...1. Jules Kroll is planning to enter the credit ratings business. Is this a good idea? Is this a good time? Why? We suggest it is a good time but not a good idea for Jules Kroll to enter the credit ratings business. In order to know whether it is right for him to do so, we have used SWOT analysis to see the feasibility of this plan. Strength Jules B. Kroll — the leader of Kroll Bond Rating Agency, is the formidable strength for them to enter this new industry by his successful business career and abundant experience as an entrepreneur. Few people ever penetrate the dark side of money, but Jules Kroll is one of them. He has done all his life to look under the covers. The previous success and reputation of the Kroll corporate intelligence firm and K2 Global Partners can help Kroll Bond Rating Agency stepping into spotlight, while give public confidence that Jules Kroll could break into such a tough industry. Weakness Credit rating business is brand new field to Jules Kroll. He must do a lot of preparations to meet the requirements — a large amount of qualified experts, which would be a key to success; interest from users and issuers; NRSRO designation; investors who can help developing the financial viability of the project. Startup companies lack the geographical reach and industry expertise of the established players. It is costly and time consuming to recruit prominent staff of credit rating industry, and it is also hard for Kroll to attract users and issuers since majority...
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...Introduction Credit rating agencies play a key role in todays and the last century’s financial life. Their function is to analyze and then publish country’s and firm’s or basically any financial entity’s/product’s creditworthiness. However, their defining impact on today’s economics is goes way beyond their definition. The Three Big, Moody’s, S&P and Fitch are in possession of 95% market share, that means the competition is negligible. The lack of competition multiplies their individual effect on the markets and raises the question of whether they work with the moral standards today’s stakeholders are expecting from them. (The Role Played by Credit Rating Agencies in the Financial Crisis, Asian Development Bank Institute, 2012) Major investors and creditors are knowingly deciding about their financial moves based on a very narrow and far from comprehensive information. The three bigs ratings are certainly part of these data and they do have major consequences on whether a company will invest in a certain country or on what terms will a bank lend capital to a given enterprise. If we go even further, we can see that credit ratings will have impact on a country’s fiscal and monetary policies, industries’ success or in many case failure, and through that, on people’s everyday life and economic well-being. Now that the concept of ratings are not so abstract, let’s take a look at how they relate to the financial crises. The 2007 credit crisis were caused by the overvaluation...
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... Case study 2 6 Argentina Bankruptcy 6 Argentina towards Bankruptcy 6 What Happens When Argentina Goes Bankrupt? 8 Background to the Crisis 9 Argentina's Unemployment Rate 10 The Facts of the Case 12 Riots, Rate, Default and Resignations of Argentina 13 Research Matrix about Bankruptcy 16 CONCLUSION 17 REFERENCE 17 INDRODUCTION Bankruptcy is a legal proceeding in which a person who cannot pay his or her bills petitions the court to get legal protection from creditors and to obtain a fresh financial start. Although a bankruptcy filing is a court proceeding and all documents are signed under oath. However, in most bankruptcy cases you do not need to go before a judge. At the moment your bankruptcy is filed, the automatic stay goes into effect. The automatic stay immediately stops your creditors from attempting to collect debts from you in any way, including phone calls, letters and pending court proceedings. There are some exceptions to the automatic stay including criminal or government proceedings or those related to most domestic relations matters. Part of the bankruptcy petition is the completion of a Means Test. The Means Test averages then annualizes your gross monthly income for the six months prior to filing to determine your Means Test Income. If your gross income varies from month to month, your Means Test Income may not necessary be your actual annual income. If...
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...(M&A) advising side of corporate finance, bankers assist in negotiating and structuring a merger between two companies. If, for example, a company wants to buy another firm, then an investment bank will help finalize the purchase price, structure the deal, and generally ensure a smooth transaction. The underwriting function within corporate finance involves shepherding the process of raising capital for a company. In the investment banking world, capital can be raised by selling stocks or bonds (as well as some more exotic securities) to investors. * Sales: Sales are another core component of any investment bank. Salespeople take the form of: 1) the classic retail broker, 2) the institutional salesperson, or 3) the private client service representative. Retail brokers develop relationships with individual investors and sell stocks and stock advice to the average Joe. Institutional salespeople develop business relationships with large institutional investors. Institutional investors are those who manage large groups of assets, for example pension...
