Question

1. As a chief financial officer (CFO) of a large
industrial firm, you need to raise cash within a
few months to pay for a project to expand
existing and acquire new manufacturing
facilities. What are the primary options
available to you?

2. You work for an investment bank and you are
to do a presentation to private wealth clients
of your firm on the most fundamental facts
concerning the role of interest rates in the
economy. What main points should you try to
include in your presentation?

3. As a relatively new member of the business
community, you decide it would be advantageous
to join the local lunch club to network with
businesspeople. Upon learning that you are a
financial analyst, club members soon enlist you to
give a lunch speech. During the question and
answer session afterward, a member of the
audience asks, “I keep reading in the newspaper
about the need to regulate ‘financial
intermediaries,’ but really don’t understand
exactly what they are. Can you tell me?” How do
you answer?

Answer 1

1. The primary options available to raise cash for expansion activities are :

• Bank loans : The business can acquire funs in the form of loans from banks, which they can easily pay back in the form of monthly instalments , even if we repay before the date of maturity there is no prepayment penalty.
• Secured/unsecured loans: the industry can keep certain assets as collateral and raise loans against these assets in unsecured loans there is no collateral, but the interest rate is high, although a high risk is involved.
• Retained earnings: The business can use the internally generated funds as a means of financing as well. Lower cost of these funds make it very attractive.
• Issue bonds: the large industry is also capable of raising money by issuing bonds and promising the investors a fixed amount consisting of principal and interest payments. With the amount of money raised the business ca fund the expansion projects.

2. the role of interest rate in the economy:

Interest rates play a very important role in the economy . Interest rates determine the borrowing costs , the return that the investors an on their investments , they provide a peak into the financial activities happening in the economy.As the interest rates are low, the people borrow money to make purchased like a house or cars. Lower interest rates increases the spending power of people.

Now, as the spending power of people increase, the economy grows which results in inflation and higher interest rates. Now, the consumers tend to save due to the higher interest rates as they now want to earn higher returns on their savings.

3. Financial intermediaries are banks, insurance, mutual funds and pension funds. Regulation of financial intermediaries are important investors often blindly trust these intermediaries and the fine line between investors and advisors is blurred. They exists in the financial markets for a profits and as as a conduit between the investors and large corporations they help in the efficient allocation of resources and they reduce systematic risk.Since they have an increased responsibility towards the borrowers and lenders they need to be properly regulated so that the interest of the investors is protected.the sub prime crisis is an evidence that the activities of the financial intermediaries if left unregulated can lead to crisis on the economy. To prevent systematic collapse. regulation is mandatory.