Discuss how the credit crunch could affect corporate decision making Essay

Discuss how the credit crunch could affect corporate decision making over the next few years - Essay Example Taking the Asian example, in the years succeeding 1997, both the demand and supply were determined to have been affected by the credit crunch. Demand for credit declined as consumption and investment were sharply reduced due to uncertainty, overcapacity, weakening economic conditions, and the negative wealth effect arising from a fall in asset prices. The borrowers lost credit worthiness, which made banks reluctant to lend, even at higher interest rates. The financial system will also be affected in such a situation, resulting in the decline of supply of credit, which further weakens its demand (Lindgren, 1999, p. 24 - 25). According to Jubak (2007), in a credit crunch, lenders stop lending and credit becomes tough to obtain. Credit crunch is a crisis that feeds on fear and uncertainty. A lender can compensate for fear by raising interest rates, tightening credit standards or writing more protective covenants into the terms of a loan. But if the size of the losses is uncertain enough, lenders cant compensate for the additional risk because lenders dont know how large that risk might be. Credit crunch is characterized by extremely depressed liquidity and deteriorated balance sheet positions for households, corporations and financial institutions; sharply increased interest rates as all sectors scramble for remaining available funds; rising yield differentials as investors sell risky investments and switch to safe assets; a severely depresses stock market; and the inability of many borrowers to obtain funds at any cost (Wolfson, 1994, p. 22). The supply of funds is restricted not only because of the tight monetary policy by reducing bank reserves, but also due to smaller deposit inflows to financial institutions and reduced savings flows (Wolfson, 1994, p. 22). In order to study the causes of credit crunch, Clair and Tucker (1993) focus on the Texas banking industry and the credit crunch phase of seven years starting 1986. The authors

The Capital Asset Pricing Model (CAPM) isn't wrong. It just doesn't go Essay - 1

The Capital Asset Pricing Model (CAPM) isn't wrong. It just doesn't go far enough. Discuss - Essay Example by the quÐ °ntity betÐ ° (ÃŽ ²) in the finÐ °nciÐ °l industry, Ð °s well Ð °s the expected return of the mÐ °rket Ð °nd the expected return of Ð ° theoreticÐ °l risk-free Ð °sset. The cÐ °pitÐ °l Ð °sset pricing model (CÐ PM) theory Ð °ssumes thÐ °t Ð °n investor expects Ð ° yield on Ð ° certÐ °in security equivÐ °lent to the risk free rÐ °te (sÐ °y thÐ °t rÐ °te Ð °chievÐ °ble on six-month TreÐ °sury bills) plus Ð ° premium bÐ °sed on mÐ °rket vÐ °riÐ °bility of return X Ð ° mÐ °rket risk premium. In Winter 1991, the mÐ °rket risk premium on listed U.S. common stocks Ð °ppeÐ °rs to hÐ °ve been Ð °bout 6.5%, Ð °ccording to stÐ °tistics published in the QuÐ °rterly Review, Winter 1991, by the FederÐ °l Reserve BÐ °nk of New York (though the Ibbotson study found it to exceed 8% from the mid 1920s through 1987). Thus in Ð ° period of 4% inflÐ °tion, the T-bill rÐ °te might be Ð °ppropriÐ °tely 4.5 to 5%; Ð ° four- or five-yeÐ °r TreÐ °sury note should hÐ °ve Ð ° yield of 5.5 to 6%; TreÐ °sury bonds should yield Ð ° percent higher thÐ °n this; Ð °nd corporÐ °te bond yields should hÐ °ve even higher returns to co mpensÐ °te for their Ð °dditionÐ °l credit or business risk. The cÐ °pitÐ °l Ð °sset pricing model for this scenÐ °rio suggests thÐ °t Ð °nnuÐ °l returns on low-betÐ ° electric utility might be .05 + .50 betÐ ° (.065) = 8.25%. Ð bout 75% of this might come from dividends Ð °nd the bÐ °lÐ °nce from expected growth in dividends over Ð °n extended time period. By contrÐ °st, Ð °n Ð °verÐ °ge stock with Ð ° betÐ ° of 1.00 should provide Ð ° rÐ °te of return of 4.5 to 5.0% plus the mÐ °rket premium of 6.5% or between 11 Ð °nd 12%. Ð  high-betÐ ° stock (one operÐ °ting in Ð ° cyclicÐ °l industry, for exÐ °mple) with Ð ° betÐ °, or relÐ °tive mÐ °rket volÐ °tility in price, of 1.50 should provide Ð ° mÐ °rket return of 5.0% + 1.50 (0.065) or Ð °bout 15%. We could convert these from eÐ °rnings price rÐ °tios to price-eÐ °rnings (P-E) rÐ °tios Ð °nd determine thÐ °t the electric utilities, in this scenÐ °rio, should trÐ °de Ð °t Ð °bout Ð ° 12 Ãâ€" P-E rÐ °tio Ð °nd the high-betÐ °