Unspanned Macroeconomic Factors in the Yield Curve

Question: Discuss about the Unspanned Macroeconomic Factors in the Yield Curve. Answer: Introduction: Abu Dhabi National Hotels (ADNH): Abu Dhabi National Hotels (ADNH) was established about four decades ago as an asset manager, hotel owner and developed as a group for hospitality services that includes restaurants, hotels, transportation, catering and provides services related to destination management. ADNH owns some recognizable and reputable hotels around Emirates and outside. They are: Grand Canal, Park Hyatt Abu Dhabi hotel, Sheraton Abu Dhabi hotel, Sofitel Dubai Jumeirah Beach. Over the time, ADNH also developed hotel apartments, portfolio management for hotels, hotel apartments, and operator division in the prime locations of the city under the group name of Al Diar Hotels brands. The restaurant division of the group is symbolized by the unique food and beverages collection under the group of Venetian Village, where the branches of famous international restaurants brands are functioned in a special system within the group of Grand Canal and The Ritz-Carlton Abu Dhabi. National Corporation for Tourism Hotels (NCTH): National Corporation for Tourism Hotels (NCTH) was established in 1996 with respect to the requirements to develop commerce as well as tourism in UAE (United Arab Emirates), specifically in Abu Dhabi. NCTH is dignified to contribute towards the endorsement of Abu Dhabi as an international and tourist destination. It followed the following four directions: catering, transport, hospitality services and hotels. Each sector is lead by a professional team of management and it offers their customers with a range of superior services. NCTH targets something more than just shoppers and sun seekers, as they believe that the tourists required alternatives, which will fulfil their personal enhancement. It aims to help in preparing each vacation in Abu Dhabi filled with adventures and inter-cultural diversity, where travellers will get an chance to meet with the local people, visit the nation and experience Arabia. Affect of macro business and macroeconomic factors on the industries: Hotel and tourism industries in Abu Dhabi was facing challenges during 2013-2014 due to various macroeconomic issues like falling of oil prices and valuations of currencies, which put pressures on spending by tourists. As per the study of Abu Dhabis Tourism and Culture Authority (TCA), instability in global political situation increased the concerns among the travellers about their safety. In was also noticed that the global economic issues continued to affect the tourism industry, which resulted more people to have less earnings to spend in travelling. The global challenges led to fall in the average period of stay for the tourists (Coroneo, Giannone and Modugno 2016). Further, various issues were there regarding supply and demand in the tourism industry. From the demand aspect, uncertainties increased due to decrease in the value of Euro, Russian Ruble and prices of oil that restricted the arrival of tourists from Russia, Europe and GCC countries. From the supply aspect, the tourism and hotel industry faced challenges due to entries of new hotels that affected the level of occupancy and rates of rooms (Piljak 2013). Ratios for liquidity position: Ratio Formula Abu Dhabi National Hotels National Corporation for Tourism Hotels 2013 2014 2013 2014 Current Ratio Current assets/current liabilities 1.32 1.15 1.23 1.05 Quick Ratio (Current assets - Inventory)/ current liabilities 1.26 1.08 1.15 1.00 Cash Ratio (Cash + Cash equivalents)/ current liabilities 0.53 0.71 0.49 0.44 Current ratio: The current ratio is the efficiency ratio that measures the ability of the company to pay off their short-term liabilities with the available current assets. This ratio explains that the company has limited time to raise the funds for paying off the liabilities that are due within one year (Heikal, Khaddafi and Ummah 2014). A higher current ratio is always preferred as compared to the lowest one as it reveals that the company is in good position to pay off its short term obligations. Banks and creditors prefer the current ratio of at least 1. As per the above table, the current ratio of both the company for 2013 as well as 2014 is more than 1. That means both the company are in well position to pay off their short term liabilities. However, for both the companies, the position for 2013 was little bit better as compared to 2014 (Hou 2017). Quick ratio: Quick ratio calculates the liquidity position of a company and shows its ability to pay off the short term obligations with available quick assets. If a company has sufficient quick asset to cover their current obligations, the company will not have to sell its capital assets or long term assets to pay off its current obligations (Dri, Sanna and Maroto-Valer 2014). A higher quick ratio is always preferable as it enable the company to pay the current obligations without selling long-term assets. From the above table, it is seen that the quick ratio of both the company for 2013 as well as 2014 is more than or equal to 1. That means both the company can quickly convert its assets into cash and are in good position to pay off their short term liabilities with the available quick assets. However, for both the companies, the ratio for 2014 became little bit down as compared to 2013 (Okuyama et al. 2014). Cash ratio: The cash ratio reveals how well an organization can pay off their short-term obligations only with available cash and cash equivalents. It measures the cash and equivalent cash as the percentage of current obligations. Like other liquidity ratios, a higher cash coverage ratio is always preferable. Higher cash ratio means the companys liquid position is good and pays off its debt more comfortably (Bliss, Cheng and Denis 2015). Creditors are concerned about this ratio as they want their dues to be returned on time. A cash ratio of 1 or more than 1 are considered good. It can be seen from the table that both the companies could not achieve the cash ratio of 1. Except for 2014 of ADNH, in the other cases the cash ratio is approximately 0.50. That is half of standard average. It means the both the companies