FINANCIAL MANAGEMENT ASSIGNMENT 1

DISCUSSION QUESTION (1-5)

ANSWER 1:
The Comparison between the Period and Intensity of Recession in 2007-2009 to the recessions
since the Great Depression.
Recessions have been a critical phenomenon to analyze since World War II. The recession of
2008 was the 11th after the Great Depression. The frequency of the occurrence of recessions has
dropped down from 1982 to 2001 by a great percentage, but the impact of it makes the economy
vulnerable and difficult to recover.
The impact of recessions on an economy depends on their length and intensity. To answer the
question above, the following comparison has been made between the recession in 2007-2009
and the recessions that have occurred in 1990s to 2000s:

The last two recessions (1990-1991 and 2001) lasted eight months each, and only two of the 10
previous post-Depression downturns lasted as long as a full year, according to the NBER. 1

Source: NBER
The table above shows the data in terms of Duration and GDP of the recessions occurred Post
World War II.
The comparison explains that the length of the recession in 2007 -2009 was the maximum and
so was the fall in the GDP. The monetary value of the production fell by 1.4% in 1990-1991 and
by 0.3% in 2001. In the 1957-1958 recession, the fall in GDP was the largest until we were hit by
the recession in 2007.
Sources:

1 http://money.cnn.com/2008/12/01/news/economy/recession/
Foundation of Financial Management Handbook.

http://www.nber.org/data/
http://www.au.af.mil/au/awc/awcgate/crs/r40198.pdf

ANSWER 2:
Effects of the recession of 2007-2009 on government regulations
A recession is identified by a countrys falling rates of employment, decreasing incomes, high
mortgages, government loans, etc. The longest recession post WW-II has had many negative
impacts on the government.
When faced with a recession in 2001 following the bursting of the so-called dot.com bubble,
the US monetary authorities aggressively reduced the policy interest rate to unprecedented
levels and thus fueled a debt-financed consumption boom that led the way in boosting global
aggregate demand. Interest rates in the US stood at just 1 per cent in 2003. This ensured that
the 2001 recession was shallow and short-lived, but it paradoxically sowed the seeds of the
global recession of 2008-2009. 1
When considering the role of policies, we have to reflect on the government regulations that
were during, and after the economic breakdown. The government monetary policies became
unreasonable and interrupting leading up to be one of the reasons of economic depression.
Hence a shift in policy was required and it still continues but it has not shown much positive
results towards a fast recovery. Some of the government regulations that were effected:
Minimum wages were set, Interest rates were lowered, deposit guarantee schemes were
introduced, there was a reduction in export finance, unemployment benefits were given,
adjustments in tax laws were made.
Sources:

Foundation of Financial Management Handbook.

1 The Great Recession of 2008-2009: Causes, Consequences and Policy Responses /Sher Verick &
Iyanatul
Islam /Discussion Paper No. 4934 / May 2010

ANSWER 3:
Advantages and Drawbacks of Sole Proprietorship Organization.
Most of the small business are run as sole proprietors. In this form of organization, a single
person owns the organization and is responsible for all the operations. Thus a single person takes
care of all the decision making process, profits, loss, etc., making the process less complicated.
The chances of getting into an argument with a partner or getting cheated do not exist.
A sole proprietorship offers the advantage of simplicity of decision making and low
organizational and operating costs. 1
Moreover, in a sole proprietor ship organization formal requirements are very few and there are
no corporate tax payments.

The independence to run a sole proprietorship business comes with few drawbacks. A major
drawback is that there is unlimited liability to the owner. 1 The owner is solely responsible for
all the obligations of the business and also the investors hesitate to invest in such form of
organizations.
Sources:

1 Foundation of Financial Management Handbook.

ANSWER 4:
Partnership in which investors can limit their liability.
Under partnership business, there is a special form of partnership, called Limited Liability
Partnership(LLP), which gives an opportunity to some of the particular partners to control their
share of liability in the business. There are no general partners in this form of partnership
A limited partnership allows some of the partners to limit their liability. Under this
arrangement, one or more partners are designated general partners and have unlimited liability
for the debts of the firm; other partners are designated limited partners and are liable only for
their initial contribution. The limited partners are normally prohibited from being active in the
management of the firm. 1
Sources:

1 Foundation of Financial Management Handbook.

ANSWER 5:
Protecting and Managing Stockholders interest.
A shareholders interest is managed by the Board of Directors. These group of Directors can
constitute people from the companys management as well as from outside.
Sources:

Foundation of Financial Management Handbook.