Please strive to completely answer each of these question elements: a. From your personal research – pls outline what

Financial Management for Business College Name Table of Contents The Capital Structure

Financial Management for Business

College Name

Table of Contents

The Capital Structure Decision: How a Firm Should Be Financed 3

Introduction 3

Review of Literature 3

i. The Modigliani and Miller (MM) Hypothesis 3

ii. Trade-off Theory (TOT) 4

iii. Pecking Order Theory (POT) 5

Evaluation of Capital Structure Literature 6

a. Why does it matter? 6

b. Determinants of ‘Optimal’ Capital Financing 6

c. How should a firm be financed? 9

Conclusion 9

The Capital Structure Decision of a Firm

Introduction

Capital structure is the equity-debt financing mix utilized firms to fund their real investments. In equity financing; firms have the option of sourcing for funds from internal sources like retained earnings or external sources like issuance of common stocks. On the other hand; debt financing can be short term from commercial papers and trade creditors, or long-term debt in the form of term loans and leases. As Titman & Wessel observed, the specific attributes of stockholders (equity owners) and bondholders (creditors) have a significant influence on the optimal capital structure of the firm. Optimal capital structure decisions are based on the cost-benefit analysis, and impact on firm value, of either debt or equity financing (Titman & Wessel, 1988). Since the 1958 preposition by Modigliani & Miller (MM) on capital structure and value of the firm; various theories have been advanced to shed light on firms’ capital financing decision, and the possibility of arriving at an optimal debt-equity structure.

Review of Literature

This section will review some of the key theories advanced on capital structure decisions, and their impacts on value of the firm. These are the MM’s ‘irrelevance theory’, Trade off theory and Pecking order theory.

The Modigliani and Miller (MM) Hypothesis

In 1958; Modigliani and Miller advanced the ‘irrelevance theory’ of capital structure based on perfect market conditions characterized by an absence of corporate taxes and agency costs including asymmetric information, brokerage and bankruptcy costs. The irrelevance theory postulated that how a firm was financed was irrelevant to its value. MM argued that the value of the firm was determined by its real assets, on the left hand side of the balance sheet, and not its capital structure, on the right hand side of the balance sheet (Modigliani & Miller, 1958). In 1961; and on the same spectrum, MM arguments drew in the dividend policy of firms by maintaining that they too were irrelevant to the value of the firm. They maintained that the value of the firm was determined by its real assets, the underlying risk therein and their earning potential. Other scholars have observed that the implication of the irrelevance theory is an absence of an optimal capital structure choice that would maximize firm value. Consequently; this lack of an optimal choice translates to a lack of actual determinants of the firm’ capital structure. (Enakirerhi & Chijuka, 2016). The optimal capital structure is the acceptable mix of various sources of financing that minimize WACC and maximize firm value. Some economists argued that the weighted average cost of capital from equity and debt financing had a significant effect firm value, and this could be managed by in capital structure decisions (Huda, 2015). MM’s irrelevance theory was primarily criticized for its assumptions based on perfect markets, especially the absence of taxes which at the time were as high as 50 percent.

In 1963; MM responded to the criticism by modifying their irrelevance theorem to incorporate the element of taxation on firms. MM hypothesized that firms ought to utilize as much debt-financing as possible in order for them to maximize on the associated tax-shield benefits (Modigliani & Miller, 1963). MM argued that the more a firm take up debt financing, the more its earnings are shielded from corporate taxation, and as such the levered (debt-financed) firm gains more value relative to the unlevered (equity-financed) firm. However; De Angelo and Masulis, as cited by (Titman & Wessel, 1988), observed that the tax-shield benefits could still be substituted by non-debt tax shields such as investment tax credits. This explained observable behaviour where firms with large non-debt tax shields maintained a low debt profile contrary to MM (1963) prepositions.

