Importance of Debt Management-Free-Samples-Myassignmenthelp.com

Question: How debt management will improve the expected profit of the Commonwealth Bank. Answer: Introduction In the modern world, management of debt has been one of the key issues for the organizations that are performing in the global economy. The debt management is helpful in determining the level of profit for any organization. In the current aspect to time, the basis of finance is the initial step in the functioning of an organization or business. The basic and the fundamental financial source are inclusive of equity and debt financing which is even called the capital structure of financing (De Jonghe, ztekin 2015). In accordance to equity financing, the common fund can be increased by issuing the Initial Public Offering (IPO) to the common people and the issuance of the ordinary shares. On the other hand, debt is explained as the agreement among two parties where the borrower has to assure to make payments of certain amount of interest with the treaty to make payment for the principle value in the coming future (De Mooij, Keen 2016). The process of debt financing is regarded as a key aspect of the financial strategy of the organization because of the fact that debt are of numerous kinds that includes the issuing of the bonds, debentures, trade credits and loans etc. On the other hand, profit is explained as the financial advantage or the rewards that have been achieved when the revenue value is more than the costs of the business operations. As the profit is associated directly with the process of decision making of an organization and therefore has an effect on the selection of the equity or debt financing (Alshatti, 2015). Problem Statement Different kinds of organisations has the option of selecting in between the equity financing and debt financing for the activities of the business which is associated directly to the growth and profit of the organization (Allegret et al., 2016). It can be explained that debt financing has the benefit over the tax savings or the tax intentions over the financing related to equity and debt financing is not a complex process with respect to the equity financing in the process of debt management and the lender is eligible only to undertake repayment of the principle of the loan that has been agreed on and additionally the rate of interest. Therefore, most of the organizations have the intention of undertaking debt financing (Alessandri, Nelson 2015). It is due to this reason that this thesis paper has looked to discuss about the management of debt variables that have an impact on the anticipated profits of the firm, the process of research planning that are going to be utilised in order to compare and compute the variables that can be exploited in order to assess the various kinds of ratios, leverage and the amount that can be used in order to undertake a comparison of the outcome in the present scenario (Bennett et al., 2015). This paper has therefore looked to determine the debt management process and its impact on profit of Commonwealth Bank of Australia. Research Aims and Objectives The objectives of the paper has been constructed in order to have an idea about the process that would be undertaken and the factors that would be taken into consideration in order to have an idea about the result that would be obtained in this paper. The research aims and objectives are as follows: Determine how profitability has an impact on the operations of a bank Ascertain how debt management improves the level of profit in the bank Research Questions The researcher looks to frame the research questions in order to create a path in accordance to which the research paper would move ahead and thereby would be able to answer to the issues that are pertinent to this research paper. The research questions are as follows: Q1. How does profitability have an impact on the activities of Commonwealth Bank? Q2. How does debt management improve the profit level of Commonwealth Bank? Literature Review The anticipated profit and the capital structure of the organizations are dependent on the numerous decisions associated with the capital structure that are undertaken by them. In the current period, several researches have been explained that capital structure has been swelling but there are empirical evidences has been key even today (Waemustafa, Sukri 2015). There have been several studies and reports that have discovered that positive tax has an impact on the extent of debt financing (Subrahmanyam et al., 2017). There has been several numbers of studies that have revealed a negative impact on of tax on the extent of leverage. Therefore, it needs the Meta assessment of the impact of marginal tax on the debt ratio (Barth et al., 2017). The tax benefit is seen to be one of the most significant pieces of information