The firm would borrow from the foreign market which has an interest rate lower than that of the local market. This amount would be equal to the converted present value of the total amount repayable to the bank at prevailing exchange rates. Since the local interest rate on lending is higher, its maturity is greater and will be used to repay the bank loan. The surplus of this and other earnings from the business operations will then be used to repay the maturity value on the foreign borrowing at the spot rate. 3.
2. A current account deficit may imply that the government is replying on consumer spending, and are becoming uncompetitive. 3. A balance of payments deficit may cause a loss of confidence by foreign investors. Therefore, there is a risk, which may cause investors to remove investments causing a huge fall in value of the country’s currency.
A high ratio generally means that the company has been aggressive in financing its growth with debt. Such capital structure is likely to result in volatility in the earnings as a result of additional interest expense. This can also said to be a measure of the gearing level of the company. The optimum level of gearing is different to specific business sectors. For example, capital intensive industries such as logistics tend to have a slightly higher long term debt/equity ratio while electronics manufacturing companies have a relatively lower ratio The company had a debt equity ratio of 2.44 in FY 2011.
1a. An interest rate is defined as the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Various factors determine interest rates, among which are: Supply and Demand Interest rate levels are a factor of the supply and demand of credit: an increase in the demand for credit will raise interest rates, while a decrease in the demand for credit will decrease them. Conversely, an increase in the supply of credit will reduce interest rates while a decrease in the supply of credit will increase them. The supply of credit is increased by an increase in the amount of money made available to borrowers.
The main findings are that the banks, who have raised funds when their market valuations were high, have lower current leverage ratio. This confirms Baker and Wurgler (2002) results that the historical market valuation has a large, negative and persistent impact on bank’s capital structure. The effect of past market valuation is stronger than the effect of current investment opportunities, which is measured by the market-to-book ratio. The results are inconsistent with the traditional capital structure theories, but provide support for the market timing
The first and foremost aim of the Central Bank is to maintain the inflation level to the minimum. The Quantitative Easing policy is differing and very inflationary since it uses money for both lending and keeping as reserves. Nevertheless the economic policy on the other hand states that the effect of inflation will be good when Quantitative Easing is used, when the economy goes down as it will encourage the economy as a whole initially. But it will create problems in the longer run as the effects of such a simulation will be an extreme challenge to deal with when the economy gradually recovers. Secondly, quantitative easing can lead to a fall in the interest rates in the short term and an increase in the rate of inflation in the longer run, hence causing an instability in the financial system as well as an increase in the interest rates, therefore it is essential for the central banks to keep the interest rates
However, this theory cannot take into account the fluctuations of forex rate. Hence, another theory called overshooting model by late Rudiger Dornbuschis was proposed. This theory explains that a currency appreciates more in the short-run than in the long-run. This can take into account the fluctuations of the forex rate. However, predicting the short-run is complicated and this is viewed by economists as a random walk.
ABSTRACT In a relatively poor economy like Pakistan, market size and the number of insurance companies’ operate may be at a seemingly insignificant point, yet, oversight of the importance of the firm size and their risk taking behavior could potentially lead to not just a financial breakdown and national crisis, but also to investors’ panic, which could likely escalate and seriously task for other countries. A vital deliberation underlying the AIG bailout pertains to firm size, premised on the too-big-to-fail (TBTF) theory. Support of the TBTF theory believe that many large financial organizations received financial bailout from the federal government access to a range of liquidity facilities (including asset guarantees and capital injections)
The hope of these loans was to put the country on a faster development path through rapid investment and faster growth. But the debt ratio reached a level in 1980s, making it clear that repayment would not just constrain economic performance but be actually impossible. This project examines the structure of Kenya’s external debt and its implications on the economic growth through debt overhang and debt crowding out effect. The finding of the study shows that Kenya’s external debt is relatively from multilateral sources. The study adopted overhang hypothesis, the crowding out effect, Neo-classical theory and the Endogenous growth theory for the study
An expansionary approach fabricates the total supply of trade out the economy rapidly or reduces the financing cost. Right when the national bank needs to finish an expansionary monetary approach, it goes to the security market to buy government securities with money, accordingly extending the money stock or the trade accessible for use out the economy. Expansionary approach is for the most part used to fight unemployment in a subsidence. A contractionary approach of course decreases the total money supply or grows it just step by step, or raises the financing cost. Right when the central bank needs to complete a contractionary money related course of action, it goes to the security market to offer government securities for trade out this way decreasing the money stock or the trade accessible for use out the economy.