UNITED ASIA SCHOOL

OF MANAGEMENT

PROGRAM:- ADVANCE DIPLOMA IN INTERNATIONAL

HOSPITALITY AND TOURISM MANAGEMENT

MODUAL CODE:- AHM1003

SUBJECT:- FINANCIAL MANAGEMENT

LECTURER:- MR. DESMOND

SUBMISSION DATE:- 24th NOVEMBER 2008

STUDENT NAMES: AISHA

RAHUL

PIYUSH

Answer - 1

TRADING A/C OF LITTLEWOODS FOR

30 JUNE 2004

$

Sales 28,794

Purchases 23,803

Gross profit 4,991

PROFIT AND LOSS A/C OF LITTLEWOODS FOR

30 JUNE 2004

INCOME : $ $

Gross profit (from trading A/c) 4,991

EXPENSES:

Rent 854

Lighting & heating expenses 422

Salaries & wages 3,164

Insurance 105

Sundry expenses 506

Motor running expenses 1,133

6,184

Net loss 1,193

Answer-2

BALANCE SHEET OF LITTLEWOODS FOR

30 JUNE 2004

Assets

$ $

Fixed assets:

Building 50,000

Fixtures 1000

Motor van 5,500

56,500

Current assets:

Debtors 3,166

Cash at bank 3,847

7013

63,513

Liabilities and Owner’s Equity

Liabilities:

$ $

Creditors 1,206

Owners Equity:

Capital 65,900

Drawings 2,400

Net loss (from profit and loss a/c) 1,193

62,307

63,513

Answer 3

When a security has been newly issued, it is said to be a primary market security.

The Secondary market is where used or previously owned securities are bought and sold

For example, when a company decides to issue new shares, the initial sale of those securities takes place in the primary market. Once the shares have been sold to an investor, that investor can sell those shares to someone else in the secondary market.

Usually the volume of trading is higher in secondary markets as compared to primary markets.

Answer 4

The three major financial intermediaries are as follows:

Commercial Banks:

An important source of capital for the hospitality industry.

They take in funds from investors in the form of deposits and lend them out to businesses and other individuals in the form of loans.

Many commercial banks intermediate both domestically as well as internationally.

For a small hospitality organization – owner operated restaurants – commercial banks are usually the only source of capital, apart from private funding from friends and relatives.

Life Insurance Companies:

They take in policy premiums and invest them – usually long term – to be available to pay out benefits when needed.

Life Insurance Companies find the hospitality industry very attractive as hospitality properties represent long term assets and tend to offer protection against inflation.

Brokerage Firms:

Intermediate primarily between individuals or institutions that want to purchase financial securities and those wanting to sell them.

Also intermediate for firms that wish to issue new shares in the market – firms that specialize in this function are called investment bankers.

A hospitality firm that wants to issue new shares or bonds goes to a brokerage firm. The firm charges a fee and markets the new securities through its network of brokers.

Answer 5

Asset Structure: Relates to which assets the firm should invest in and how much money should be invested in the assets. Such decisions typically involve the left side of the balance sheet.

Capital Structure: Involves determining how to pay for the firms investments. Such decisions are on the right side of the firm’s balance sheet.

It’s easier for a hospitality manager to create value using the asset structure rather than the capital structure:

Competing firms can easily duplicate any capital structure innovation that the manager of a particular firm may develop. Thus, we can say that its virtually impossible for a capital structure innovation to generate sustained value creation opportunities.

Asset structure innovations can lead to potentially sustained competitive advantages – copyrights, trademarks, development of a new property in a unique location.

Usually in larger hospitality firms, the investment function and the financial function are two separate entities. The ones responsible for capital expenditure decisions are the unit managers while the financing of such decisions is arranged through corporate headquarters.

Many smaller and moderate sized capital expenditure projects are financed out of a pool of resources generated by the firm from time to time.

Thus, hospitality managers tend to lean more towards asset structure or investment project decisions.

Answer-6

T- Account for the month of may 2007

Bank A/c Proprietor A/c

1/5 2,000 3/5 150 31/5 44 1/5 2,000

21/5 5 24/5 300

Purchase A/c M. Mills A/c

2/5 175 18/5 23 18/5 23 2/5 175

6/5 114

Fixtures & Fittings A/c Cash A/c

3/5 150 5/5 275 10/5 15

12/5 27

30/5 177

31/5 44

S. Waites A/c

Sales A/c

6/5 114 5/5 275

23/5 77

Rent A/c Stationery A/c

10/5 15 21/5 5 12/5 27

U Henry A/c Motor Van A/c

23/5 77 24/5 300

Salary A/c

30/5 177

Answer 7: FANNIE MAE

The Federal National Mortgage Association (FNMA), is commonly known as Fannie Mae. It was established as a federal agency in 1938 (during the Depression), and is a private shareholder-owned company, it was chartered by Congress in 1968 as a government sponsored enterprise (GSE) On September 6, 2008, Director James Lockhart of the Federal Housing Finance Agency (FHFA) appointed FHFA as conservator of Fannie Mae. In addition, the U.S. Department of the Treasury agreed to provide up to $100 billion of capital to ensure that the company continued to provide liquidity to the housing and mortgage markets.

