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Sample Capstone Project Paper on Lehman Brother’s Holding Inc

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Sample Capstone Project Paper on Lehman Brother’s Holding Inc
5.0 Discussion, Findings, Recommendations and Conclusions

5.1 Abstract

Lehmann Brothers Holdings Inc. has been experiencing the problems in the capital structure. Senior managers and the finance committee have reviewed the Lehman Brothers Holding Inc. liquidity and the funding risks management to be able to evaluate the company ability to assure the funding and liquidity at all times. The secondary data source was used to get the data to be able to determine the impact of the capital structure to the financial performance of the company. However, the scope of the study involves the organization structure, lines of authority, governance structure, funding framework and the procedures.

The choice between the debt financing and equity financing is directed to seek the optimal capital structure. Therefore, the studies show that a company with high leverage have an optimal capital structure and therefore it leads to good performance, and MM theorem shows that high leverage has no impact on the value of the company. Thus, these differences have motivated the researcher to carry out the research on the relationship between the capital structure and the Lehman brothers Inc. financial performance. However, the objective of the research was to establish the impact of capital structure on the financial performance of the Lehman brothers Inc.

The financial performance of the Lehman brothers was measured in terms of the return on equity and the capital structure was measured in terms of the debt ratio. Secondary data was used and it was obtained from the company websites and the company financial statements. The results revealed that there was an inverse relationship between the capital structure of the company and the financial performance of the company. Thefindings indicate that the higher the debt ratio, the less the return on equity and thus, the company needs to inject more capital than borrowing.

5.2 Introduction

This chapter covers the findings, discussions and recommendations of the research. The previous chapter presented both the analysis and findings of the study as set out in the research objectives and research design. This chapter presents the summary of the key data findings, conclusions, and policy recommendations. Secondary data was collected from the financial statements of Lehman Brothers Inc. and published books of accounts.

5.3 Regression analysis

The research study established the impact of capital structure on the financial performance of the Lehman Brothers Inc. therefore, to get the performance of the company; return on equity (ROE) was calculated whose financial statements were accessed by the researcher.  In addition, the capital structure of the company was obtained by finding the debt ratio of the company.

5.4 Interpretation of findings

The capital structure of Lehman Brothers Inc. was measured by debt. Debt ratio was considered to be the long term debt divided by the shareholders equity. The findings from the study revealed that debt ratio had an inverse relationship on return on equity. Therefore, the debt ratio(x1=0.472) shows that in 1 per cent increase in return on equity lead to a 0472 percent decrease in the debt ratio. The result was inconsistent with the findings of the (Ito, Koibuchi, Sato & Shimizu, 2015)who established that capital structure had a negative effect on the company financial performance. From the findings, it was95 percent confidence level that the debt ratio variable had statistically significant values where p is greater than 0.05 and this conclude that the model was significant. The findings shows that the probability of the model was 0.035 and this was less than the 0.05 thus, concluding the overall model was significant at 95 per cent.

5.5 Summary and conclusions

The main objective of the study was to establish the impact of capital structure on the financial performance of Lehman Brothers Inc. to achieve the objective the study used secondary data from the financial statements. Chapter one introduces the topic by giving an insight on the leverage levels of the company, the performance of the company and the nature of the macroeconomic variables on the company performance (Robb & Robinson, 2012). The chapter also covers the statement of problem, objectives of the study and the plan of action. Chapter two reviews relevant literature with respect to capital structure: Modigliani and Miller theory that asserts that capital structure is not important in determining company performance (Robb & Robinson, 2012). The chapter also reviewed various ways of performance measurement and the empirical studies on the capital structure. Chapter three discussed the theoretical framework and the methodology. The chapter also has the stated research questions and the model. The chapter also has source of data and the data analysis.

5.6 Conclusion

The conclusion is supported by the results of the regression analysis. Consequently, the higher the debt ratio, the less the return on equity and therefore there is an inverse relationship between the debt ratio and the return on equity that measures the financial performance of the company. Therefore, this showed us the need to increase more capital injection rather than borrowing.  However, the benefits accrued to debt financing are less than the negative aspects; thus, the firms always prefer to finance its projects by internal sources. The study concludes that there is a positive relationship between the capital structure and financial performance. Therefore, the company should make good capital structure decision to earn high profits and carry out a successful business.

