Explain monetary-fiscal policy to manage financial crisis


Case Study 1:

Azeez, the finance manager in Wellness Health Care Limited, is confused. For the last few months, Azeez is following the various decisions of Board of Directors (BoD) and is preparing a report, to be submitted to the Board of Directors at the end of this month.

Wellness Healthcare is one of the top hospitality service providers in the region. Expecting a safe return on investment, investors bought shares of Wellness Healthcare. The share price increased over the years, though the company hasn't distributed any of the earnings to the shareholders. It is high time that the company should distribute a share of profit to the shareholders, to satisfy the expectations of the shareholders. The total retained earnings of the company as on date is RO400,000.

During the year, the Wellness Healthcare planned for expanding its activities to more locations in the GCC region. This expansion plan requires an additional RO600,000 investment. The Board of Directors projects that the expansion program will increase the revenue by 15% and the profit after tax by 10%. The market is promising; however, the competition is severe. This requires the company to invest heavily on the infrastructural facilities to gain a competitive edge in the market. The company asked Azeez to prepare a feasibility study on expansion plan. A hurdle rate of 12% return on investment is expected. The Board of Directors agreed that the expansion program won't be financed using issue of additional share capital. The company have other options such as issue of bonds, bank loan, or investment from other corporates.

At present, the total assets of the company is valued RO1500,000. The issued capital stands RO500,000 and the long-term debt is RO300,000. The company is paying an interest rate of 12% on the borrowed fund. The company is regular in repayment of interest and repayment of principal.

During the year, the company generated a profit after tax of RO200,000. Azeez, is contemplating the situation now. Shareholders expect a share of profit from the company. The company requires funds for its expansion program. The company is also looking for different options for financing the expansion program.

Based on the above scenario, answer the following questions

Question 1: If the company is opting for a bank loan, briefly explain the five C's of credit using relevant information from the above scenario.

Question 2:

a. As a financial expert, will you recommend for the loan? Justify your answer.

b. Briefly explain the three principles of finance with relevant information available in the case. What are the factors that Wellness Healthcare Services should consider in their financial decision?

Case Study 2:

Banking institutions are major pillars in the financial system of both developing and developed countries. The following are details of few customers who approached the bank for various services.

Amal, a working lady, would like to open an account for her business. She runs a IT company that provides sale and service of IT equipment's and also involves in software development.

The account is required for business purpose. She would like to avail temporary loan for unplanned activities. Amal also wants to use the account for paying staff salaries and for payment to the suppliers

Latheefa, a schoolteacher, approached bank to open an account for herself. She wants to deposit RO50 every month for the next few years. She is planning to use this money for her daughter's college studies. Latheefa's daughter is currently in 6th standard.

Masoud, is a trader in Al Khuwair. He purchases computers from Dubai and sells it in the local market. There are distributors of major computer manufacturing companies (HP, Dell, Acer, Fujitsu, etc) in Dubai. He approached the bank for two purpose. He wants to avail loan for buying computers. He also wants guarantee which is often required in international transactions.

Based on the above case, answer the following;

(Minimum word count for Case Study is 100 Words)

Question 3:

a. Briefly discuss the type of deposit account suitable for Amal and Latheefa. Justify your answer explaining the reason for selection (using relevant information from the case)

b. What type of loan do you suggest for Masoud? Justify your answer.

Question 4:

a. Assume that you work in a bank, what additional services can you offer to Amal, Latheefa and Masoud? Justify the reason for selecting these services for each of them.

b. Zamzam wants to receive RO50,000 after 10 years. When she enquired with the bank, it was informed that bank provides 5% on deposits per annum. How much does she needs to deposit now to get RO50,000 after 10 years.

Case Study 3:

The rapid spread of the novel coronavirus (Covid-19), which has been declared a pandemic by the World Health Organization, is adversely affecting economies and businesses around the world. Governments are announcing relief measures to mitigate its economic impact and help individuals and businesses navigate these unprecedented times. Along with the Covid 19 crisis, there is a sharp decline in oil prices, which also poses significant threat to the government finance.

Lockdown of activities and restricting the travels of citizens to avoid spread of the virus, the commercial activities are also affected. In order to withstand the pressures of the financial crisis and to encourage the business, the government has decided to lower the rate of interest, so that business can finance their activities by taking loans from the market. However, the government is also facing short of funds to finance their various activities.

The shortage of funds also poses issues for corporate organizations. Some of the financial requirements for which they require short term funds include payment of salaries, working capital requirements, adjusting the temporary shortfall in the revenue etc.,

Based on the above scenario, answer the following;

(Minimum word count for Case Study is 200 Words)

Question 5:

a. Briefly explain the role of Monetary and Fiscal policy to manage the financial crisis, due to COVID 19 outbreak.

b. With the oil prices going down and a reduction in the economic activities, the government is finding shortage of funds to finance its activities. As a student in fiancé, suggest the different financing options available for the government in financing their short-term financial requirements? Justify your answer.

Question 6:

COVID 19 outbreak has created financial problems for the corporate sector as well. As mentioned, the corporate sector is finding difficulty in managing their day to day operations because of lack of funds. Suggest the sources from which the corporates can borrow funds or finance their short term financial requirements. (you are required to explain the advantages and disadvantages of each sources)

Case Study 4:

Goodwill Contracting Company is engaged in the supply of machineries to the local companies in Oman. They purchase machineries from international market, as per the requirements of the local companies. Currently, the company received a purchase order (for supply of machineries) for five machineries which must be purchased from Malaysia in three months. In order to purchase these machineries, the company requires RO250,000. The requirement is temporary as the company can repay the amount within three months. Currently, the company has investments in treasury bills and securities in the capital market.

Consider yourself as the finance manager in the Goodwill Contracting Company, answer the following questions.

Question 7:

a. What are the major financing options available for the Goodwill Contracting Company, if they wish to approach the capital market? Which non-banking financial institution can support the company in dealing with capital market? Justify your answer.

b. Which money market security should the company issue to finance their requirements? Justify your answer.

Question 8:

a. SPAR Trading Company plans to invest its surplus funds. Different options are available. The company can either deposit the money in bank of purchase bonds that carries different maturities. At present, the bank is providing an interest rate of 4.5%. If the company invests RO300,000 in the bank account for five years, how much amount can they receive at the end of five years? (Show the calculation)

b. The second option available for SPAR trading is to buy bonds. At present, RO600,000 face value bond issued PD Tech Limited has a coupon rate of 7%, with interest paid semi-annually, and matures in 10 years. If the bond is priced to yield 6.5%, What is the bond's value today? Would you recommend buying the bond for a premium?

Question 9:

a. Mazoon Diary Products Company sold RO100,000 face value, commercial paper, for RO98,850, for 100 days. Calculate the yield on Commercial Paper.

h. Asim invested RO5,000 in a bank account that provides 7% interest pa. Assume that the rate of inflation is 2.5%, calculate the real return on investment. If Asim invests the deposit for one year, calculate how much will be the real return on investment.

Question 10: Majid is an investor who prefers to invest his surplus funds in the capital market. He read the stories of millionaires in the stock market like the Centrum Investments. Currently, the stock market is reporting a growth cycle and the market index is moving forward. The currently (USD) is also valued high, on account of the increased demand for oil and the increase in oil prices. The changes in capital market is also bringing prospects for the derivative market. Gold derivative is the preferred option in derivatives. However, he is skeptic whether to invest the money in forex market or in the derivative market.

If you were an advisor to Majid, which of the above-mentioned investment option would you suggest? Justify your answer.

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Finance Basics: Explain monetary-fiscal policy to manage financial crisis
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