Assignment Sample on Financial Decision Making
Introduction
HSBC is the banking company associated with the British nationals, and the company is associated with the provider of financial services to the citizens. The company has more than 390 offices expanded over 65 countries, and the management of the business is associate with the maintaining and understanding of several financial terms to performs the business activities in the proper way, and as the institution is associated with the public limited and the financial purpose, so, the several factors associated with the finance should be seriously considered. The internal equity skills for the management of the capital market should be highly considered to maintain and operate the business in the proper way.
Internal equity
Internal equity is involved with the process of paying to all employees within the company (Agarwala et al., 2020). Every employee associated with a specific post within a company should have to pay the same amount of salaries, and if there are any disparities that occur within the paying criteria of the employees, then the employees who are paid less should feel insecurity in the job sector and should leave the company.
Loan
The loan is associated with a certain amount of monetary value that is taken as interest in case of running the business along with meeting the business needs. When the amount of profit is not sufficient to carry out the business procedure, then the company should opt for taking the loan. The loan is offered with a particular value of interest yearly or monthly. The company has to pay a fixed amount of money to the loan pursuer monthly to repay the loan gradually. If timely repayment is not made for the loan, then legal steps may be taken against the company.
Market debt
Market debt is another concept that should be considered seriously in the case of a business. There is no association of any kind of the bond with the process of the market debt, and the transactions associated with the market debt are mostly done between the brokers, and the large group of organizations or any individual investors may be associated with the process of the market debt (Billings et al.2017). If the company should be not able to repay the debt to the investor, then the investor may take the legal step, including the occupying of certain portions of the company.
Convertible debt
This kind of debt is associated with the process of borrowing money from the side of the organizations or a group of industries and the investors. The intention of using the convertible debt is to convert the debt amount into specific equity within a specified time period, and that specified time period is determined by both of the parties associated with the debt process at the time of sanctioning of the debt. As this kind of debt is associated with the fixed income of the company, the risk associated with this type of debt is credit risk.
Convertible share
This kind of share is associated with the securities regarding the “fixed income,’ and the deal occurs within the investors and the organization. In this process, the investor chooses that a certain amount of the share should be converted to the common stock of the company after the specific time period.
Pecking order theory
According to the theory of the pecking order, the company should always prefer to finance the performance through the earning of the company. If not enough profit is made to run through the earnings, then as a second option, the company should continue the financial responsibilities through the debt, and if the two options should not be effective, then the company has to issue new stocks (Galdeano et al.2019). The pecking order is considered by the public because, if the company performs well, then it should be able to run through its own stocks if the management of the company is very much skilled; then the company should opt for the debt, and if those two facilities are not there in the company, hen the company is compelled to issue new stock. Thus the performance parameter of the company is generated by analyzing the pecking order.
HSBC is sufficient to run the business procedure with the help of its own resources without taking too much debt from other organizations.
Static trade-off theory
This theory was determined in the year 1950 by two professors, and according to the theory, the used capital structure of the firm is not any determinant, and the market value of the firm is estimated by the power of earning and the risks associated with the underlying assets of the companies. The value of the firm should be dependent on the estimated future earnings of the firm, and the financial leverages are associated with boosting the firm value. Thus, the trade-off theories are associated with the firm value.
Sources of finance of HSBC
There are three shareholders associated with the investment of HSBC, and the organization is “Dimensional Fund Advisors (DFA) LP”, “Renaissance Technologies LLC” and “J.P.Morgan securities”.
Gearing ratio calculation
The gearing ratio can be calculated as liabilities associated with the noncurrent divided by the total funds of the company along with the liabilities associated with the noncurrent assets.
Thus the gearing ratio of HSBC is (49805/ ( 49805 + 3965))= 92%
Working capital management theories
There are two types of assets associated with the company. One is the fixed assets, and another is the current assets. Buildings, lands, machinery are examples of the fixed assets, and the cash, raw materials are associated with the current assets. The working capital is associated with the total amount of funds required to obtain the amount of the current assets. The entire operating cycle of the product is associated with the purchasing of the raw materials to the accomplishment of the production of the final product (Johannes, 2018). There are several approaches associated with the process of the management of the working capital. The approaches are a matching approach, an aggressive approach, and a conservative approach. In the case of choosing the matching approach, the long-term assets are contained with the help of the long-term sources, and similarly, the short-term sources are associated with short-term assets. If the aggressive approach is determined in the case of working capital management, then the short term resources are utilized for the management of the temporary as wella s the permanent capital associated with the business; this approach is quite risky but profitable as the “low pricing costs” associated with the “short term resources”. In the case of the conservative approach, the entire financing is done by the “long term resources and the consternation of the short term resources are done for the purpose of fulfilling the requirements associated with the emergency conditions.