for the purpose of financial decisions in accordance to the capital structure. It is due to this fact that development in the capital structure has been suggested as a c entral principle as the companies have been making use of extreme utilisation of the debt in order to damage the level of profit for an organization. DeAngelo, Stulz (2015) have undertaken the tax advantages of debt making use of the rate of the marginal tax at various degrees of interest. As the taxable income after the subtraction of the rate of interest is lower than the past financing, the process expressed by Calomiris, Carlson (2016) has a good chance of estimating the lower rate of marginal tax than the one predicted by Ball et al., (2015). The development in the capital structure with the assistance of the debt to equity ratio will raise the profitability of the firm (Ashraf et al., 2016). The extent of debt or the debt to equity ratio themselves does not specify whether the organizations have been using increased amount of debt or not but on the other hand, the companies that are operating outside Australia has faced the transformations in the usage of debt after the fina ncial crisis in accordance to the financial decisions from the point of view of the tax advantages and costs (Van Bekkum, 2016). There have been other papers as well who have concentrated on the agency issue that has a direct impact on the capital framework of an organization (Chan-Lau et al., 2015). The agency issues come out when there is supposed to be the probability of disputes among the owners of the company and the lenders which may limit the optimal capital ability decision of the company (Panizza, Presbitero 2014). In this case, the capital investment will look to explain the agency issues with the help of debt financing. On the other hand, cost associated with bankruptcy is looked upon to be comparative to the value of liquidation of the company where the concentration is given on the assessment of the decisions of the organizations that are associated with the capital investment in accordance to the external debt financing along with the bankruptcy threats (Alshatti, 2015). Therefore, the companies will look to select the extent of optimality in order to mitigate the increased expense of borrowing and bankruptcy. But in certain scenario, the agency cost can be existent even when the estimated cost of bankruptcy is terminated. Furthermore, when the rate of the corporate tax is raised, the agency expense will reduce but the optimal level of capacity will rise with the rise in the extent of borrowing (De Jonghe, ztekin 2015). Research Methodology This segment of the research paper has the intention of revealing the process of collecting the authentic data that would the helpful in taking the paper forward and answering the issues that have been identified by the researcher previously. In order to discover the effective capital structure that is related to debt financing and equity financing that will be helpful in finding out the anticipated profit of Commonwealth Bank, the researcher has looked to collect quantitative data. Data collection process The main objective of the data gathering process has been to reveal the impact of debt management on the on the anticipated profit of Commonwealth Bank. In accordance to this research, the researcher has looked to undertake descriptive research design in order to explain the data that has been gathered by the researcher from several sources (Borisova et al., 2015). The paper has tried to collect the data with the assistance of the secondary data methods so that critical level of analysis can be attained (Black et al., 2016). In order to gather the data in an effective and swift manner, the researcher has utilised the most general methods of gaining the secondary data. This kind of data has been gathered by taking assistance of the sources like the websites and even website journals. The other sources include the journals, relevant books, and articles, reports from the governments and the annual reports of the banks that have been taken into consideration (Greenwood et al., 2015). The researcher has even taken assistance of the researches that have been taken previously by other researches in order to link them with the current researches and have a clear idea about the result that needs to be accomplished. The collection of the data with the help of these sources will be reducing cost for the researcher and thereby this method is looked upon as cost efficient. The secondary data even addresses the current concern by not taking assistance of any other sources that are available to the researcher. The information related to Commonwealth Bank and the other banks that have been selected for the assessment in this paper has even gathered from the Australian Statistics Bureau (ABS) as this website contains