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The current recession or financial crises began in United States of America and created a domino effect of creating instability in the financial markets the world over; the spark of this recession ignited fire around December 2007. Our current financial crisis is also known as sub-prime mortgage crisis and it occurred because of reckless practices of giving out loans, without backing them with security or collateral. Obviously this credit bubble that had been blown by investment and commercial banks primarily popped when loans started going bad and risky borrowings got exposed. The fall of Lehman Brothers was a major blow as it created a situation of panic. This was also accompanied by a fall in house and share prices.
If we look at the latest statistics regarding the overall condition of the economy, there are evident indications of recovery. According to an economic report published in Market Watch (www.marketwatch.com), the US economy has grown at the rate of 5.6% during the last 3 months of 2009. According to the report, during the past year US real GDP had grown by 0.1%. It is said that the increase in this GDP figure should be associated with changes in inventories and not by final sales; in addition, on average the before tax profits have risen by 8% and a modest rise in consumer spending. A rise in business profit also indicates a probable rise in investments and increase in employment in future.
Martin Feldstein, the former president and founder of the National Bureau of Economic Research, has predicted that the recession will end in the year 2010. Now coming to some facts, we all know that a rise in spending shows an increase in aggregate demand in an economy signified by a high GDP, this marks the end of recession. The following graph shows the year to year change in new car registration in UK. The graph clearly shows the fall in the % change in registrations in 2008 of around 25% to 35%, especially towards its end.
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Source: The Society of Motor Manufacturers and Traders. (Mearns, 2010)
Question: What is meant by financial value? Compare and contrast three evaluation methods relative to the decision-making process to create financial value. Compare these methods by examining the methods themselves, the application of the methods, and their validity and reliability.
The financial value of a firm refers to the worth a business has constructed over its lifetime and through its operations. A firm’s profitability is the main determinant of the result of its policies and decisions. There are a number of evaluation methods that assess the effectiveness of a firm’s operations. Three methods of evaluating the value of a firm are profit margin on sales, return on total assets and return on equity.
Profit margin on sales is calculated by dividing the net income of a company through its sales.
Profit Margin on sales = Net income available to common stockholders/ Sales
A firm can compare its figure by the industry average to assess its performance. If a company finds its ratio to be low, it can judge that most probably its costs are very high and so it needs to increase its efficiency and operations.
Return on total assets (ROA) is the ratio of net income to total assets of a firm. If a firm finds its ROA to be low, it means that the firm is not utilizing its resources properly and is not investing in the right direction. (Return on assets) . It can be calculated as
Return on total assets = Net income / Total Assets
Return on Common Equity (ROE) is the ratio of a firm’s net income to its equity. It shows the return that a firm is getting over each dollar of its equity. It tells the investors if they are investing at the right place. It can be calculated as
ROE = Net income / Common Equity
Question: What is meant by the term econometric techniques? Provide at least two examples of its use in financial studies.
Econometrics is a quantitative analysis of economic theories through the use of inferential statistics and mathematics. (wordnetweb.princeton.edu/perl/webwn)
It has a lot of use in economics, for instance econometrics has been used to find the positive relationship between consumption and income to come up with the Keynesian consumption function, whose slope is MPC or marginal propensity to consume.
Another example of it is to find the relationship between labor force participation and the level of GDP in the economy. Statistical methods can be applies, keeping in mind the presence of other factors such as the level of technological advancement.
Question: How can the analysis of financial statements are used in dissertation research?
The financial statements of a firm are its accounts which include its statements of cash flows, balance sheet etc. the analysis of financial statements can be used to describe the relationship between 2 phenomena such as the effect on household income due to the introduction of a few new developmental projects by the governments. Based on the relationship, a firm or individual can used to create a thesis or dissertation. Through this government can know the effects of a rise in its developmental investments. The resulting information can also be valuable for various sections of the market, to analyze how government can use the rise in GDP as an indicator of future spending.
Mearns, E. (2010, March 17). UK new car sales and recession. Retrieved March 24, 2010, from The oil Drum: http://www.theoildrum.com/tag/recession
Return on assets. (n.d.). Retrieved March 27, 2010, from Investopedia: http://www.investopedia.com/terms/r/returnonassets.asp