Financial matters

The organization of the business firm

admin — Mon, 05 Dec 2011 10:11:30 +0000

The business firm is an entity designed to organize raw materials, labor, and machines with the goal of producing goods and / or services. Firms (1) purchase productive resources from households and other firms, (2) transform them into a different commodity, and (3) sell the transformed product or service to consumers.
Every society, no matter what type of economy it has, relies on business firms to organize resources and transform them into products. In market economies, most business firms choose their own price, output level, and methods of production. They reap the benefits of sales revenues, but they also must pay the costs of the resources they use. In socialist countries, governments often set the selling prices of goods and services and constrain the actions of business firms in various other ways. Firms typically do not pay all their bills from their revenues, and they are often not allowed to keep revenues that exceed costs. In any case, the business firm is the entity used to organize production in capitalist and socialist economies alike.

The impact of subsidy

admin — Tue, 15 Nov 2011 10:05:58 +0000

The supply and demand framework can also be used to analyze the impact of a government subsidy. A subsidy is a payment to either the buyer or seller of a good or service, usually on a per-unit basis. Subsidies are often granted in an effort to help buyers afford a good or service, or to increase the profitability of producers in an industry. As we have seen in other cases, however, the effect of a government program often differs substantially from its original intent. Because prices change when subsidies are imposed (just as when taxes are imposed), the benefit of a subsidy can be partially, or totally, shifted from
buyer to seller, or vice versa. Suppose that the government, in an effort to make textbooks more affordable, gives college students (buyers) a $20 subsidy for each book they buy. The $20-per-book subsidy paid to the buyers will increase demand by the amount of the subsidy (shift from D , to D2).As the result of the subsidy, the equilibrium price will increase from $80 to $90, and the total quantity purchased will expand to 110million textbooks per year.
The subsidy program reduces the students’ out-of-pocket cost of a textbook (from $80 to $70), but the net gain to them is less than the amount of the subsidy. Why? Even though the textbook subsidy is granted to buyers, substantial benefits also accrue to sellers. Because the subsidy program increases the demand for textbooks, pushing their price upward by $10, half of the benefits are captured by sellers (including resource suppliers like copy editors, authors, and paper suppliers).
Alternatively, if textbook supplier? had been granted a $20 payment from the government for each textbook sold, the supply curve would have shifted downward by the amount of the subsidy. This would cause the market price of textbooks to decline to $70. In this case, buyers pay $10 less than before the subsidy program, while the sellers receive $10 more (the sellers now get $90 for each book sold the $70 market price plus the $20 government subsidy). Just like a tax, a subsidy results in the same outcome, regardless of whether the subsidy is granted to buyers or sellers.

The Loan Agreement

admin — Sat, 19 Dec 2009 10:17:53 +0000

The loan agreement provides a legal contract between the borrower and the bank. It spells out in detail the terms of the loan. This normally specifies the amount(s) to be drawn down, the interest rate that will be charged and sets out a schedule of the dates when interest payments and principal repayments are due. It will also contain a detailed breakdown of any fees to be paid and penalties that the bank may charge for minor transgressions such as late or missed payments. For secured loans it will also include details of the collateral being pledged by the borrower. Most agreements also contain clauses indemnifying the bank against potential liabilities arising from specified events.
If the loan is a floating rate loan the loan agreement will specify the underlying benchmark rate, the margin over that benchmark, the conditions under which the rate charged to the customer will be changed and the notice to be given when such a change is made.
The bank will try to ensure that the loan agreement covers all possible eventualities. If the value of the collateral pledged falls below a certain level the agreement may require the borrower to provide additional collateral to restore the original value.
In countries such as the US where litigation is a constant potential threat it is important that the agreement states clearly any risks arising out of taking out the loan.

Forecast Results

admin — Tue, 15 Dec 2009 10:16:22 +0000

Once the coefficients have been determined, they are used to calculate the forecast value. These forecasts are most accurate for the next day, and should be used with less confidence for subsequent days.
What if the forecast does not work? First. the process should be checked to be certain that it was performed properly. Pay particular attention to the removal of trends using the correlogram. Next, check the data used in the process. if the data sample is changing (which can be observed on a price chart), select either a shorter or longer period that contains more homogeneous data, that is. data similar to the current market period.

