StudentShare solutions
Triangle menu

Credit Crunch and Shareholders' Value - Essay Example

Not dowloaded yet

Extract of sample
Credit Crunch and Shareholders' Value

Banks start charging high interest rates for lending that becomes restrictive and selective. This impacts money (credit) market as mortgages becomes expensive. Stock markets start fluctuating wildly. Savings get reduced affecting pensioners a great deal. Use of credit cards becomes costlier. Foreclosures of mortgages and repossession of mortgaged properties become frequent feature of credit market, and worst the rate of bankruptcy rises.
Credit crunch does not necessarily mean a period of recession. It is in fact a voluntary extension or interruption of monetary policy pursued by the federal bank. The success of any monetary policy depends upon attitude of lending institutions. 'Even if Fed increases the level of bank funds during a weak economy, banks may be unwilling to extend credit to some potential borrowers, and the result is credit crunch.'(Jeff Madura, page 93)1. The government some times introduces a sort of restrictive monetary policy that accentuates credit crunch. Jeff Madura (page 93) while explaining the effects of restrictive monetary policy states that 'as the money supply is reduced, and interest rates rise, some potential borrowers may be unable to obtain loans because interest payments would be too high. Thus the effects of restrictive monetary policy are magnified because higher interest rates not only discourage some potential borrowers but also prevent others from obtaining loans. Overall the credit crunch may partially offset the desired effects of a simulative monetary policy and magnify the restrictive monetary policy.'

The prime objective of every company these days is to create and enhance the shareholders' value. Let us first understand the meaning of the term 'shareholders' value' before analyzing the effects of credit crunch on shareholders' value. Shareholder makes investment in order to earn good dividends and capital gains when shareholder happens to sell the investment. In other words a shareholder is concerned about cash flows he receive from the investment and also about the appreciation of the value of investment that will result in after tax future cash flows. Ultimately the value of an investment is related to cash flows from such investment.

Cash flows are connected directly to profitability of the firm and thus cash payout can be increased by increasing profitability. 'Since investors value cash payouts, managers increase shareholders value when they increase the present value of the firm's net cash flows, primarily by finding new ways to either increase revenues or reduce costs. Generating more cash or receiving it earlier increases shareholders value. Manipulating the timings of sales or expenses to increase reported earnings, however, will actually decrease shareholders value if it reduces the cash that can ultimately be paid out to shareholders.'(James A. Brickley, Clifford W. Smith, and Jerold L., page 23)2 It can be said that profitability that generates more cash flows in fact add to shareholders value, and vice versa. The focus is on cash payouts or cash flows on investments of shareholders. Also it is clear that profitability or growth of the company, that is ultimately important to generate cash flows, is the vital factor that affects the shareholders' value.
Growth of a company is directly related to general upward economic ...Show more

Summary

'Credit crunch' and 'maximizing shareholders value' are two different terminologies that needed to be analyzed during the impact of credit crunch. 'Credit crunch' is a latest addition to economic terminology No body knows who coined this but the term 'credit crunch' came to the fore when US Federal bank used it in 1967…
Author : gulgowskidelila
Credit Crunch and Shareholders Value essay example
Read Text Preview
Save Your Time for More Important Things
Let us write or edit the essay on your topic
"Credit Crunch and Shareholders' Value"
with a personal 20% discount.
Grab the best paper

Related Essays

Global Credit Crunch
The major causes could be termed as excessive liquidity, excessive lending, excessive leverage and excessive risk taking by the banks and other financial institutions. The global credit crisis posed a greater threat to UK Economy. It is estimated that almost 20,000 people will be losing their jobs alone in London's Financial Service Industry.
8 pages (2000 words) Essay
Shareholders Value
Liabilities are the claims to the assets of the firm. Owner's equity is the claims that remain after deducting liabilities from assets. The balance sheet equation is: Transactions that affect the financial position of the firm are recorded in the balance sheet.
6 pages (1500 words) Essay
Credit Crunch Essay
The result is greater market fluctuation, which can lead to negative effects, such as more expensive mortgages, problems for pension savers, and even bankruptcy. Apart from that, credit crunches can occur even without an evident recession. "Credit crunch" has been the most commonly used new term over the past few years.
4 pages (1000 words) Essay
Credit Crunch
Credit normally contracts during a recession, but an unusually large contraction could be seen as a credit crunch. In their analysis, Bernanke and Lown compare the contraction in credit during the most recent recession to those in the previous five recessions.
4 pages (1000 words) Essay
Credit Crunch
dwardian summer" of prosperity and tranquillity and the trench warfare of the credit crunch - the failed banks, the petrified markets, the property markets blown to pieces by a shortage of credit” (Special report: Credit crisis - how it all began, 2008). The major reasons for
2 pages (500 words) Essay
Credit Crunch
The author states that the current financial problems are caused mainly because of the improper lending habits of banks. Banks were ready to satisfy all the customers who approached them for loans without any investigation about their financial abilities. Interest rates were cut down and the repayment periods were increased by the banks.
2 pages (500 words) Essay
Credit Crunch
Suddenly people have become unemployed, house prices have risen and banks have stopped helping the common man and woman on the street. It looks like a war; however the
2 pages (500 words) Essay
Credit Crunch
dwardian summer" of prosperity and tranquillity and the trench warfare of the credit crunch - the failed banks, the petrified markets, the property markets blown to pieces by a shortage of credit” (Special report: Credit crisis - how it all began, 2008). The major reasons for
2 pages (500 words) Essay
Credit crunch
There have been job cuts, firings and downsizing – all of which have hampered the basis of sanity within the world’s domains. It goes to show that credit crunch has played havoc with the world order and the people who have brought the globe
4 pages (1000 words) Essay
Credit crunch
In such condition, the connection between the interests rates and the availability of credit has unconditionally changed in such a manner that either the loan is fundamentally less than any quoted formal rate of interest or there stops to be a precise
10 pages (2500 words) Essay
Get a custom paper written
by a pro under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Your email
YOUR PRIZE:
Apply my DISCOUNT
Comments (0)
Rate this paper:
Thank you! Your comment has been sent and will be posted after moderation