Financial Management

TASK 1

Financing Decisions

In order to make strong capital structure of an organization it is very necessary to take an effective decision of finance in the business. Further, with help of appropriate financing decisions the firm is able to become more beneficial as well as profitable in the industry where it operates. Financing decisions consists with mainly two factors which are such as make an investment and control over the expenditures. Behind taking proper financing decision manager's intention is profit maximization of company as well as shareholders. When company issues shares then it is purchase by different shareholders who expects higher return in terms of dividend amount (Petty and et.al., 2015). Capital structure always helps to the respective firm in order to increase finance for different purpose. It has two alternatives such as debt and equity which are long term source of finance for raising fund in the business. Company often use debt as well as equity options for raising finance through long term financing sources. Apart from these both avenues, management can issue preference share as well in the market where company must give dividend to the potential investors. In case if firm unable to earn higher or sufficient profit then also management has to provide interest as well as dividend while using debt and preference shares as well.

As per the view of Finkler and et.al., (2016) In context to this when company wants to raise capital then it has two alternatives which are such as debt and shares or equity. Further, when company raise from both avenues then it affects profitability in different manner. In case of equity the management of firm needs to give dividend amount to the potential shareholders. On the other hand side, when firm going to raise capital using debt then it has to pay interest amount which lead to reduce profitability of shareholders. Investors or shareholders make an investment in the firm by purchasing equity or preference shares then they expect that firm provide higher rate of return of potential investment. In order to meet with expectations of shareholders company needs to earn and maximize level of profit in the industry. It can be said that higher the amount of debt is reduced profitability of the company as well as return of the shareholders. When debt is higher in comparison to previous years then attraction of shareholders for making investment in respective company are reduced in next year.

Furthermore, debt is sum of money which is taken or borrowed from external party such as bank, financial institutes etc. For this firm has to pay cost of finance in terms of interest amount which is lead to decrease level of net profit of the firm as well as increase indirect expenses. This factor highly affects on the different potential shareholders in negative way and reduce return of initial investment made by them. Higher the amount of debt lead to increase indirect expenditures such as interest amount by which shareholders are affected in negative way. When the organisation borrows money using avenue of debt then its level of profit is hamper which lead to reduce return of potential investors or shareholders (Karadag, 2015). Lower the profit of company lead to provide less amount of dividend by which return of shareholders get decrease and wealth of respective shareholders affects in the adverse manner. Apart from this higher amount of interest affects earning per share (EPS) of the business entity. It can be reduce by using appropriate area in order to raise capital using external or internal sources of finance. In the present case debt as well as equity both are taking financing cost in terms of interest and dividend respectively by which management unable to meet with its goal such as profit maximization.

According to the Chua, Lowe and Puxty (2015) debt is the alternative which imposes financing cost on the company in terms of interest amount. On the other side firms are often use equity capital in order to expand the business in another market. The another alternative imposes cost of finance on the organisation that is in terms of dividend amount. Both the costs of finance are paid by the enterprise from earned yield in an accounting period. These are highly affects to the profitability ratio such as net profit ratio in terms of negative. By this reason management cannot provide expected return of investment to potential investors or shareholders. Hence, due to this reason the company will become less efficient in order to give return as well as dividend to the shareholders. It can be said that debt is a source for raising finance in order to expand business as well as increase product range in the industry.

Moreover, the business can use another alternative that is equity or shares for increase capital in the firm in order to expand as well as enhance level of company. It is an external source of finance where the company needs to follow a process as well as complete formalities for raising fund. At the initial level it needs to give application to stock market for listing the firm in that market (Olamide, Uwalomwa and Ranti, 2015). Further, after give approval the enterprise listed in the share market and then it can issue its shares in the market. Rate of share of every company is depends on the economy of that particular company as well as sensex point. When the point of indexes are fluctuated then prices of shares of the firm as well which lead to make changes in the decision of making investment by different shareholders. As per the present alternative the company has to pay dividend amount to its shareholders in terms of cost of finance. On the other side the debt is an avenue which takes interest amount and most of the firms are listed in stock market and raise fund by issuing shares. While taking debt the management needs to pay dividend to the existing shareholders as well as interest amount to the bank or financial institutes from where it borrows money. Further, while issuing shares the company not needs to pay several kinds of costs such as interest etc. Here the firm has to pay dividend to the shareholders only which lead to save higher amount of profit by which the company able to provide high dividend and increase financial health of the firm (Hribar and Yang, 2015). So, overall it can be said that the equity alternative of capital structure is more beneficial and profitable for the firm.