all the data that are associated with any organization that are functional in the Australian economy (Gomariz, Ballesta 2014). However, as this paper mainly concentrates on the financial aspects of the banks, effective level of information has been available from the annual reports of the concerned banks and thereby effective results can be attained. Data Analysis The researcher has looked to collect quantitative data as the paper is concerned with assessing the financial figures that are associated with the transactions that have taken place in Commonwealth Bank and the other banks that have been selected in order to gain the outcome that is required in order to complete the paper. The data that has been attained needs to go through several software tools in order to get the results out of them (Hasan et al., 2017). Excel software and tool has been used in order to evaluate the data and the internal aspect of the data that would explain the impact of debt management on the expected profit for Commonwealth Bank can be obtained. The leverage ratio of the selected banks will be taken into consideration in order to attain the results that are associated with the research aims and questions. Data Analysis and Findings This segment of the paper has been framed in order to have an idea about the process and the measures that have to be taken in order to critically evaluate the financial figures and break them down in an effective manner in order to have an idea about debt management and their impact on the expected profit of Commonwealth bank in Australia in comparison to the ANZ Bank and Westpac. The values that are in relation to Return on Equity, Return on Asset and the Financial Leverage have been compared of each of the banks in order to have an idea about their operational activities. The analysis has been given as follows: Descriptive Statistics Commonwealth Bank Commonwealth Bank 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Mean 13.5667 12.8667 12.4567 12.5967 12.5367 11.9533 11.9133 11.88 10.9667 10.8633 Standard Error 6.26346 6.10346 5.79784 5.81498 5.76262 5.46916 5.43391 5.40705 4.97982 4.91503 Median 19.76 17.07 17.53 18.17 17.91 16.77 16.21 16.65 15.5 15.46 Standard Deviation 10.8486 10.5715 10.0422 10.0718 9.98115 9.47287 9.4118 9.36529 8.6253 8.51309 Sample Variance 117.693 111.757 100.845 101.442 99.6234 89.7352 88.582 87.7087 74.3957 72.4726 Skewness -1.7317 -1.5064 -1.6932 -1.7276 -1.7205 -1.6965 -1.6262 -1.6974 -1.7118 -1.7214 Largest(1) 19.9 20.69 18.95 18.65 18.68 18.05 18.41 17.9 16.38 16.09 The descriptive statistics of Commonwealth Bank explain that the mean value of the bank in accordance to the variables that have been taken into consideration has their value in between 10.86 to 11.56. The values have been very close to each other. The median for the variables for the past 10 years have ranged from 15.46 to 18.17. The standard deviation on the other hand has been around 8.5 to 10.8. The figures explain that there have been slightest of changes in the financial scenario in accordance to the debt management and profitability. ANZ Bank ANZ Bank 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Mean 11.05 8.65 10.27 10.7367 10.4833 10.47 10.86 10.21 8.79 8.96667 Standard Error 5.29878 4.26738 4.72902 4.89934 4.80181 4.77838 4.93603 4.67128 4.42123 4.30678 Median 14 10.19 13.91 15.21 14.61 14.75 15.62 14.19 9.92 10.97 Standard Deviation 9.17775 7.39132 8.1909 8.4859 8.31698 8.2764 8.54946 8.0909 7.65779 7.45956 Sample Variance 84.2311 54.6316 67.0908 72.0105 69.1721 68.4988 73.0933 65.4627 58.6417 55.645 Skewness -1.297 -0.8969 -1.6048 -1.713 -1.6831 -1.7048 -1.7288 -1.678 -0.6496 -1.1214 Confidence Level(95.0%) 22.7988 18.3611 20.3473 21.0801 20.6605 20.5597 21.238 20.0989 19.023 18.5306 The values in regards to ANZ Bank indicate that the mean value has been in between 8.7 to 11.05 and the median on the other hand has been 9.92 and the highest value has been 15.62. On the other hand, the standard deviation explains that value has been in between 7.4 to 9.1. These figures have lower values in accordance to the ones that have been observed for Commonwealth Bank. Westpac Bank Westpac 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Mean 16.1467 10.27 11.5567 11.5267 10.0033 10.31 10.95 10.6933 9.57333 9.40333 Standard Error 7.61549 4.93026 5.26551 5.23509 4.57405 4.66003 4.96 4.84357 4.34745 4.23443 Median 22.86 13.12 16.19 16.02 13.87 14.94 15.91 15.3 13.38 13.37 Standard Deviation 13.1904 8.53947 9.12014 9.06745 7.92248 8.07141 8.59097 8.3893 7.53 7.33425 Sample Variance 173.987 72.9225 83.1769 82.2186 62.7657 65.1477 73.8048 70.3804 56.7009 53.7912 Skewness -1.697 -1.3346 -1.6961 -1.6824 -1.6731 -1.7319 -1.7321 -1.7259 -1.6935 -1.7219 Confidence Level(95.0%) 32.7668 21.2132 22.6557 22.5248 19.6805 20.0505 21.3412 20.8402 18.7056 18.2193 The descriptive