Nevertheless; the contributions of MM to the field of capital structure and value of the firm cannot be overlooked. The three propositions: 1) The capital structure is irrelevant to a firm’s market value (1958), 2) The value of the firm is independent of its dividend policy (1961), and 3) An increase in debt-equity ratio increases the cost of equity as firms could manipulate their WACC through financial leveraging (1963) (Ahmeti & Prenaj, 2015) laid the foundation for the development of other theories on capital structure decisions and their correlation to firm value

Trade-off Theory (TOT)

Picking up from MM’s 1963 prepositions; Kraus and Litzebnerger hypothesized that firms could determine their optimal capital structure by trading-off the costs and benefits associated to debt-financing. In such a scenario; firms would continue to take up debt and moving closer to an optimum capital mix. At this optimal point; the tax shields benefits associated with debt-financing are equal to the marginal cost of debt. According to Myers; an adjustment of the debt-to-value ratio, given by the present value of financial distress costs and PV of interest tax shield should guide the firm towards an optimal debt-equity capital structure (Myer, 2001). Any additional debt past the optimum mix yields negative utility to the firm in the form of financial distress (Enakirerhi & Chijuka, 2016)

A major drawback of the TOT is in its limitation in failing to account for the relationship in firm’s with a high profitability and lower debt ratio (Myer, 2001). The number of well adjusted, highly profitable firms across the US and Europe lead by Microsoft Inc. and other big pharmaceuticals, but with conservatively low debt ratios, was just too big to ignore. This led to the development of an alternative theory to TOT.

Pecking Order Theory (POT)

In 1984; Myers and Majluf advanced a pecking order hypothesis premised on two fundamental assumptions – the management of the firm is more informed on the intrinsic value of the firm than any other stakeholder, and their allegiance is to the existing shareholders (Huda, 2015). The POT hypothesized that firm managers would rank their sources of finance in order of preference starting with internal funds from retained earnings, to debt and lastly issuance of new equity. In essence; the existence of asymmetric information favouring the management over stockholders and other external investors invites more scrutiny by the latter on the former. These well-informed managers would therefore navigate from the internal sources of finance which invite less scrutiny on their utilization as there exists little information asymmetry (Myer, 1984), to debt financing where most scrutiny comes from trade creditors and other bondholders. In light of this; the management of highly profitable would favour the accumulation of retained earnings for reinvestment over other sources of finance (Serrasqueiro & Caetano, 2012). This would explain the negative correlation between profitability and debt ratios. Equity financing has the highest degree of information asymmetry as external investors cannot confidently ascertain whether the issuance of new common stock is under or over-valued (Barclay & Smith, 2005). When the stock is undervalued, existing shareholders transfer their value to incoming shareholders contrary to the second assumption of POT.

A major drawback highlighted by Myer from the POT is the lack of insight on how observed information differences affect financing decisions (Myer, 2001). The author maintained that there were no observable financing strategies, by using such instruments as ‘deferred equity’ financing, to counterbalance the management’s information advantage. Also; firms are more likely to ‘time’ the optimal period for issuance of stock, when stock prices are at their highest in the markets. This timing phenomenon defied the pecking order hierarchy as issuing equity stocks would be preferred over taking debt (Myer, 1984).

Evaluation of Capital Structure Literature

This section interrogates the available theoretical literature in light of published empirical studies across the developed and developing economies.

Why does it matter?

First; capital structure decisions are a core function in the Financial Management (FM) profession. The primary functions of FM are in the making of investment, financing and dividend decision. The first two functions are concerned with the capital budgeting – appraisal of the most suitable projects based on their cash outlay, expected returns and economic life, and the allocation of funds thereof. The dividend decision entails the appropriation of net earnings to shareholders of the firm, and retention of earnings for reinvestment (Mathur, 2015).

Second; in a debt-equity capital mix, financial leverage is aimed at maximizing wealth of shareholders by increasing the firm’s market value. The market value of a firm may differ substantially from its book value as the former is informed by the outstanding common stock and their current market price whereas the latter is the value of net assets, at cost (total assets less total liabilities). The determination of an optimal capital structure may increase shareholders wealth (Ugwuanyi, 2012). It could also inform the movements of foreign direct investment (FDIs) into local capital markets, as empirical evidence from the UK (Enakirerhi & Chijuka, 2016), the Netherlands (Oolderink, 2013), Poland (Kaźmierska-Jóźwiak, et al., 2015), Nigeria (Ugwuanyi, 2012), Portugal (Serrasqueiro & Caetano, 2012) and Bangladesh (Hoque, et al., 2014) suggest that investments are directed to listed firm that would maximize investors’ wealth.