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...CORPORATE FINANCE 307 LITERATURE REVIEW Student Name / ID: Chay Yu Xi 15907811 Jacqueline Teo Hui Yun 15805054 Ting Heng Huat 14973837 Tutor: Leo Kee Chye Tutorial Day / Time: Monday / 2pm Table of Contents Abstract The Tech Bubble Introduction Lowering of Interest Rates Adjustable Rate Mortgage Securitization Mortgage Backed Securities Collateralized Debt Obligation Credit Default Swap Government Reaction and Policies Emergency TARP Repercussions Basel Disadvantages Future Policy Requirements Controversy Conclusion Reference List Review of the causes of the 2008 Financial Crisis in US. Abstract This paper seeks to summarize a stream of research that has delved into the major causes of the financial crisis in 2008. More precisely, we will be looking at a combination of causes such as the sub-prime mortgage crisis, the mortgage backed security, the collateralized debt obligation as well as how the incidental credit-default swap contributed to the incident. This paper will begin from analyzing the past, when it happened and how it built up and resulted in the financial crisis. The significance of this literature review seeks to give a simplified explanation of the financial crisis of 2008 and will be useful for the people unversed in economics or finance but wish to have a basic understanding of its causes and history. The Tech Bubble During the early 2000, numerous companies and individuals bought new operating...
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...project provides an opportunity to get some hands-on experience applying investment theory and models to real firms. In the process, participants will get a chance to: evaluate the risk profile of a firm and examine the sources of risk; analyze its capital structure and decide whether the firm is under- or over-leveraged; examine its dividend policy and decide whether the firm is under- or over-leveraged; and value the firm. How is the project structured? This is a project requiring by individual analysis and group synthesis. Each group should have at least 5 members but not to exceed 7. Each group will pick an industry to study. Each group member will pick a firm within this chosen industry to analyze. The companies chosen does not imply that they be competitors. For instance, a group can pick a company that manufactures personal computers, a company that produces software, and a company that provides computer services as part of the same group. Each person will be responsible for doing the entire analysis for the company that he or she has chosen. At the end of the process, the group will write one integrated report for all the firms in the group. In this report, the firms will be compared and contrasted and the results will be presented as a whole rather than as five separate parts. How will the project be graded? Each group will be graded on the final project and all of the presentations during the semester. The group grade will be allocated according to...
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...value is derived from another financial security. According to Oxford dictionary, derivative is defined as something derived or obtained from another, coming from a source; not original. In financial jargon, a derivative security is referred to a financial contract whose value is derived from the value of an underlying asset or simply underlying. This underlying is usually stocks, bonds, foreign currency, or commodities. The derivative buyer or seller does not have to own the underlying security to trade these instruments. Several factors have contributed to massive development in derivative markets since the 1970s. First, the collapse of the Bretton Woods system of fixed exchange rates in 1971 increased the demand for hedging against exchange rate risk. The Chicago Mercantile Exchange allowed trading in currency futures in the following year. Second, the changing of its monetary policy target instrument by the US Federal Reserve (FED) promoted various derivatives markets. The adoption of a target for money growth by the FED in 1979 has led to increased interest-rate volatility of Treasury bonds. That in turn raised the demand for derivatives to hedge against adverse movements in interest rates. Later in 1994 when the US Federal Open Market Committee moved to explicitly state its target level for the federal funds rate, that policy has spurred the growth of derivatives on the federal funds rates. Third, the many emerging market financial crises in the 1990s, which were often...