5.7 Policy recommendations

It was considered very significant when finance directors trying to finance the firm’s assets to comprehend the impact of capital structure on the performance of the company as wellas the cost of funds. This was supported by the study and analysis. The study recognized that capital structure analysis as well as asset structure analysis isimportant analyses that are used to increase the company competitive edge and therefore the profitability of the company. It alsonoted that the capital market analyst should as well advise he investors of the company on the optimal capital structure based on the capital structure analysis of the company. Borrowing increases the risks of the company and on the return to shareholders through reducing the amount of profit available to them. In addition, the company is also exposed to asset dissolution in the event of failing to repay the debt in the stipulated time. Therefore, adequate emphasis need to be put in place to enable the company employ more shareholders funding than debt and reduce the risk that occur as a result of using high debt. Senior management and the management finance committee should be the one involved in the developing, implementing and enforcing the liquidity, funding and the capital policies. However, the committee should be involved in the policies relating to the cash capital, liquidity and the capital allocations to ensure that the company is not exposed to undue funding and the liquidity risks.There should be a daily review within the treasury to discuss the funding and liquidity issues. The liquidity should be reviewed and the changes in the liquidity are explained (Zeitun&Tian, 2014).

5.8 Recommending the Best Method to Manage the Foreign

In this part, we are going to summarize the results in the empiricalstudies concerning foreign exchange risk management.

Organization of the foreign exposure management

In this case, the concern is whether the organization should be decentralized or centralized. Lehman Brothers Inc. is a centralized organization and therefore, it is expected to incur lower costs but it has some disadvantages such as loss of autonomy of some units.

Importance of foreign exposure management

Most researches tend to show that foreign exchange exposure is an important risk to manage. Foreign exchange risks are among the most important financial activities in large organization in America. The main objectives of the foreign exchange exposure management include: reduce the volatility of the cashflows, minimize foreign exchange losses, protect earnings fluctuations and finally hedge the exposure irrespective of the views on foreign exchange risks. The researchers have found the main reasons for managing the foreign exchange exposures to be: reducing taxes, preventing losses, simplifying planning and guaranteeing the cash flow.

Do Lehman Brothers Inc. hedge?

The company hedge the foreign exchange exposure. The company hedge less than 25 per cent of the perceived exposures. The study has shown that foreign currency hedging does not completely eliminate the risks but only reduces the exposures.

Is the company managing transaction, translation and economic exposure?

The study found that the transaction exposure is the most hedged type of foreign exposure. However, the economic and the translation exposure appear to be less important.

Transaction exposure

The study found that transaction exposure is the most important risks to manage. In addition, the study found that netting and matching are the method used for internal hedging to manage transaction exposure. For the external hedging, the company uses methods such as forwards, swaps, future and options.

Economic exposure

The study has shown that there is no framework for managing the economic exposure in the Lehman Brothers Holdings Inc. therefore, it can be concluded that managing economic exposures is difficult. The study found that the economic exposures are not managed by the derivatives but can be managed by the internal methods such as raising productivity and pricing strategy. The study found that the company reason for not managing the economic exposure is inadequate effective tools and the costs exceeding the benefits.

Translation exposure

Researchers argue that translation risk should not be managed since they are purely an accounting concept. The study found that the derivative instruments are similar instruments used to hedge translation exposure as in the case of transaction exposure.

Summary

We have indicated that translation exposure is not hedged by the company and that the competitive component of the economic exposure is highly company and the industry specific (Kirca, Hult, Deligonul, Perryy &Cavusgil, 2012). In reviewing literature, the study identified five components that compose effective foreign exchange management. First, foreign exchange policy where this forms the basis upon which the foreign exchange exposures are built. In this case, position calculation is done to establish the net exposure that is used for managing foreign exposure. Second, hedging that form another distinct component. Third, forecasting future foreign exchange rates. Fourth, performance evaluation and therefore, the manager should evaluate the performance of the techniques employed in dealing with the foreign exchange exposures (Zin, 2014).