Determinants of ‘Optimal’ Capital Financing

The 1958 and 1963 MM prepositions informed the growing interest on capital structure of the firm and financing decision, but it is the static trade-off and pecking order theories that have provided a basis for empirical studies to examine the real determinants of an ‘optimal’ capital structure characterized by low levels of WACC and high market value of the firm. These determinants include:

Industry

The debt-equity mix expressed by firms’ debt ratios varies across different industries. Whereas the large, integrated oil corporations, telecoms, utility companies and real estate are characterized by highly geared occasioned by external debt-financing and retirement of equity through stock repurchases, most pharmaceutical companies seem to operate from the opposite extreme, with balance sheets carrying negative debt ratio (Myers, 2001).. Growth companies especially from the field of ICT are also know to carry very conservative debt ratios led by Microsoft whose debt to equity-ratio has oscillated between 0.55 to 1.09 between FY2016-2018.

By conducting an industry-based debt-ratio comparative analysis in Dhaka (Bangladesh); Huda (2015) observed that the optimum capital structure varied from industry-to-industry based on degree of government involvement, nature of business activity and other industry-specific issues.

Tangibility of Assets

In capital financing; debtors (bondholders) have a first claim on the assets of the firm, while common stockholders (equity owners) over the last claim. It is therefore in their best interest irrespective of the source of financing, for the firm to have substantial tangible assets. However; since debtors do not enjoy any dividends from the firm, nor gain from its appreciation in market value, their resort are the firm’s real assets. In essence; firms with low tangibility are considered to carry a higher business risk for external investors, and as such, these firms have lower debt-equity ratios (Myers, 2001).

In Bangladesh; the IT and Insurance service sectors registered the lowest debt-ratio levels partly due to a lack of tangible assets to secure more debt (Huda, 2015). Asset tangibility was equally observed to have a significant positive correlation for list firms in Netherlands (Oolderink, 2013), an outcome consistent with both the static trade-off and pecking order theories.

In a different perspective; equity owners might prefer issuance of debt secured by collateralized assets, whose value is known, in order to mitigate on the management’s information advantages (Myers, 2001). When such debt if collateralized, managers are more restricted from investing sub-optimally in unrelated projects hence maximizing the value of the firm, and subsequent shareholders’ wealth.

Profitability

Myer attributed the negative relationship between profitability and the debt-equity ratio of firms to ‘managerial capitalism’. This phenomenon was responsible for the separation of the ownership (shareholders-principals) and control (management-agents) aspects of the firm. The resultant existence of agency problems with respect to information asymmetry dictated that managers would primarily favour utilization of internal funds, and debt over equity when external financing is necessary (Myer, 1984).

While similar results were registered from firms listed in Poland’s Warsaw Stock Exchange; it was established that this could be attributed to a general inefficiency in the proper utilization of debt-financing (Kaźmierska-Jóźwiak, et al., 2015). Consequently; high profitable but risk averse firms could not fully capitalize on existent opportunities nor utilize tax-shield benefits to shield their net earnings.

In Portugal; SMEs were studied to establish the impact of profitability, based on their return on assets, on their capital structure decisions. It was observed that the more profitable and established an SME, the lesser it turned to debt financing as more its earnings could be reserved as retained earnings to financing future investments. However, despite the declining debt-ratios, debt levels still increased as a function of the SME size (Serrasqueiro & Caetano, 2012), and seemingly towards an optimal capital structure choice (Ugwuanyi, 2012).

Another statistically significant determinant of the capital structure choice include size of the firm which has a negative correlation to debt-equity ratio in line with the POT (Serrasqueiro & Caetano, 2012), The non-debt tax benefit was observed to be statistically insignificant in UK (Enakirerhi & Chijuka, 2016), the Netherlands (Oolderink, 2013) and Portugal (Serrasqueiro & Caetano, 2012).

How should a firm be financed?

Ideally; firms should base their capital financing decisions on both static trade-off and pecking order theories as they are not mutually exclusive (Hoque, et al., 2014). The static TOT can guide financing decisions at a specific point in time, where the POT offers more dynamism in its influence on financing decisions. Firms should establish, and work towards, an optimal capital structure mix consist with the two ‘complementary’ theories. Whereas there are a host of factors that would determine, or at the very least influence, the choice of capital structure; firms would be encouraged to:

Ascertain the industry attributes that they operate in, with respect to the average debt ratios, as this would not be far from the specific-industry’s optimal point. This would be essential in guiding the firm on the setting up its own target debt ratio.