The economic rule of costs

admin — Thu, 10 Dec 2009 10:12:55 +0000

Consumers would like to have more economic goods, but resources to produce them are scarce. How much of each desired good should be produced? Every economic system must balance consumers’ competing desires. When decisions are made in the political arena, the budget process performs this balancing function. Legislators, a central planning committee, or a monarch decide which goods will be produced and which will be forgone. Taxes and budgets are set accordingly.
In a market economy, though, consumer demand and production costs are central to performing this balancing function. The demand f o r a product represents the voice of consumers instructing firms to produce the good. On the other hand, a firm’s costs represent the desire of consumers not to sacrifice goods that could be produced if the same resources were employed elsewhere. A profit-seeking firm will try to produce only those units of output buyers are willing to pay full cost for. Proper measurement and interpretation of costs by the firm are critical to both the firm’s profitability and the efficient use of resources.

Covenants

admin — Tue, 01 Dec 2009 10:10:10 +0000

There is an inherent conflict between the providers of debt and equity to companies. Most providers of debt financing require the borrower to agree to conditions on the way in which the borrower runs their business to protect the lenders from actions that would weaken their own positions. These conditions are called covenants.

Public sector

admin — Wed, 25 Nov 2009 10:09:00 +0000

These include state-sponsored organizations that specialize in guaranteeing loans for a particular type of borrower such as small companies or cooperatives. Some specialist public sector banks (such as national import–export banks) also provide guarantees. These guarantees are useful in helping the guarantor achieve objectives of funneling credit to selected borrowers or facilitate exports without having to actually fund such loans itself. Use of Highs and Lows
Both the implied highs and lows as well as the independently forecasted highs and lows can be the basis for other interesting strategies.’ The following two are used with intraday prices.
1 . Using confidence bands based on the closing prices, buy an intraday penetration of the expected high or sell a penetration of the expected low, and liquidate the position on the close. Use a stop-loss. Consider taking positions only in the direction of the ARIMA trend.
2. Using the separate ARIMA models based on the daily high and low prices, buy a penetration of the 50% level of the high and sell a penetration of the 50% level of the lows. Liquidate positions on the close. Use a stoploss.

Guarantees

admin — Fri, 20 Nov 2009 10:08:05 +0000

Guarantees can take many forms and banks generate fee income from providing a range of guarantees, such as a standby letter of credit, to its customers. A bank may also be offered a guarantee from a third party with respect to a loan the bank is making to a customer. In the event of default the guarantor is required to meet the borrower’s outstanding obligations. Loan or credit guarantees can be considered as a form of collateral. They are treated as contingent liabilities by the guarantor unless it becomes likely that it will be forced to honor its guarantee.

TRUST

admin — Tue, 10 Nov 2009 10:04:57 +0000

The trust business covers a wide range of activities and the degree to which banks provide trust services varies significantly between countries. They both compete with and cooperate with legal firms in some of these areas. In many of these areas they have specific fiduciary responsibilities that may be laid out by law or established through the terms of their appointment:

Estate. Banks frequently provide estate planning and act as the executor for the winding up of estates. This involves handling the legal matters, managing the estate’s assets and arranging for their disposal and the subsequent disbursements.
Guardianship. Banks may be appointed to act in a guardian capacity on behalf of a beneficiary and take overall responsibility for their financial dealings under the terms of the guardianship.
Trust management. In some countries many education institutions and charities rely upon income from endowments and other bequests. Banks may act as the trustee itself or in an advisory role to the trustees. A few of these trusts are personal trusts usually set up to effect a transfer of wealth from one generation of a family to the next while minimizing future death duties.
In all of these areas banks usually act in a very conservative manner. They are high-volume, low-margin businesses. In some countries “trust” has taken on a different meaning and may be employed as part of an overall strategy to attract customer deposits by guaranteeing returns. These businesses are extremely difficult for external analysts to analyze due to the opacity of publicly available data.

Price elasticity of supply

admin — Thu, 05 Nov 2009 10:04:23 +0000

The Price elasticity of supply is the percentage change in quantity supplied, divided by the percentage change in the price causing the supply response. Because this measures the responsiveness of sellers to a change in price, it is analogous to the price elasticity of demand. However, the price elasticity of supply will be positive because the quantity producers are willing to supply is directly related to price. Like demand elasticity, time plays a role once again. Supply elasticities will be greater when suppliers have a longer time to respond to a price change. In the next two chapters, we will discuss more fully the factors that determine supply elasticity. For now, it is important simply to recognize the concept of supply elasticity and the fact that suppliers (like buyers) will be more responsive to a price change when they have had more time to adjust to it.