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...Corporate Finance Lecture Note Packet 2 Capital Structure, Dividend Policy and Valuation B40.2302 Aswath Damodaran Aswath Damodaran! 1! Capital Structure: The Choices and the Trade off Neither a borrower nor a lender be Someone who obviously hated this part of corporate finance Aswath Damodaran! 2! First Principles Aswath Damodaran! 3! The Choices in Financing There are only two ways in which a business can make money. • The first is debt. The essence of debt is that you promise to make fixed payments in the future (interest payments and repaying principal). If you fail to make those payments, you lose control of your business. • The other is equity. With equity, you do get whatever cash flows are left over after you have made debt payments. Aswath Damodaran! 4! Global Patterns in Financing… Aswath Damodaran! 5! And a much greater dependence on bank loans outside the US… Aswath Damodaran! 6! Assessing the existing financing choices: Disney, Aracruz and Tata Chemicals Aswath Damodaran! 7! Financing Choices across the life cycle Revenues $ Revenues/ Earnings Earnings Time External funding needs High, but constrained by infrastructure High, relative to firm value. Moderate, relative to firm value. Declining, as a percent of firm value Low, as projects dry up. Internal financing Negative or low Owner’s Equity Bank...
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...Debt and Value: Beyond MillerModigliani Aswath Damodaran Stern School of Business Aswath Damodaran 1 The fundamental question: Does the mix of debt and equity affect the value of a business? Assets Existing Investments Generate cashflows today Includes long lived (fixed) and short-lived(working capital) assets Expected Value that will be created by future investments Assets in Place Debt Liabilities Fixed Claim on cash flows Little or No role in management Fixed Maturity Tax Deductible Growth Assets Equity Residual Claim on cash flows Significant Role in management Perpetual Lives Different Value? Different Financing Mix? Aswath Damodaran 2 Approaches to Valuation Discounted cashflow valuation, relates the value of an asset to the present value of expected future cashflows on that asset. Relative valuation, estimates the value of an asset by looking at the pricing of 'comparable' assets relative to a common variable like earnings, cashflows, book value or sales. Contingent claim valuation, uses option pricing models to measure the value of assets that share option characteristics. Aswath Damodaran 3 Valuation Models Asset Based Valuation Discounted Cashflow Models Relative Valuation Contingent Claim Models Liquidation Value Stable Replacement Cost Two-stage Three-stage or n-stage Current Equity Firm Sector Option to delay Option to expand Young firms Option to liquidate Equity in...
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...Policy #2 The history of the American economy has been greatly impacted by the industrial revolution. Life as the people of this time knew it would have a big change ahead of them. The normal life of using your hands to produce products would become more of machines doing the manual work. There was a boom in population and income stemming from the economy becoming more efficient. The Industrial Revolution increased the supply of goods dramatically from the invention of a mass-production technique that was represented by Henry Ford. The majority of the increase of supply was largely seen in mining, steel, oil, transportation networks, communications networks, industrial cities, and financial centers, but also consumer goods. The concept of people not having to use their hands as much anymore was an important advancement. The time being saved was significant not to mention how efficient these steam powered machines were in production. Now the overall work time is being cut dramatically considering they could now have settings for machines to produce the work. At the same time, the workers needed to realize this meant there would be less jobs available for employees. There would be less work to manage, but this led to creating a bigger profit since there was not as much man power needed in the factory. This idea of having the machine do the dirty work sparked the importance of profits for the business leaders, which over time has arguably led to the greedy business leaders we...
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... This project with International Autotrac Finance Ltd as a combination of hard works & challenges and was both exciting and simulating. No project being individualistic efforts, this is one too is a combination of the efforts and views of many people. I would like to express my gratitude to all. First I would like to thanks Dr. Gurwinder who has given me the opportunity to do summer training in Sonlaika International Tractors Limited. I am very thankful to Mr. Rohit Mohan (Manager Finance cum Company Secretary), without his efforts it would have been impossible for me to get and complete project. I want to pay my regards to Ms Richa Gautam for being my corporate guide and as well as for continuous encouragement and guidance which he has given me during the course of the project. I also wish to convey special thanks and reverence to other colleagues of the IAFL department who has provided valuable acumen into project. Last but not the least would like to express my gratitude to the faculty at ICFAI National College for conducting our course with utmost sincerity. As a matter of fact every MBA...