Take stock, and where possible grow, its real assets as well as intangible assets. The former can be collateralized to secure more debt-financing whereas the latter is essential in generating incomes, and growing profitability levels.

Improve on their operational efficiencies to boost profitability, and subsequent liquidity. The two are important factors in ensuring the firm is, not only, able to meet its obligations as they fall due but also able to general adequate reserves (retained earnings) to check on over-gearing which increases the risks of financial distress and bankruptcy

Having observed these critical factors; firms can pursue targeted debt-financing to diversify their capital mix, and enjoy the associated benefits of each financing decision.

Conclusion

MM propositions laid the foundation for capital structure decision, but their assumptions of perfect market conditions made them less ideal in conducting empirical studies. Consequently; the static trade-off and pecking order theories were advanced. The TOT observes a trade-off between the PV of distress costs to PV of tax-shield benefits, tending towards an optimal mix. On the other hand; the POT observes a hierarchy ranking in sourcing for financing. Following TOT and POT; firms should be financed by a mix of debt and equity. This would ensure they increase the market value of the firm by significantly reducing their WACC (debt-financing) while mitigating on the risks of high financial leverage (benefit of equity-financing). An optimal capital structure should also be pursued to ensure the firm adequately utilizes its financing options to capitalize on growth opportunities.

References

Ahmeti, F. & Prenaj, B., 2015. A Critical Review of Modigliani and Miller’s Theorem of Capital Structure. International Journal of Economics, Commerce and Management, United Kingdom, III(6), pp. 914-922.

Enakirerhi, L. I. & Chijuka, M. I., 2016. The Determinants of Capital Structure of FTSE 100 Firms in the UK: A Fixed Effect Panel Data Approach. Research Journal of Finance and Accounting, 7(13), pp. 59-67.

Hoque, J., Hossain, A. & Hossain, K., 2014. Impact of Capital Structure Policy on Value of The Firm – A Study on Some Selected Corporate Manufacturing Firms Under Dhaka Stock Exchange. Ecoforum, 3(2 (5)), pp. 77-84.

Huda, K. T., 2015. Capital Structure and Financing Decision: Industry-Base Debt-Equity Ratio in Bangladesh. Research Journal of Finance and Accounting, 6(8), pp. 7-10.

Kaźmierska-Jóźwiak, B., Marszałek, J. & Sekuła, P., 2015. Determinants of Debt-Equity Choice – Evidence From Poland. Emerging Markets Journal, 5(2), pp. 1-9.

Mathur, S. B., 2015. Financial Management: Theory and Practise. 1st Ed. ed. New Delhi, India: Trinity Press.

Modigliani, F. & Miller, M. H., 1958. The Cost of Capital, Corporation Finance and Theory of Investment. American Economic Review, 48(3), pp. 261-296.

Modigliani, F. & Miller, M. H., 1963. Corporate Income Taxes and the Cost of Capital: A Correction. American Economic Review, 53(3), pp. 433-442.

Myer, S. C., 1984. The Capital Structure Puzzle. The Journal of Finance, XXXIX(3), pp. 575-589.

Myer, S. C., 2001. Capital Structure. The Journal of Economic Perspectives, 15(2), pp. 81-101.

Myers, S. C., 2001. Capital Structure. The Journal of Economic Perspectives, 15(2), pp. 81-101.

Oolderink, P., 2013. Determinants of Capital Structure: Static Trade-off Theory vs. Pecking-order Theory: Evidence from Dutch Listed Firms, Enschede, The Netherlands: University of Twente.

Serrasqueiro, Z. & Caetano, A., 2012. Trade-Off Theory Versus Pecking Order Theory: Capital Structure Decisions in a Peripheral Region Of Portugal, Covilhã, Portugal: University of Beira Interior.

Titman, S. & Wessel, R., 1988. The Determinants of Capital Structure Choice. The Journal of Finance, XLIII(1), pp. 1-12.

Ugwuanyi, U., 2012. Capital Structure and Market Values of Companies. European Journal of Business and Management, 4(21), pp. 49-53.

