Bank Laws And Financial Markets - November 22, 2012
Bank Lawsfinancial Marketsdate November 22 2012the Mcfadden Act Of 19
Bank laws Financial Markets Date November 22, 2012 The McFadden Act of 1927 was one of the most hotly contested pieces of legislation in U.S. banking history, and its influence was still felt over half a century later. The act was intended to force states to accord the same branching rights to national banks as they accorded to state banks. By uniting the interests of large state and national banks, it also had the potential to expand the number of states that allowed branching. Congressional votes for the act therefore could reflect the strength of various interests in the district for expanded banking competition. Unlike previous work, we find strong evidence of elite influence.
The United States has long had a dual banking system, where state banks are chartered and regulated at the state level, while national banks operate under federal oversight. Before the McFadden Act, some states allowed state banks to open multiple branches, while others prohibited all branching. The McFadden Act attempted to level the playing field by forcing states to accord largely the same branching rights to national banks as to state banks. It was the key piece of federal legislation regulating bank branching, and hence bank competition, in the United States for about 70 years—up until the passage of the Riegle-Neal Act in 1994. McFadden insulated small banks from out-of-state competition, and inefficient, weak, small banks cannot be driven out of business by competition from a more efficient bank from another state, or even the same state.
Branching restrictions varied from state to state. Some states had "unit branch banking" laws, which permitted only one location, no branches. In most cases, it was easier for a bank to open a branch in a foreign country than to open a branch in another state or even the same state. This reflects the historic hostility toward large banks, rent-seeking by small rural banks, and the legacy of 19th-century politics: heavy restrictions on branch banking, many small, local banks.
Financial Ratios and Industry Comparison
For a sample company, Ahl Enterprise, the data for 2011 and 2010 include net income, net sales, average total assets, and average common equity. To evaluate the company's financial performance, we calculate key ratios: net profit margin, return on assets, total asset turnover, and return on common equity.
Calculation of Ratios for 2011 and 2010
2011:
- Net profit margin = Net income / Net sales = $52,500 / $1,050,000,000 ≈ 0.005%
- Return on assets = Net income / Average total assets = $52,500 / $230,000 ≈ 22.83%
- Total asset turnover = Net sales / Average total assets = $1,050,000,000 / $230,000 ≈ 4565.22
- Return on common equity = Net income / Average common equity = $52,500 / $170,000 ≈ 30.88%
2010:
- Net profit margin = $40,000 / $1,050,000,000 ≈ 0.0038%
- Return on assets = $40,000 / $230,000 ≈ 17.39%
- Total asset turnover = $1,050,000,000 / $230,000 ≈ 4565.22
- Return on common equity = $40,000 / $170,000 ≈ 23.53%
Comments: The company's net profit margin shows a slight increase from 2010 to 2011, indicating improved profitability relative to sales. The return on assets has also increased, reflecting better utilization of assets to generate income. The total asset turnover remains unchanged, signaling consistent efficiency in asset use. The return on common equity has grown significantly, suggesting enhanced profitability relative to shareholders’ equity.
Industry Financial Analysis
The plastics industry, as represented by Vent Molded Plastics, reported sales of $462.3 million with specific cost and expense data. Conversion of these figures into percentages of net sales provides a basis for comparison with industry averages.
Industry Data (Vent Molded Plastics):
- Sales returns: 4.3% of net sales
- Cost of goods sold: 71.4%
- Selling expenses: 9.3%
- General expenses: 6.9%
- Other income: 0.3%
- Other expenses: 1.6%
- Income tax: 4.8%
Industry Benchmark and Analysis
The company’s expenses are proportionally consistent with typical manufacturing firms. The relatively high cost of goods sold (71.4%) indicates a standard margin structure in the industry. The operating expenses, including selling and general expenses, comprise about 16.2% of sales, reflecting industry norms. The slight variation from industry averages could be due to operational efficiencies, scale, or product mix.
Comparative Evaluation:
Vent Molded Plastics maintains industry-aligned expense ratios, suggesting effective cost management. The industry’s consistent expense ratios also indicate competitive pressure to maintain margins and efficiency. Any deviations should be analyzed further to identify cost-saving opportunities or areas needing improvement.
Financial Leverage and Earnings Per Share Analysis
Degree of Financial Leverage (DFL)
Based on McDonald Company’s data:
- Operating income: $975,000
- Interest expense: $70,000
- Income before taxes: $975,000 - $70,000 = $905,000
- Taxes: $335,000
- Net income: $510,000
The degree of financial leverage (DFL) is calculated as:
\[
DFL = \frac{\text{Operating income}}{\text{Operating income} - \text{Interest expenses}} = \frac{1,025,000}{1,025,000 - 70,000} \approx 1.073
\]
This indicates that for every 1% change in operating income, net income would change approximately by 1.073%, emphasizing some financial risk exposure due to debt.
Earnings Per Share (EPS) Calculation
For the current year:
- Net income = $200,000
- Preferred dividends = $10,000
- Basic EPS = (Net income - Preferred dividends) / Weighted average shares outstanding
Assuming no other share issuances or repurchases (except the July issuance and December split):
- Shares outstanding at January: 10,000
- New shares issued in July: 10,000
- Stock split doubles shares: total shares at year-end = (10,000 + 10,000) * 2 = 40,000
Weighted average number of shares:
\[
(10,000 \times \frac{6}{12}) + (20,000 \times \frac{6}{12}) = 5,000 + 10,000 = 15,000
\]
Thus, EPS:
\[
\frac{200,000 - 10,000}{15,000} \approx \$12.60
\]
Comparing to the prior year EPS of $8.00, the two-year trend indicates significantly improved profitability per share, driven by higher net income and the stock split.
Conclusion
This analysis demonstrates how various financial metrics and ratios can be employed to evaluate firm performance and industry positioning. The growth in net profit margin, return on assets, and EPS reflects positive financial health and operational efficiency. The use of leverage magnifies potential gains but introduces associated risks. Comparing these metrics across industries and time frames helps investors and managers make informed decisions about strategic directions and financial management.
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