need more than just cash and cash equivalent to pay off their short term obligation (Snchez and Yurdagul 2013). Share Capital: Abu Dhabi National Hotels National Corporation for Tourism Hotels 2013 2014 2013 2014 10,00,000 10,00,000 2,40,000 4,80,000 ADNH: The shares of ADNH are the issued ordinary shares of AED 1 each and classified as equity shares. NCTH: During 2014, NCTH issued 24,00,00,000 bonus shares to the existing stakeholders based on 100% ordinary shares, which were only 20% during 2013. The issued bonus shares are ordinary shares and have the same rights as the ordinary shares. Share holder value: ADNH: For the year ended 2013, dividends of 0.05 per share amounting to total payment of AED 50 million were made. On February 2014, the companys Board of directors proposed the cash dividend of AED 0.05 per share amounting to total payment of AED 50 million was approved during the Annual General meeting by the shareholders and as on 31st December 2014, dividends of 0.05 per share amounting to total payment of AED 50 million were made. Earnings per share of the company for the year 2013 were AED 0.26 and for the year 2014 it was AED 0.33 (Financial Information - Abu Dhabi National Hotels 2017). NCTH: During 2013, dividends amounting to AED 10,00,00,000 were declared and subsequently approved, out of which, AED 96,775,485 were paid to shareholders. During 2014, dividends of AED 12,00,00,000 were declared and approved subsequently, out of which, AED 11,58,65,271 were paid to shareholders. Earnings per share of the company for the year 2013 were AED 0.22 and for the year 2014 it was AED 0.20 (Financial Statements - NCTH 2017). It is seen that both the companies are quite regular in paying dividends to their shareholders. When the company pays regular dividend to its shareholders, it is regarded as more valuable and sustainable from the investment aspect. The earnings per share for ADNH was increased from AED 0.26 to AED 0.33 from 2013 to 2014. However, the EPS of NCTH slightly fell from AED 0.22 to AED 0.20 over the years 2013 to 2014. With regard to the EPS, it is seen that both the companies are expected to be viable over the long-term period as they generate positive return on shareholders investment (Constantin et al. 2015). Management Accounting Decisions: ADNH: The financial statement of the company are prepared on the basis of IFRS under the convention of historical cost as except for land revaluation, financial assets and investment held for sale and liabilities that are valued at fair values. The preparation of financial statements requires the judgements of management. The financial statements are prepared based on the IFRS issued by IASB. The policies are adopted consistently throughout the year except for the amended IFRS. The statements are prepared in UAE Dirhams that is in AED, and all the amount are rounded off to the nearest dirham (Schmidt 2016). NCTH: The financial statement of the company is prepared on the basis of historical cost, only the financial assets, investment available for sale and derivatives are measured at fair value. The statements are prepared in UAE Dirhams that is in AED, and all the amount are rounded off to the nearest dirham. The financial statements are prepared based on the IFRS issued by IASB. The policies are adopted consistently throughout the year except for the amended IFRS. Preparation of the companys financial statement needs the management to express their judgement, assumptions and estimates that influence the reported amounts of expenses, revenues, liabilities and assets and the disclosures of contingent liabilities at the closing period. However, estimates and assumptions about those uncertainties that could lead to the result that may require material adjustment to the carrying value of assets and liabilities (Jermakowicz et al. 2014). SWOT Analysis: ADNH: The SWOT analysis of Abu Dhabi National Hotel states the analysis of operations and businesses of the company. It shows the strengths, weaknesses, opportunities and threats against the company (Bull et al. 2016). The company achieved a growth rate of 5%. Strengths: High revenue and profit Entry barriers to new entrants in the market Provides monetary assistance Reduce the cost of labour Have skilled employees High rate of growth Weaknesses: Small units of business as compared to the competitors Opportunities: High rate of profitability and growth Level of income is rising continuously Threats: Newly implied regulations of government Increase in cost of labour Increasing interest rate Risk from external sources Increasing cost of raw material Financial capability NCTH: Strengths: High revenue and profit Committed to the regulation of Government that assure sustainability Provides unique mix for hotels Have skilled employees High rate of growth Weaknesses: Impact of global economic uncertainties Opportunities: High rate of strategic growth Level of revenue is rising continuously Continuous improvement in shareholders returns and values Threats: Newly implied regulations of government Increase in cost of labour Increasing interest rate Risk from external sources Increasing cost of raw material Conclusion: It is noticed from the above analysis that both the companies are financially viable. Both the companies are working on the the diversification strategy in the hotel sector with respect to grades strategies and are working on to make additions in the hotel sector of Abu Dhabi and Dubai, with the target of generating immediate earnings while developing on continuous basis. Their commitments and consistent approaches are to fulfil the requirements of shareholders as well as the tourists and citizens of UAE. References: Bliss, B.A., Cheng, Y. and Denis, D.J., 2015. Corporate payout, cash retention, and the supply of credit: Evidence from the 20082009 credit crisis.Journal of Financial Economics,115(3), pp.521-540. Bull, J.W., Jobstvogt, N., Bhnke-Henrichs, A., Mascarenhas, A., Sitas, N., Baulcomb, C., Lambini, C.K., Rawlins, M., Baral, H., Zhringer, J. and Carter-Silk, E., 2016. Strengths, weaknesses, opportunities and threats: A SWOT analysis of the ecosystem services framework.Ecosystem services,17, pp.99-111. 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