1 Introduction In this case scenario, Paul and Vera are advised on

Please strive to completely answer each of these question elements: a. From your personal research – pls outline what Management Assignment Help 1

Introduction

In this case scenario, Paul and Vera are advised on their legal rights regarding the contract of shipment of cars between them. Additionally, there is a consideration of the difference if any, were CISG be applicable to the contract entered into by Paul and Vera.

Issue

The issue here is whether there is breach of contract entered into between Paul and Vera and if yes, who is liable for such breach. Are there any remedies available to the innocent party?

Rule

In an FOB contract, the risk is not passed to the buyer until the goods arrive at the port where loading is to occur. Any damage or loss that occurs to the goods is therefore borne by the seller. An FOB contract is however a form of flexible contract which in most circumstances depends on the realities of business and the circumstances under which the contract was entered into as was stated by the court in the case of Pyrene v Scindia Navigation (1954).

Under section 20 of Sale of Goods Act (SOA), the risk associated with the goods passes to the buyer upon shipment and does not depend on the time when the property is the goods passes to the buyer. A bill of lading taken by the seller will not affect the time when risk passes to the buyer as was held in the case of Stock v Inglis (1885). In cases where only part of the goods is shipped, the risk that passes relates to the goods shipped.

The buyer in an FOB has the option of exercising his right to reject the goods especially where a condition in the contract has not been met and a breach of contract can be proved at this point. He is entitled to reject the goods and refuse to pay as well. This is in line with the judgment in the case of Gill & Duffus v Berger [1984] 1 Lloyd’s Rep. 227.

The seller has the obligation to ensure that the goods shipped are in conformity with the contract that the parties had entered into. The seller has no right to unilaterally change the terms and the description of the goods under the contract without the knowledge of the buyer. If a material change in the contract that can be said to be a condition, the buyer has the right to reject the goods and withhold any payment.

The buyer on the other hand bears the risk of damage or loss to the goods after they are on board the ship even before the property in such goods has passed to the buyer. The buyer is required to notify the seller on the ship or port of shipment that he has nominated; receive the goods and cater for the price of the goods as well as any incidental charges.

Application

Vera as the seller is under a duty in an FOB contract to deliver the goods under the contract and clear the goods for export purposes to the port named or nominated by the Paul. However, the contract being capable of modification, Vera has the right to change a term due to necessity and circumstances of the contract. This however does not take away the seller’s duty to supply goods that conform to the contract, deliver the goods to the nominated ship or port of shipping and pay costs of delivery to the ship. Vera also has a duty to acquire the entire exporting license as well as the bill of lading and to tender documents that relate to the goods to the Paul.

Vera bought two other cars NF1BX and NF2BX so as to complete the contract with Paul and the two were shipped separately. Both ships arrived in Hamburg on the 3 March and Paul was informed of the arrival of the cars. He rejected the three cars and only accepted CF29BX and refuses to pay the freight for the cars claiming that Vera had arranged for £550 instead of £500 as they had agreed.

Damage to the goods and the associated risk should be borne by the buyer if such damage occurs while the goods are on transit. However, under section 32 (3) of the SGA, the seller can be made liable especially in situations where the seller sends the goods but fails to notify the buyer so that the buyer makes necessary arrangements to take out insurance for the goods. The car was stolen from the store and liability is on Vera to reimburse Paul for the price paid for the stolen car.

CF40BX was not one of the cars Paul had paid for and he is right to reject it. Paul is right in exercising his right to reject goods that do not match the agreement entered into at the contract stage in accordance with the decision of the court in Gill & Duffus v Berger [1984] 1 Lloyd’s Rep. 227.The responsibility and loss associated with this car including the shipping and freight should be borne by Vera. On freight charges, the parties had agreed on £500 only. This is the amount that Paul should pay on three cars, CF29BX NF1BX and NF2BX; the balance should be paid by Vera. Paul is not liable to pay the additional £ 50 on each car as that was not agreed on by the parties.

Conclusion

A fundamental breach of contract has been occasioned by Vera. She failed in her obligation to supply goods according to the contract. However, the only car that Paul could reject in the circumstances is CF40BX which was not part of the contract. Paul should also cater for the freight for the three cars to the tune of £500 only per car as they had agreed. Vera is liable to compensate Paul for the non delivery of two cars; CF19BX and CF39BX.

