a.ABC is a deficit unit because it operates on credit and loans. The companys financial life is sustained by the commercial companies that loan it. Stating that ABC is a deficit unit is substantiated by the fact that the company cannot operate without the funds from the commercial companies and banks loaning. If it were to sell its treasury securities in an attempt to repay those loans the company would still not settle the loans and would therefore call for further liquidation of assets and equities. If the company were a surplus, therefore, there would be a very minimal need for loans (Carter, 2014).
b.Despite ABC being a deficit unit, it is using well the advantage of financial companies, investment banks and commercial banks to increase its worth (Coffee, Sale,& Henderson, 2015). Through the credit obtained from these financial institutions, the company is able to expand through asset acquisition and acquisition of other companies. If the company lands a substantial long-term financing partner, it will be able to grow through acquisitions which lead it to increase its net income earning. Any increase in the income earning of this company will enable it to repay its loans faster. However, the financial plans that ABC seek to conduct with its financial partnering institutions consider gradual payment, with any increase in the companys earnings, therefore, it will be able to capacitate for bigger financial borrowing and thus increasing growth through acquisition.
ABC could have the capacity to shift from being a deficit unit to being surplus unit if it limited its growth strategies. The company does not plan to be in the state of surplus any time sooner because it is still anticipating taking advantage of the strong Malaysian economy. The various financial companies, investment banks and other commercial banks offer ABC the financial support needed to purchase assets and buy out other small companies in an attempt to expand business operations. This expansion is facilitated by enabling ABC to access the necessary assets in expansion and later pay for the undertaken costs using the amounts collected from those undertakings. The company will be using its profits to pay off debts to these financial companies instead of waiting for their profits to accumulate so that they can be used for investment purposes. The advantage enjoyed by ABC in this case is that of being able of acquire what it would have taken them more than four years of profit saving to acquire. Despite the interests paid to the financial companies, investment banks and commercial banks, ABC still enjoys growth advantage from these companies. Apart from offering loaning services to ABC, financial companies and investment banks play a role in the companys endeavors of selling its shares to investors, whereby they act as the trusted party between the company and the investors seeking to buy ABC shares.
c.ABC can benefit through primary financial markets in the facilitation of its expansion by conducting a sale of bonds. The company can sell new bonds to investors and generate the target amount needed in its expansion quests. The other manner in which ABC will be able to use primary market in its expansion is by auctioning its shares with the aid of a financial syndicate or an investment bank. The use of these bodies will help in the process linking the buyers of company shares to the company and enhancing the necessary trust for the business to take place. An initial public offering IPO or private offering, are the other primary way of earning funds for expansion from the primary finance markets. Within primary markets is the use of commission auctioneers to markets the interests, shares and bonds of the company on a commission basis.
d.Once the company has been granted financial loaning, it might be hard for it to get extra loaning during the growth phase because it will have utilized all the financial securities needed by financial companies and investment banks. As a much as a company can be granted financial loans for use in acquisition of new assets and consequent expansion, there is a point of credit limit that a company is allowed to. ABC might be denied these loans by the financial institutions because the investment banks and financial companies will be considering risks taken by ABC in its investment quests. Another reason that might lead to ABCs denial of more loans during the expansion will be due to the use of a credit score. Having sought various long-term loans, ABCs credit score will drop and will either lead financial companies to loan it at higher interest rates or completely deny any loaning to ABC.
e.Secondary financial markets are sometimes referred to as the aftermarkets. Included within ABC secondary market options for investments are the loans that it obtains from the commercial banks and other loaning institutions. In the case of loans, the company seems to have bought the loan money from the mortgage banks for use in its endeavors of expansion and asset purchase. ABC can also take part in a secondary trading of shares, bonds and securities whereby it buys shares and bonds at lower prices and sells them at higher prices with a sole intention of making profit and raising funds for the companys expansion. ABC still benefit from the secondary market by having its new securities sold and transferred from one investor to another (Ahmed, Kristal & Pagell, 2014). The company is to maintain a highly liquid secondary market through stock exchanges. Being a company that bases its operations in the Malaysian economy, it will have to consider a deeper study of the Malaysian stock exchange and have its agents in the physical stock exchange market. With secondary markets, it is important for ABC to target accurate price allocations since the secondary market take advantage of the unforeseen circumstances in the market. Though secondary financial markets have a lot of uncertainties, it can be a quick source of capital for ABCs investment and expansion. Lastly, within secondary markets as a source of funds for expansion, ABC can utilize the sale of preexisting investor commitments to private equity funds.
f.If the financial markets that have been discussed above were perfect, ABC would fully exploit these markets and earn enough profit from them allowing it to operate free from any financial institution. However, these markets are not perfect and financial institutions are needed by ABC for two purposes. The first purpose is for the financial institutions to stand as a refereeing party between ABC and other investors during the primary market. The second and the major dependence that ABC puts on financial companies are for the purpose of loaning. Both primary and secondary financial markets are not perfect. A company or an individual investor cannot indulge in financial trading with much certainty (Cortes, Duchin & Sosyura, 2016). The company stands a chance of benefiting or losing from these markets and therefore cannot get to break away from financial institutions. ABC would be able to measure the finical outcome from every trading in both primary and secondary markets if they were perfect. The company would be able to avoid financial companies for the two reasons explained above, but the markets keep fluctuating and have been marred with uncertainties, ABC chooses to stick with the financial corporations that see it though long term investment agreements.
g.The condition that ABC requires the banks approval before pursuing large projects benefits both the bank and the company. The bank benefits because it is able to limit cases of encountering loan defaulting cases with ABC. The bank understands the negative implications surrounding a case whereby a loaned company runs bankrupt. It therefore lays out precaution with an attempt of limiting any loan repayment problem from their client. The purpose of this condition is therefore for the bank to measure the credibility and safety of the investment projects that the company seeks to delve into. However, as much as the bank benefits by limiting repayment issues with its creditor, the condition benefits the owners of the company more than it does to the bank. It helps the owners of the company in avoiding high risk investments which can lead them into loss making. Although it might appear challenging for the company owners to consider a loan denial, they always come to realize that it is for their mutual benefit.
Ahmed, M. U., Kristal, M. M., & Pagell, M. (2014). Impact of operational and marketing capabilities on firm performance: Evidence from economic growth and downturns. International Journal of Production Economics, 154, 59-71.
Cortes, K., Duchin, R., & Sosyura, D. (2016). Clouded judgment: The role of sentiment in credit origination. Journal of Financial Economics, 121(2), 392-413.
Carter, S. (2014). From pool of profits to surplus and deficit industries: Archival evidence on the evolution of Piero Sraffas thought. In Research in Political Economy (pp. 3-61). Emerald Group Publishing Limited.
Coffee Jr, J. C., Sale, H., & Henderson, M. T. (2015). Securities regulation: Cases and materials.
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