Global Financial crisis was arisen in the year of 2007-2008 which highly affected to the each and every business entity of each industry. Further, due to respective crisis overall world economy is highly influenced in negative way and impacted on the share market of the world as well. By global financial crisis various sectors such as oil and gas, banking industry, manufacturing, services based etc. are highly affected in terms of profit as well as debt. Due to such kind of problems banking sector of UK is also influenced where profit was reduced speedily (Schwalbe, 2015). In order to run the business, banks were started to take debt from external party such as government or EU grant, international monetary fund etc. Debt is increases and investment was decreases which lead to create high burden on the management. Further, due to this all reasons banks was unable to provide better dividend amount to the existing shareholders which lead to reduce investment as well. In the present case in order to identify impact of global financial crisis 2007-2008 the Barclays Bank is identified which is affected in up to greater extent in the overall banking industry of UK. In the times of financial crisis the Barclays bank's level of debt is increases up to greater extent after the accounting year 2008. In the financial year 2007 and 2008 debt equity ratio of the bank was 0.78 and 0.81 respectively which is not that much high as per the standard ratio i.e. 0.5:1 (Financial position of Barclays Plc, 2017). Afterwards in the accounting period of 2009 the debt to equity ratio is highly increases and reaches up to 3.46:1. In comparison to standard ratio of solvency 0.5:1, Barclays's ratio of the year 2009 is too much higher which indicate that the respective bank was taken high debt.

The Roberts (2015) stated that there are different reasons due to which debt of Barclays bank is highly increases in the year 2009. Very main reason behind such situation is that arisen of financial crisis in the overall world in the year 2007-2008. Further, due to such crisis the Barclays is unable to fulfil its expenses and recover investment which are made by the bank in different avenues. Apart from this flow of money was reduced in the UK economy after the financial crisis in the world which lead to reduce investors. Further, another reason behind enhancing level of debt are such as reducing money in hand of community of the country which lead to reduce investment making decisions. When the shareholders will not purchase its shares and not make investment in the company then it leads to reduce capital. Ultimately level of profitability as well as debt is highly influenced. Moreover, after the global financial crisis prices of shares was consistently increased by which shareholder's attraction to purchase stock of the bank was reduced for which it has to take loan from different avenues. There was not any another option is remaining for raising fund or finance in the company such as Barclays bank (Armantier and et.al., 2015). In this the company gives high amount of interest to financial institutes form where it takes loan or debt. Due to this existing shareholders are also get disappointed because the bank unable to give better amount of dividend to them. Due to these all above mentioned causes the Barclays bank's level of debt was increased and equity capital was reduced up to greater extent.

Furthermore, it is very necessary for each and every business organisation to make effective business plans as well as strategies in order to reduce and overcome any kind of obstacles and problems which affects smooth functioning of the firm. In the present case Barclays bank is highly affected due to arising global financial crisis in the year 2007-2008. Debt of the bank was increased up to greater extent as well as profitability decreased in the financial year 2009. In order to reduce such problems the company make effective plans by which it was able to fulfil its debt and enhance level of profit after the financial crisis. It makes strategies in order to attract more number of consumers which helps to increase sales and revenue as well as profit in the banking sector of UK (Bordo and Haubrich, 2017). Further, it prepares effective plan for managing financial transactions by which management able to identify problems that in which function or at which activity costs are increases. In this context it uses cost control techniques in the bank where it identifies the activities where high cost was incurred. By using such strategies and plans debt to equity ratio was reduced from 3.46 to 0.56 from the accounting year 2009 to 2010. On the other side in the same accounting period ability of the firm in order to fulfil debt obligation was highly increased which helps to reduce level of debt in the year 2010.

TASK 2

Dividend Decisions

The Global Financial Crisis 2007-2008 was highly affected to each and every business organisation in terms of increasing debt level as well as reducing profitability of the company. Further, due to this policy of the company in order to pay dividend also fluctuated up to greater extent (Karnik and Kanekar, 2015). When the dividend policy is decreased then it affects to the wealth of shareholders in negative way while higher the dividend amount lead to increase return of the investment made by different shareholders. In context to this there is Barclays Plc which is a UK based company and operating in the banking industry of UK. The bank is highly affected by the Global Financial Crisis in terms of increasing debt of the company up to high level. Further, due to such reason the Barclays bank has been changed its dividend policy by which shareholders are affected. After the crisis company takes high amount of debt from different financial institutes where it gives high interest amount which lead to reduce dividend of the shareholders (Caporale and et.al., 2015). In order to fulfil the debt obligation bank decided to reduce amount of dividend after the accounting year 2009.

