., Howells, P., & Soliman, A., 2004. Stock Market Development and Economic Growth: The Causal Linkage. Journal of economic Development, Vol. 29, No. 1. [Online] Available at: http://www.jed.or.kr/full-text/29-1/02_J665_.PDF. [Accessed 09 Feb 2010].

Gokal, V., & Hanif, S., 2004. Role of Macroeconomic Factors in Growth. Relationship Between Inflation and Economic Growth. [Online] Available at: http://www.reservebank.gov.fj/docs/2004_04_wp.pdf. [Accessed 09 Feb 2010].

Oladipo, O., 2009. Does Saving Really Matter for Growth in Developing Countries? The Case of a Small Open Economy. [Online] Available at: http://economics.ca/2009/papers/0619.pdf. [Accessed 09 Feb 2010].