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...Bond Market INTRODUCTION Presently, as there is a robust growth of industrial activity in our economy, the need for investment has grown significantly and has resulted in a strong credit growth Some disintermediation is expected to take place as the most creditworthy borrower seeks the lowest borrowing costs. This development has re-emphasized the fact that bond financing has to supplement the traditional bank financing to take care of the growing credit needs of the economy. The Indian debt market, particularly the government securities market, has undergone a significant transformation since the introduction of reforms in the financial markets in 1991-92. The primary objective behind the reforms has been to moderate liquidity growth, contain inflationary pressure, and conduct public debt management in a cost-effective manner. Various reforms have also been undertaken in the corporate debt market. The corporate bond market is an important segment of the financial market in terms of funds raised well as potential for future growth. The Securities and Exchange Board of India (SEBI) was established in 1992, to regulate the primary issue in equity and de markets and to ensure sound trading practices in the secondary market throu stock exchanges. The bond market is an important source of funding for both t government and corporate sector. The bond market, also known as the debt, credit, or fixed income market, is a market where participants buy and sell debt securities...
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...How did increased competition affect credit ratings? Bo Becker Todd Milbourn Working Paper 09-051 Copyright © 2008, 2009, 2010 by Bo Becker and Todd Milbourn Working papers are in draft form. This working paper is distributed for purposes of comment and discussion only. It may not be reproduced without permission of the copyright holder. Copies of working papers are available from the author. How did increased competition affect credit ratings? Draft Date: September 15, 2010 Bo Becker and Todd Milbourn* Abstract. The credit rating industry has historically been dominated by just two agencies, Moody’s and S&P, leading to longstanding legislative and regulatory calls for increased competition. The material entry of a third rating agency (Fitch) to the competitive landscape offers a unique experiment to empirically examine how in fact increased competition affects the credit ratings market. Increased competition from Fitch coincides with lower quality ratings from the incumbents: rating levels went up, the correlation between ratings and market-implied yields fell, and the ability of ratings to predict default deteriorated. We offer several possible explanations for these findings that are linked to existing theories. Key words: Credit ratings; competition and reputation; information quality * Harvard Business School (Becker) and Washington University in St Louis (Milbourn). Contact author’s e-mail address: bbecker@hbs.edu. We wish to thank Pierluigi Balduzzi...
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...Question 4. At its most basic level hedging is a strategy aimed at reducing potential significant losses (and gains) of an individual and/or organisation. In the world of sports betting this can mean covering a bet you have made on team A by backing team B at some point in the contest to ‘hedge’ your position. In finance there are numerous strategies used, a number of which I will explain later. The goal of a hedge fund is to generate positive returns no matter what the market does. A hedge fund can be described as an “actively managed private investment fund that seeks positive attractive returns”. Frush, Scott. (2006). Understanding Hedge Funds. Ann Logue differentiates them from other investment tools, “They differ from so called ‘real money’ traditional investment accounts such as mutual funds, pensions, endowments and so forth, because they have more freedom to pursue different investment strategies”. Logue, Ann C. (2006). Hedge Funds For Dummies. This comment is valid as for the most part they are not as heavily regulated as other investment institutions. In his book Investing in Hedge Funds (2005), Joseph Nicholas asserts that in days gone by the term hedge fund is actually used to describe both a structure that is “a co-mingled investment fund” and a strategy. Today, however he argues that it is best describes the context of the structure of the investment and the strategy used to help the strategy come to fruition. Similar to most private equity funds hedge funds...
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...years. But where exactly did it come from and what are its basic tenets? What events changed the course of credit risk history? And who were the true innovators of credit risk management? Aaron Brown takes us on an interesting journey, from the ancient origins of credit to the birth of ratings agencies, all the way through modern-day deficiencies in understanding probability of default. C redit is much older than writing. Hammurabi’s Code, which codified legal thinking from 4,000 years ago in Mesopotamia, didn’t outline the basic rules of borrowing and didn’t address concepts such as interest, collateral and default. These concepts appear to have been too well known to have required explanation. However, the Code did emphasize that failure to pay a debt is a crime that should be treated identically to theft and fraud. The Code also set some limits to penalties. For example, a defaulter could be seized by his creditors and sold into slavery, but his wife and children could only be sold for a three-year term. Similarly, the Bible records enslavement for debt without disapproval; for example, the story of Eli’sha and the widow’s oil concerns the threatened enslavement of two children because their father died without paying his debts. But the Bible also goes further than Hammurabi in limiting the collection rights of creditors — purely as a matter of mercy. The modern bankruptcy concepts of protection from creditors and extinguishment of debt are entirely absent from both Hammurabi...
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