Question

Using income statement, balance sheet, net revenues, and few financial ratios, please explain four main factors which have made it difficult for firms to achieve equity returns above the cost of capital in the securities Industry since the last global financial crisis of 2007/2008.

Answer 1

Since the last global financial crisis in 2007/08, there is a slow growth rate of the securities market and the industry would not able to make anything above the cost of capital because

1) Investors watchful : Investing community is scared of crash of the markets because after the 10 years passed since that incidence, the bank and financial markets would not able to recap. The interest rate has been almost zero so that investment in the economy get improved. The investors are not going fully invested in the market. The short term profit booking has been become a pattern.

2) No long term investment : the securities company would able to earn only in the condition when the capital invested through them are for long term. The investors now-a-days are going for the short term investment and not for long term.

3) Reinvestment of Profits : The companies are ploughing back their profits so that debt content on them would be less. The financial crisis has provided the companies a lesson to not to rely too much on the debt financing. Therefore , the dividend payment, which a good source of income for the securities industry, has been dried up in the financial markets.

4) Heavy taxation : After crisis the government of various countries has raised their tax rates to come up with the financial problems. Thus, high rate of tax payment through the securities companies has taken away all the growth over and above the cost of capital.