statistics in relation to Westpac indicates that the mean value ranges from 9.4 to 16.14. The median for the financial figures of Westpac are 13.37 to 22.86 and the standard deviation has a range of 7.33 to 13.19. Correlation The process of correlation refers to the understanding of the relationship among the variables that have been taken into consideration. This paper has looked to undertake a correlation among the financial leverage and the net profit margin of the banks that have been chosen. The correlation of all the banks have been explained as follows: Commonwealth Bank Correlation -0.786950463 MSE 0.940482382 The correlation of Commonwealth bank has been constructed by taking help of the financial leverage figures and the net profit of the company. The figures indicate that the correlation is negatively correlated explaining that financial leverage and net profit margin are not associated to each other for Commonwealth Bank. The mean squared deviation has a value of 0.9404. This addresses that debt management does not improve the profit of the bank. ANZ Bank Correlation -0.156814712 MSE 1.48335 The figures for ANZ Bank has been similar to Commonwealth Bank as it is seen that the values for the past ten years are negatively correlated and the two variables are not associated to each other. The mean squared deviation of ANZ Bank comes to 1.48335 Westpac Bank Correlation -0.203415414 MSE 1.727055587 The correlation for Westpac is negatively correlated as well and thereby explaining that debt management is not having improving the level of profit for the bank. The mean squared deviation for the bank is 1.727055587. Discussion Descriptive Statistics The figures that have been attained for the three banks indicate that the performance of the banks have fallen with the advent of time for all the three banks. The fall in the leverage ratios have indicated that there has been an impact on the profit of the companies (Greenwood et al., 2015). The values of all the three banks have decreased significantly for the past 10 years and there has been an observation that out of the three banks the performance of Commonwealth Bank has been the best. The assessment therefore has been able to explain that debt management has an impact on the estimated profit and the same has been observed in the analysis of Commonwealth Bank. Correlation The values that have been obtained for the correlation analysis of all the three banks have addressed that all the variables that have been compared for the banks are not closely related to each other for all the 10 years. Westpac, ANZ Bank and Commonwealth Bank have their profit and financial leverage not associated closely to each other as the obtained value is negative. This explains that debt management may not improve the estimated profit of the banks especially in the case of Commonwealth Bank as it has the highest negative value. The outcome is positively related to the constructed literature review. Conclusion Addressing the aims and the questions The paper has been extensively able to answer the research aims and objectives as the results that have been collected explain that management of debt has the capability to improve the expected profits of a bank. The result has been able to signify that leverage may not have an impact on the profitability of Commonwealth Banks and debt management cannot improve the profit level of the banks. The results even indicate that debt management and level of profit are indirectly associated to each other and therefore steps has have been undertaken by the management of the banks to improve the level of profit. Limitation The limitation that is existent with this research paper has been that the secondary data that has been collected for the completion of the paper may not be accurate as the transactions that have been disclosed by the companies may not be true. The other limitation that has been observed is the time limitation and therefore the researcher could not construct a much better result. Recommendation Every research paper has certain aspects in accordance to which suggestions can be given in order to improve financial position of the banks and thereby improve the operational activities as well. The management of the banks can take steps in improving the debt management process of the banks with the help of which the level of profit can be enhanced. The banks can even look to undertake partnerships with other financial institutions who would look and control the debt management processes of the banks which can be effective in maintaining the profit level they desire. Reference List Alessandri, P., Nelson, B. D. (2015). Simple banking: profitability and the yield curve.Journal of Money, Credit and Banking,47(1), 143-175. Allegret, J. P., Raymond, H., Rharrabti, H. (2016). 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