Fannie Mae functions as an intermediary in the U.S. secondary mortgage market. Instead of making home loans directly available to consumers, Fannie Mae works with mortgage bankers, brokers, and other primary mortgage market partners to help ensure they have funds to lend to home buyers at affordable rates. The mortgage investments are primarily funded by issuing debt securities in the domestic and international capital markets.

Fannie Mae has three businesses - Single-Family, Housing and Community Development, and Capital Markets - that work together to provide services, products, and solutions to lender partners and a broad range of housing partners. Together, these businesses help to increase the total amount of funds available in America to make homeownership and rental housing more available and affordable.

History

1932: Fannie Mae was established as a mechanism to provide home mortgages to the poor.

1938: It was added to the Federal Home Mortgage association, a government agency in the wake of the Great Depression as part of Franklin Delano Roosevelt's New Deal in order to facilitate liquidity within the mortgage market.

1968: The government converted Fannie Mae into a private shareholder-owned corporation in order to remove its activity from the annual balance sheet of the federal budget. Consequently, Fannie Mae ceased to be the guarantor of government-issued mortgages, and that responsibility was transferred to the new Government National Mortgage Association (Ginnie Mae).

1970: The government created the Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, to compete with Fannie Mae and, thus, facilitate a more robust and efficient secondary mortgage market.

Since the creation of the GSEs (Government Sponsored Enterprises), there has been debate surrounding their role in the mortgage market, their relationship with the government, and whether or not they are indeed necessary. This debate gained relevance due to the collapse of the U.S. housing market and subprime* mortgage crisis that began in 2007. Despite this debate, Fannie Mae, as well as Ginnie Mae and later Freddie Mac, has played an integral part in the development of the most successful mortgage market in the world which has allowed U.S. citizens to benefit from one of the highest home ownership percentages worldwide.

*Subprime borrowers have a higher risk of defaults.

1999: Fannie Mae came under pressure from the Clinton administration to expand mortgage loans to low and moderate income borrowers. At the same time, institutions in the primary mortgage market pressed Fannie Mae to ease credit requirements on the mortgages it was willing to purchase, enabling them to make loans to subprime borrowers at interest rates higher than conventional loans. Shareholders also pressured Fannie Mae to maintain its record profits.

2000: Due to a re-assessment of the housing market by HUD (Housing and Urban Development), anti-predatory lending rules were put into place that disallowed risky, high-cost loans from being credited toward affordable housing goals.

2004: These rules were dropped and high-risk loans were again counted toward affordable housing goals.

Business mechanism

Fannie Mae buys loans from mortgage originators, repackages the loans as mortgage-backed securities, and sells them to investors in the secondary mortgage market with a guarantee that principal and interest payments will be passed through to the investor in a timely manner.

One part of Fannie Mae's income is generated through the positive interest rate spread between the rate paid to fund the purchase of mortgage investments and the return it earns on those retained mortgage investments.

Fannie Mae may hold the purchased mortgages for its own portfolio.

Fannie Mae's mortgage portfolio was in excess of $700 billion as of August 2008.

Fannie Mae also earns a significant portion of its income from guaranty fees it receives as compensation for assuming the credit risk on the mortgage loans underlying its single-family Fannie Mae MBS and on the single-family mortgage loans held in its retained portfolio.

Investors, or purchasers of Fannie Mae MBSs, are willing to let Fannie Mae keep this fee in exchange for assuming the credit risk; that is, Fannie Mae's guarantee that the scheduled principal and interest on the underlying loan will be paid even if the borrower defaults.

By purchasing the mortgages, Fannie Mae and Freddie Mac provide banks and other financial institutions with fresh money to make new loans. This gives the United States housing and credit markets flexibility and liquidity.

In order for Fannie Mae to provide its guarantee to mortgage-backed securities it issues, it sets the guidelines for the loans that it will accept for purchase, called "conforming" loans.

Mortgages that don't follow the guidelines are called "non-conforming"; typically the secondary market for non-conforming loans deals in mortgages larger (termed "jumbo") than the maximum mortgage that Fannie Mae and Freddie Mac will purchase.

In early 2008, the decision was made to allow TBA-eligible MBS to include up to 10% "jumbo" mortgages.

