36 Capital Management

Question 1

DEF: capital management [1.5]

Answer 1

Ensuring sufficient solvency & liquidity to meet:
* existing L
* future growth aspirations
While maximising reporting profit

Question 2

Why Individuals need capital [1]

Answer 2

¹ Provide cushion against unforeseen events
- like car breaks down
² Save for future
- like holiday

Question 3

Why Companies need capital [2]

Answer 3

¹ provide cushion against financial adverse events
² provide cushion against fluctuating trading volumes
³ save for future - expansions
⁴ buy stock, work in progress
⁵ hire staff, purchase equipment

Question 4

Why State need capital [2]

Answer 4

Don't need capital as it can:
* tax
* borrow
* print money 
But still keep capital for:
* fluctuations in balance of
    payments & economic cycle 
* timing diff in income & outflow

Question 5

Why Providers of Fin products need capital [6]

Answer 5

¹ provide cushion against unforeseen events
² meet benefits before sufficient prem/cont are received
³ meet development expenses
⁴ commission, expenses, admin, invest cost at start of business
⁵ new business strain
⁶ sell products with guarantees
⁷ statutory/ solvency requirement
⁸ demonstrate fin strength to attract new business
⁹ invest more freely
¹⁰ allow greater mismatch
¹¹ smooth report for profit, bonuses, div
¹² achieve strategic aims - mergers, acquisition, expansions

Question 6

How to meet capital need or capital management tools [5]

Answer 6

• proprietary issues shares
• benefit scheme from sponsor
• reinsurance as risk lower, need less capital
• fin-reinsurance as lone
• securitisation - convert illiquid assets to tradable
• subordinate debt
• banking products
• derivatives
• equity capital
• internal restructuring - merge, other assets, weaker valuation basis, retain surplus