Current ratio
The ratio of the current assets and the current liabilities is called the current ratio.
Thus, HSBC current ratio is calculated as the ( 50429 /45840 ) = 1.10
Liquid ratio
The inventory separated from the current assets divided by the current liabilities is the liquid ratio.
HSBC liquid ratio is ( ( 50429- 5993 ) / 45840 ) = 0.96
Inventory days
Days of inventory multiplied by the 365 days divided by the total sale cost are required to determine the inventory days.
HSBC inventory days ( ( 5993 * 365 ) / 36759 ) = 59.5 days
Receivable days
The trade receivable multiplied by 365 divided by the total sales is the determinant of receivable days.
HSBC receivable days ( ( 3513 * 365) / 73220 ) = 17.51 days
Payable days
Trade payables multiplied by 365 days divided by the total sales cost is the payable days.
HSBC payable days ( ( 11327 * 365) / 36759 ) = 112.4 days
Cash conversion cycle
Summation of inventory days along with the receivable days minus payable days is the “cash conversion cycle.”
In case of HSBC ( ( 59.5 + 17.51 ) – 112.4 ) = 35.39 days
Dividend irrelevance
According to this theory, it can be suggested that the declaration associated with the dividend payment and the declaration of the company in this context should not have any impact on the stock price of the company, and as per the theory, no value is added to the stock price of the company according to the dividend (Kumari et al.2017). Actually, the ability of the company to earn and make a profit in the business determines the market value of the company, and that is the only source of driving the stock price, and the dividend payments are not associated with the case.
Being a financial organization, this theory is applicable to HSBC to understand the limitations associated with the dividend of the company.
Clientele theory
This theory is associated with the fact that the difference in the policies of the company is related to attracting the several types of investors associate with the company, as the changing in the policy should result in the changing the types of the share price of the company and thus, the investors associated with the company should also change accordingly as per the pwn benefit of the investors according to the new policy if the company (Mbama et al.2018). Thus, companies may lose many old investors and get some new investors to change their policies.
The policy of HSBC is constantly changing according to the political factors of the operating countries, and so, there is always change in the investors that took place, but that did not affect the survival of the company.
A bird in the hand theories
There are several shareholders associated with the business process in an organization, and the amount of share that is given to the shareholders as the share, rather than the cash, is taken as the dividend payment. The theory associated with a bird in the hand says that the shareholders prefer to accept the stock dividend rather than the capital gains as there are several uncertainties associated with the capital gains of the company.
Banking organizations always face several kinds of financial difficulties, so HSBC should be aware of the share of the investors.
Signaling theories
As per this theory, the several decisions associated with the corporate world are the signals which are sent to the investors from the managers associated with the corporate for the cause of shaking up the asymmetries associated with the business. These signals are considered as the cornerstone of the policy of the communication of the business (Nawaz et al., 2019). As accurate information is not equally distributed to all of the parties associated with the business procedure, therefore, it is necessary to send the correct as well as accurate information to the investors as the investors are the vital variables to be considered while calculating the business procedures.
There are several officials associated with the management of HSBC. So, there is always a chance present to divert the proper information. It is necessary to supply the correct information to the investors from the managers.
Suitable profitability ratios
If net profit is divided by the total capitals and the liabilities associated with the noncurrent assets, then the profitability ratio should be generated.
Thus, HSBC profitability ratio = ( 8159 / ( 49805 + 3965) ) = 15.1 %
Capital asset pricing model
This model is helpful in determining the relationship between the risks associated with the business procedures and the expected rate of returns from the asset overcoming the risks associated with the business. Here the expectations are observed from the side of the investors to get compensated for the risks associated, and the time value of the money is calculated with the model of the capital pricing.
HSBC is a leading banking group, so the model associated with the capital pricing should be done to understand the several risks associated with the organizations and the probable steps that should be taken to determine the expected rate of returns (Rosdiana et al., 2019). In the case of a financial organization, the proper modeling of the asset pricing should be done to avoid any kind of risks.