Recommendations

The following practices need to be implemented in order for the companies to engage in active foreign exposure management:

  • The managers involved in the trading derivatives should be separated from the managers who monitor them. Thus, allowing the independent review of foreign exchange exposures by precluding faulty book keeping.
  • Derivatives positions should be limited and thus should be marked market to market value every day to avoid massive losses.
  • Compensation schemes should be put in place some of risks on the shoulders of those taking risk to make them more cognizant of the risks they are handling.
  • A system of quickly reacting and scanning to early warning signals should be put in place. Therefore, it is better to all things such as excessive profits.
  • The company need to employ a Risk oversight committee that deals with the compliance by all parts of the company with the foreign exchange policy. The committee recommended should consist of the senior management to ensure that that the foreign exchange management procedures are followed and approved by the foreign exchange policy.
5.9 Accounting treatments of current assets

Current assets provide the Lehman brothers Inc. the liquidity. Current assets can either be cash itself or items that can be easily converted to cash. The major current assetscomponent of the Lehman brothers Inc. include; cash, inventories and account receivables. The company manage the current assets using metrics such as working capital or current ratio. Therefore, the company must manage the current assets for it to be successful. The financial statements report the changes in the current assets in the statement of cash flows. These changes indicates the flow of cash whether into or out of the company. However, the company also calculate the current ratio that is current assets divided by the current liabilities and this is used to measure the liquidity of the firm in paying the current obligations. Thus, if the current ratio is high, the company is able to meet the current obligations and if the current ratio is less than 1, then the company is at risk of liquidity problems.

Summary

Lehman Brothers Inc.reports the current assets in the balance sheet. The reporting is guided by the IFRS to enable the company to compare the industry performance. Lehman brothers Inc. expect that there is a small percentage of the account receivable will not be recovered and thus, the company recognize an allowance for the doubtful debt. The IFRS requires that the amount falling more than one year must be reported separately for each item included under the account receivables. Under the IFS 102, the amount of account receivables that is more than one year and is material in the context of the total current assets that in the absence of the disclosure of the account receivables due after one year on the face of the balance sheet may misinterpret the financial statements (Louis, Sun &Urcan, 2012).The recent academic research has studied on the benefits of the introduction and adoption of international financial reporting standards. The objectives of the study was to research on the accounting treatment of the Lehman brothers Inc. therefore, the assessment of the accounting treatment of the current assets require the exercise of the management judgement and the reporting discretion.in the study, we have reviewed empirical studies based on how the company reports the current assets and in which standards guides the implementation.

Limitations of the study

The researcher encountered several challenges regarding the research and mostly in data collection. The secondary information was not available especially regarding the treatment of the current assets and the methods used to manage risks and regarded it as confidential. In addition, the time allocated to the study was insufficient especially for a person studying part time.

Suggestions and recommendations for further research

The study provides the suggestions and recommendation for further researchers to gain more worthy if any research will be conducted in the field. Some of the suggestions include:

  • Company financial performance is computed using debt equity, debt assets and the long term debt but there are other many factors or measures that affect the financial performance of companies.
  • There are only few methods that are used to test hypothesis and answer the research questions such as regressions and correlation. Therefore, further researcher can employ more methods and techniques such as ANOVA and descriptive statistics.

 

 

 

 

 

 

 

 

 

 

 

References

Ito, T., Koibuchi, S., Sato, K., & Shimizu, J. (2015).Exchange rate exposure and risk management: The case of japanese exporting firms (No. w21040). National Bureau of Economic Research.

Kirca, A. H., Hult, G. T. M., Deligonul, S., Perryy, M. Z., &Cavusgil, S. T. (2012). A Multilevel examination of the drivers of firm multinationality a meta-analysis. Journal of Management, 38(2), 502-530.

Louis, H., Sun, A. X., &Urcan, O. (2012).Value of Cash Holdings and Accounting Conservatism*.Contemporary Accounting Research, 29(4), 1249-1271.

Maditinos, D., Chatzoudes, D., Tsairidis, C., &Theriou, G. (2011).The impact of intellectual capital on firms’ market value and financial performance.Journal of intellectual capital, 12(1), 132-151.

Robb, A. M., & Robinson, D. T. (2012). The capital structure decisions of new firms. Review of Financial Studies, hhs072.

Zeitun, R., &Tian, G. G. (2014). Capital structure and corporate performance: evidence from Jordan. Australasian Accounting Business & Finance Journal, Forthcoming.

Zin, R. A. (2014). Foreign exchange exposure and its reflection in corporate finances.African Journal of Business Management, 8(9), 283-291.

 

 

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