In order to the dividend decisions the Barclays bank was reduce its amount of dividend due to increasing level of debt after the year 2008 due to arising financial crisis at the world level. The bank make changes in dividend policy where it decreases dividend of shareholders due to reduced level of profit after such crisis (Beck and et.al., 2016). After the crisis profit is also decreased year by year, in the accounting period of 2012 net income of the Barclays bank was in negative term which is -1041m GBP. Further, it increases in the year 2013 and then again started to reduce consistently and reaches up to -828m GBP in the financial year 2015. On the other side dividend amount paid by the bank in the July 2013 was 0.061 which is increases in the next year due to enhancing profitability. Afterwards, amount of dividend is continuously decreases due to reducing net yield of the respective bank. In the year of 2015 dividend paid by the firm to its different shareholders was 0.06 only and in the accounting period of 2016 the Barclays bank allow paid dividend that is 0.19 (Dividends paid by UK banks has halved since financial crisis, 2016). The company make changes in the dividend policy even it not able to generate appropriate as well as sufficient amount of profit. Very main reason behind giving dividend amount to shareholders is that to sustain or maintain existing shareholders as well as attract more number of stockholders. When shareholders will increase then company is able to increase capital which lead to generate sales and revenue as well as yield level in the overall banking industry of UK. Economy.

Moreover, causes of making changes in the dividend policy by Barclays bank are such as reducing profit as well as increasing debt of the company up to very high level. Apart from this the bank is unable to generate sales and revenue after the financial crisis at the global level. Further, earning per share of the company is also reducing according to the net profit. In the accounting year 2012 EPS of the Barclays bank was -0.31m GBP which is increases in the year 2013 due to the bank is able to generate income in such year. After this EPS is consistently decreases and reaches up to the -0.08m GBP in the financial year 2015 which lead to make changes in the dividend policy. Still generating negative profit and earning per share the bank allows shareholders for dividend because it helps to sustain current or existing stockholders in the company (Winecoff, 2015). When the firm make changes in the amount of dividend then it leads to fluctuate financial wealth or return on investment made by the various shareholders. When company able to generate higher sales as well as profit then it able to give high amount of dividend to shareholders. On the other side if company not able to use and formulate effective business strategies then shareholder's wealth is decrease sin comparison to previous scenarios because the respective enterprise cannot provide dividend to them.

It can be critically evaluated that higher the amount of dividend lead to increase level of return on investment made by stockholders in the Barclays bank (Merola, 2015. While as per the dividend policy of paying lower amount, company is not provide sufficient money in terms of dividend to the potential investors. This situation lead to reduce financial position of the shareholder as well as affects their wealth in term of negative manner). When the Barclays bank reduce its dividend policy then shareholders are reduced to make investment in such company due to decreasing their wealth and generating lower rate of return on potential investment. On the other hand side when the respective bank changes its dividend policy in terms of providing high dividend amount, then financial wealth of potential shareholders will increase (Dungey and et.al., 2015). It leads to attract more number of stockholders as well as enhance capital of the company which helps to generate higher revenue and sales.

Conclusion

From the above research report it can be summarized that it is very necessary to manage financial resources in the business in an effective as well as appropriate manner because it is backbone of the firm. It can be concluded that Global Financial Crisis 2007-2008 affects to the company in terms of debt as well as profit which lead to make changes in the wealth of shareholders. Due to such crisis Barclays bank is highly affected because debt of the firm is increases up to 3.46m GBP in the financial year 2009. Further, it can be articulated that due to respective crisis the dividend policy of the Barclays bank is changes which lead to direct influence on the different shareholders of the company.

References

• Armantier, O. and et.al., 2015. Discount window stigma during the 2007–2008 financial crisis. Journal of Financial Economics. 118(2). pp. 317-335.
• Beck, T. and et.al., 2016. Financial innovation: The bright and the dark sides. Journal of Banking & Finance. 72. pp. 28-51.
• Bordo, M. D. and Haubrich, J. G., 2017. Deep recessions, fast recoveries, and financial crises: Evidence from the American record. Economic Inquiry. 55(1). pp. 527-541.
• Caporale, G. M. and et.al., 2015. Financial development and economic growth: evidence from 10 new European Union members. International Journal of Finance & Economics. 20(1). pp. 48-60.
• Chua, W. F., Lowe, T. and Puxty, T. eds., 2015. Critical perspectives in management control. Springer.
• Dungey, M. and et.al., 2015. Endogenous crisis dating and contagion using smooth transition structural GARCH. Journal of Banking & Finance. 58. pp. 71-79.
• Finkler, S. A. and et.al., 2016. Financial management for public, health, and not-for-profit organizations. CQ Press.
• Hribar, P. and Yang, H., 2015. CEO overconfidence and management forecasting. Contemporary Accounting Research.

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