PEST analysis
HSBC is operated by several governments within the country and abides by the policies and rules set up by the different governments at different times within the country. The company has the ability to achieve the policies set up by several governments, and the company is able to continue the business operations successfully in spite of following the policies set up by the government. Thus, the company is able to cope up with the political factors.
As the company is one of the leading organization in the fields of banking, there are several economic challenges faced by the company; there are several skilled and effective management personnels who handled the case of the several struggling periods of the company effectively so that the company should be able to tackle every kind of the economic challenges (Tahri, 2018). Thus, the management personnels of the company created protection against unemployment.
HSBC provides the chance to every society where it belongs for the purpose of saving the banking operation, in spite of being affected by several types of societies. The company strictly follows the rules and regulations associated with the company and continuously maintains its reputation in case of serving the citizens with financial services.
In recent days, certain advancements are observed in the field of technology, like the improvement of information technology and the usage of the internet. Specific advancement of the technology is thoroughly utilized by the company, and with the help of the modern and advanced technical equipment, the company is trying to expand its business in several watts and thus serving the citizens of the country with more efforts.
Minsky analysis
The “Minsky moment” is associated with the sudden and observable collapse in the graph of the asset values to indicate the ending phase of any growth persons of the assets (Talom et al.2020). The cycle is associated with the activities of the business and the several procedures of the credit markets.
As HSBC is associated with the financial service provider to the people and the organization is a leading banking group within the world, the Minsky analysis is very much required to understand and collapse the value of the graph associated with the assets to determine whether the company is required to make the different asset with the investors and should be able to proceed the business procedure with the stock value available within the company.
Conclusion
HSBC is a leading banking group and associated with the providing of financial support within several countries. The company is very much stable irrespective of the interference of several political factors. The company managed the policies implemented by the government several times, and the company operated successfully without affecting the internal performance. The skilled managers based capable of controlling the company after suffering a lot of obstruction from the economy. The usage of various technical factors also helped the company officials to expand the business and drive the company to a maximum level of operation. Thus, it can be concluded that every financial decision was taken by the officials of the company correctly.
Reference List
Journals
Billings, M., 2017. Roberts, Richard and David Kynaston. The Lion Wakes: A Modern History of HSBC. London: Profile Books, 2015. 768 Pp. Essays in Economic & Business History, 35(2), pp.183-187.
Galdeano, D., Ahmed, U., Fati, M., Rehan, R. and Ahmed, A., 2019. Financial performance and corporate social responsibility in the banking sector of Bahrain: Can engagement moderate?. Management Science Letters, 9(10), pp.1529-1542.
Johannes, R., Dedy, D. and Muksin, A., 2018. The Preparation of Banking Industry in Implementing IFRS 9 Financial Instruments (A Case Study of HSBC Holdings Plc Listed on London Stock Exchange of Year 2015–2017). International Journal of Economics and Financial Issues, 8(6), p.124.
Jun, F., 2018. Study of Relationship Between Credit Risk (Non-Performing Finance Ratio) and Internal and External Factors in HSBC Bank. Available at SSRN 3301111.
Kumari, I.G.S., 2017. A study on the financial performance of foreign commercial banks in Sri Lanka: An application of CAMEL Rating System. Economics, Commerce and Trade Management: An International Journal (ECTIJ), 1(1), pp.59-70.
Mbama, C.I. and Ezepue, P.O., 2018. Digital banking, customer experience and bank financial performance. International Journal of Bank Marketing.
Nawaz, T., 2019. Intellectual capital profiles and financial performance of Islamic banks in the UK. International Journal of Learning and Intellectual Capital, 16(1), pp.87-97.
Nooney, L.K., Comparison of Profitability, Liquidity and Credit Performance of NBO and HSBC Bank in Oman.
Rosdiana, R., 2019. Comparative Analysis of Pt Bank HSBC Indonesia Financial Performance between 2017 and 2018.
Tahri, A., 2018. Consumer based brand equity in retail banking industry: a cross analysis of a domestic and global bank operating in the UK (HSBC vs Barclays) (Doctoral dissertation, Anglia Ruskin University).
Talom, F.S.G. and Tengeh, R.K., 2020. The impact of mobile money on the financial performance of the SMEs in Douala, Cameroon. Sustainability, 12(1), p.183.
Zouaoui, M., 2019. Selectivity and market timing ability of fund managers: Comparative analysis of Islamic and conventional HSBC Saudi mutual funds. International Journal of Financial Studies, 7(3), p.48.
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