Macroeconomics Fall 2013
Macroeconomics Fall 2013
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The following data shows how the Abu Dhabi economy has been fluctuating after the recession of 2008. The data shows that the confidence of the firm and the customers have increased. This is after the great economic meltdown of 2009.
It is important to note that the Emirate of Abu Dhabi’s economic status has been resilience and stable when the world faced economic crisis. This is shown in the following data and the statistical yearbook as shown below.
GDP at Current Prices (Million AED) 620,316
GDP Growth Rate 15.9%
Oil Share in GDP 49.7%
Per Capita GDP (Thousand AED) 315.3
Fixed Capital Formation (Million AED) 177,467
Foreign Direct Investment (Million AED) 278,105.4
Oil, Gas and Oil Products Exports (Million AED), 2009 202,437
Non-oil Exports (Million AED) 11,610.9
Re-exports (Million AED) 10,991.7
Imports (Million AED) 86,574.1
Inflation Rate (%) 3.1%
According to the statistics, the revenue and expenditure of the Abu Dhabi government has been greatly affected by petroleum revenue which constitutes 82.6% of the entire 2010’s revenue. The department’s collections revenue and capital revenues contribute 7.3% and 0.1% in that order of the 2010’s revenue. Present expenditure contributes 61.6% of the entire expenditure in 2010. Present transfers 40.2%, salaries and wages 10.3%, and goods and services constitutes 11.2% about of the total revenue. Total capital expenditure accounted for 38.4% of total expenditures, while capital transfers and development expenditures on government projects and capital expenditure on goods and services contributed 24.8% , 12.5% and 1.2% of the total expenditure in 2010 in that order.
Percentage Distribution of Government Revenues (%)
Item 2005 2009 2010 2011*
Total 100 100 100 100
Petroleum royalties and tax revenue 85.9 89.2 82.6 90.6
Department collections revenue 11.6 8.1 7.3 6.5
Capital revenue 2.5 2.7 10.1 2.9
Source: Statistics Centre – Abu Dhabi *Preliminary estimates Abu Dhabi economy Expenditure
Percentage Distribution of Public Expenditures
(%) Item 2005 2008 2009 2010*
Total 100 100 100 100
Current expenditures 77.6 64.3 60.8 61.6
Salaries and wages 15.4 11.4 9.8 10.3
Good and services 15.2 10.8 11.2 11.2
Current transfers 47.0 42.1 39.8 40.2
Capital expenditures 22.4 35.7 39.2 38.4
Development expenditures on government projects 12.8 7.2 10.9 12.5
Capital expenditures on goods & services 1.0 0.2 0.4 1.2
Capital transfers 8.6 28.3 27.9 24.8
Source: Statistics Centre – Abu Dhabi *Preliminary estimates Percentage Distribution of Public Expenditures by Type (%) Item 2005 2008 2009 2010*
Total Expenditure 100 100 100 100
Recurrent Department Expenditure 23.7 26.3 27.6 25.3
Development Expenditure 11.8 6.9 10.8 9.1
Contribution to the Federal Government 42.4 31.8 27.5 32.2
Aid and Loans 18.2 28.0 24.7 23.0
Capital Payments 3.9 7.0 9.3 10.3
Source: Statistics Centre – Abu Dhabi *Preliminary estimates Sources of income in US
Business financing is used in many ways by a business entity in the execution of its duties and responsibilities. Business finance is used to account for variable expenses, overhead costs as well as day to day operating expenses. In our case due to the expansion needs of the company, sources of finance will need to be evaluated to find a more suitable option for the company. A company can raise finances in a number of ways including, equity finance, debt finance and quasi-equity finance (Manasseh, 1990).
Equity Finance
Equity finance is the largest source of finance to any limited company. This is because it forms a basis on which other finances can be raised. Equity finance is the sum total of the company’s ordinary share capital and the retained earnings/revenue reserves of the company (Hofstrand, 2013). The directors of the company can use equity finance as a source of finance because it can raise a substantial amount of money that can suit the expansion needs of the company.
Ordinary Share Capital
Ordinary share capital refers to finance that is contributed by the ordinary shareholders of a business entity. This finance is contributed by the real owners of the company, because it is raised through the sale of the company’s ordinary shares. It is a permanent source of finance for the company and is only redeemable if the company is liquidated (Manasseh, 1990). Ordinary share capital forms a base and security upon which other money can be raised. This form of finance can raise a substantial amount of money to finance the company’s expansion needs.
Retained Earnings (Revenue Reserves)
Retained earnings are a source of finance which comes about as a result of the company’s undistributed profits. It is a cost free source of finance. This helps in the constitution of growth in the amount in equity for the company. It is referred to an equity cost because it can be declared as a bonus issue in future or as extra dividends (Hofstrand, 2013). The directors could also consider using the company’s retained earnings as a source of income because it is cost free. It is considered the largest source of internal source of finance without any cost to the business. It increases the company equity base by ensuring that the gearing levels of the company are minimized making it possible for the company to get debt finance in good terms (Manasseh, 1990). Once it is capitalized it becomes a permanent source of finance to the business entity and the company can use it for long term investments. It can also be used to lower gearing levels by using retained earnings as redeemable preferential shares. It can enhance creditor’s confidence levels in the prospects of the company’s growth levels. Retained earnings can be used to finance fixed assets whose amount could not be financed using other sources of finance.
Quasi Equity
Quasi-equity combines features of both equity finance and debt finance. It is also referred to a preference share capital because it is accorded preferential treatment in comparison to ordinary shareholders. This source of finance is contributed by quasi-owners or preference shareholders (Hofstrand, 2013). Preferential shareholders are accorded preferential treatment in the following events. Liquidation of the company. In the sharing of dividends, preference shareholders receive dividends before ordinary shareholders. Selling preferential shares does not affect the control of the company, because they do not have voting rights. It can be used without restrictions or preconditions compared to debt finance. This source of finance is never secured by tangible assets. The cost is temporary for redeemable preference shares, hence is not a perpetual cost. It has a fixed sum of dividends paid regardless of the profits made by the company. The issuing company can also take advantage of preference shares by redeeming preference shares at par, when their market values exceed the par value because it can issue others and gain from share premium (Manasseh, 1990).
References
Hofstrand, D. (2013). Types and sources of financing for start-up businesses. IOWA State University Extension and Outreach.
Manasseh, P. (1990). A textbook of business finance. Nairobi, Kenya, McMore Accounting Books.
Ray, S. (2012). Effectiveness of green shoe option as a technique of price stabilization in India. Advances in Applied Economics and Finance (AAEF) 281, 2(1), 2012, 2167-6348.
Alturas, Dr. Economic Contribution of Wyoming’s Community Colleges. Web. Mar 2011. 16 Apr 2013 <http://www.caspercollege.edu/impact/downloads/2011_statewide_full_report.pdf>.
Shields, Michael P. Why Should State Government Invest in College Education? An Equilibrium Approach for the US in 2000. Web. Jun 2008. 16 Apr 2013 <http://ftp.iza.org/dp3569.pdf>.
