The recent Credit Crunch has had a very significant impact
on the firm’s cost of capital
Hong Kit, Fung
CONTENT
Induction ……………………………………………………. 3
Back View To The Root Of Credit Crunch …………………………………… 3
Lethal Weapons : CDOs & CDSs ……………………………………………… 5
THEORIES AND EVIDENCE ……………………………. 6
Miller and Modigliani Theory (MM Model) …………………………………. 6
Cost Of Financial Distress …………………………………………………….. 7
Trade-Off Theory Of Capital Structure ……………………………………… 9
Pecking Order Theory ………………………………………………………… 9
Cases Study …………………………………………………………………….. 9
Others Study: Consumption Collapsed ………………………………………. 12
CONCLUSION …………………………………………….. 12
REFERENCE ……………………………………………… 13
INTRODUCTION
The “credit crunch” the new word which shocks the whole world and makes the people cannot sleepy at night. Its impact to the whole economy is more serious, deeper and wilder than the historical crisis, because it has an unexpected destructive power, hereby from USA to Asia, not like a preceding one, only geographically limited for several locations, countries, or some business sectors only.
On 15 September, 2008, the day one famous and large investment bank of the world “Leman Brothers” filed to be bankruptcy. It represented the ever seen before credit crunch officially started. At the time, the world changed, the people life changed, and the fate of corporation also changed.
Starting from that time, the assets value on the firm’s balance sheet did not as worth as before, as a result of price slashing down whatever in housing, stock market or commodities. Additionally, the hurry market carry trade reversing transactions, it made the situation to be into more worst. The currency exchange rate of different countries deflated from 15% to 50% against the US dollar within very short period, except Japan Yen. Many international trade businessmen suddenly suffered a heavy exchange loss which they never expected and fixed to hedge before.
At the same...