The mortgage crisis from late 2007

Following their mission to meet federal Housing and Urban Development (HUD) housing goals, GSE's such as Fannie Mae, Freddie Mac and the Federal Home Loan Banks (FHLBanks) have strived to improve home ownership of low and middle income families, underserved areas, and generally through special affordable methods such as "the ability to obtain a 30-year fixed-rate mortgage with a low down payment... and the continuous availability of mortgage credit under a wide range of economic conditions."

In 2007, the subprime mortgage crisis began. An increasing number of borrowers, often with poor credit that were unable to pay their mortgages - particularly with adjustable rate mortgages (ARM), caused a great increase in home foreclosures.

As a result, home prices declined as increasing foreclosures added to the already large inventory of homes and stricter lending standards made it more and more difficult for borrowers to get mortgages.

This depreciation in home prices led to growing losses for the GSEs, which back the majority of US mortgages.

The Treasury Department and the Federal Reserve took steps to bolster confidence in the corporations, including granting both corporations access to Federal Reserve low-interest loans (at similar rates as commercial banks) and removing the prohibition on the Treasury Department to purchase the GSEs' stock.

By August 2008, shares of both Fannie Mae and Freddie Mac had tumbled more than 90% from their one-year prior levels.

Fannie Mae and smaller Freddie Mac own or guarantee almost half of all home loans in the United States. They face billions of dollars in potential losses, and may need to raise additional, potentially substantial, amounts of new capital as the current downturn in the U.S. housing market continues.

Markets assume that the taxpayer will if necessary take on the burden of all their mortgages because they underpin the whole U.S. mortgage market. If they were to collapse, mortgages would be harder to obtain and much more expensive. U.S. Treasury Secretary Henry Paulson has said the government's primary focus is in supporting Fannie Mae and Freddie Mac in their current form.

Federal Subsidies

The FNMA receives no direct federal government aid. However, the corporation and the securities it issues are widely believed to be implicitly backed by the U.S. government.

Fannie Mae and Freddie Mac are allowed to hold less capital than normal financial institutions e.g., it is allowed to sell mortgage-backed securities with only half as much capital backing them up as would be required of other financial institutions.

Regulations exist through the FDIC Bank Holding Company Act that govern the solvency of financial institutions. The regulations require normal financial institutions to maintain a capital/asset ratio greater than or equal to 3%.

The GSEs, Fannie Mae and Freddie Mac, are exempt from this capital/asset ratio requirement and can, and often do, maintain a capital/asset ratio less than 3%.

The additional leverage allows for greater returns in good times, but put the companies at greater risk in bad times, such as during the current subprime mortgage crisis.

FNMA is also exempt from state and local taxes.

FNMA and FHLMC are exempt from SEC filing requirements; however, both GSEs voluntarily file their SEC 10-K and 10-Q.

Freddie Mac and Fannie Mae placed into US government

conservatorship

September 7, 2008:

Federal Housing Finance Agency (FHFA) Director James B. Lockhart III announced pursuant to the financial analysis, assessments and statutory authority of the FHFA, he had placed Fannie Mae and Freddie Mac under the conservatorship of the FHFA.

FHFA stated that there were no plans to liquidate the company.

The announcement followed reports two days earlier that the Federal government was planning to take over Fannie Mae and Freddie Mac and had met with their CEOs on short notice.

The authority of the U.S. Treasury to advance funds for the purpose of stabilizing Fannie Mae, or Freddie Mac is limited only by the amount of debt that the entire federal government is permitted by law to commit to.

The July 30, 2008 law, enabling expanded regulatory authority over Fannie Mae and Freddie Mac increased the national debt ceiling US$ 800 billion, to a total of US$ 10.7 Trillion in anticipation of the potential need for the Treasury to have the flexibility to support the federal home loan banks.

SCANDALS

Accounting Scandal

June 15, 2000: The House Banking Subcommittee On Capital Markets, Securities And Government Sponsored Enterprises held hearings on Fannie Mae.

September 20,2004: Fannie Mae was under investigation for its accounting practices.

The Office of Federal Housing Enterprise Oversight released a report alleging widespread accounting errors.

2006: Fannie Mae was expected to spend more than $1 billion to complete its internal audit and bring it closer to compliance.

The necessary restatement was expected to cost $10.8 billion, but was completed at a total cost of $6.3 billion in restated earnings.

December 18, 2006: U.S. regulators filed 101 civil charges against chief executive Franklin Raines; chief financial officer J. Timothy Howard; and the former controller Leanne G. Spencer.

The three are accused of manipulating Fannie Mae earnings to maximize their bonuses.

The lawsuit sought to recoup more than $115 million in bonus payments, collectively accrued by the trio from 1998–2004, and about $100 million in penalties for their involvement in the accounting scandal.

LEADERSHIP

Herbert M. Allison (2008- ) Daniel Mudd (2005-2008) Franklin Raines (1999-2004) James A. Johnson (1991-1998)