The answer will however not be different if CISG was applicable in this contract since the breach by Vera is on a condition in the contract by failing to supply goods in accordance with the contract entered into between the parties.

References

Bridge MG. The international sale of goods (Oxford University Press; 2017)

Lorenzon F, Sassoon DM, Baatz Y, Skajaa L, Nicoll C. CIF and FOB contracts (Sweet & Maxwell; 2012)

Lorenzon F, Baatz Y. Sassoon on CIF and FOB Contracts (Sweet & Maxwell; 2016)

Legislation

Sale of Goods Act, 1979

Cases

Pyrene v Scindia Navigation (1954)

Stock v Inglis (1885)

Gill & Duffus v Berger [1984] 1 Lloyd’s Rep. 227

11 Insurance Law Name of Student Name of Institution Instructor Date Critical

11

Insurance Law

Name of Student

Name of Institution

Instructor

Date

Critical Analysis of Flood Re

1.0 Introduction

The insurance regime in the UK is guided by the principles of contract law such as offer, acceptance, consideration, capacity and intention to create legally binding relationships. Insurance law often plays a major role in the relationship that exists between the state, the people and the market. A citizen should be capable of accessing insurance services with little effort. In this research paper, a critical analysis of Flood Re is presented, including the advantages and disadvantages of Flood Re to the insured party as well as the insurer. Additionally, a discussion of changes to the Flood Re is also discussed and whether any change is necessary in the first place. The role of Flood Re in areas such as those covering the cost of floods especially on residential buildings has also been outlined.

1.1 The Flood Re

Flood risk subsidy can be traced to a period where there was failure by the market prices in providing the much required security for households against losses resulting from floods. The state at that time was reluctant to offer a guarantee. With Flood Re, the state stepped in but the guarantee on the individuals who are not insured has not been dealt with.

Flood Re is a statutory scheme that was developed under the Water Act 2004. It is concerned with the role that Flood Re plays as an insurer. Under section 63 (3), the Secretary of State is empowered to make provision on the levels of reinsurance premiums that are payable by the relevant insurers under an FR scheme. The draft regulations under this section provides for different pricing structures that cover Scotland, Wales, England and Northern Ireland.

On the part of the mainland jurisdictions, these regulations have produced very progressive pricing models; where prices have risen from A and B Council Tax Property to Band G. Band H, which are the most expensive households was however not included under the Regulations. The government has however stated that it is now ready to make such inclusion. Each of these bands has a cap on the rates that are chargeable by the insurer for accepting of the attendant risk and thereby providing very effective price cap that applies even to the homes situated in areas that are prone to floods.

On the part of individual insurers, they will have the freedom to make decisions on whether they want to cede the risk to Flood Re. this decision however will be influenced by among other factors, the availability of insurance based on the capped rates. Flood Re faces a number of issues as discussed below;

First, it is a corporate body created by statute and charged with performance of quasi-public roles though it does not technically form part of the executive. It is classified as a public body charged with the collection of mandatory fees and other administrative duties. Secondly, the cost of delivery is replaced with the actuarial cost of insurance against flood risks; this varies from neighborhood to neighborhood. Flood Re will set a maximum price to be charged in order to cover flood risk and will be branded as a component of the product supplied by the insurer and the consumer will not be aware of Flood Re. this means that the contract of insurance is between the property owner and the insurer. With respect to the contractual principle of privity, Flood Re will not be a party to this contract.

Thirdly, there is a subsidy of a refund for those who will be charged exorbitant amounts and therefore a levy is imposed on all the purchasers of properties to cover the subsidy.

1.2 What Flood Re means for insurers

Insurers are treated as the owners of the scheme. It is the insurers who have the mandate to set the retail prices. The insurer also has the sole responsibility of making decisions on the risks they will leave exclusively to Flood Re. the Flood Re collects levies from all insurers annually and are then responsible for compensating flood victims who are covered by the plan. Flood Re according to the plan therefore will cover most of the residential properties while other properties will be covered by insurers. Properties built on or after January 2019, small businesses and leasehold properties are however not covered under the scheme. There is no cost cutting as premium is paid to insurers. The scheme has created a lot of discriminatory practices that have excluded certain properties from the application and benefit from the scheme.

1.3 Risk Classification of Flood Re

Private insurance policies can be provided otherwise on a mutual basis, hybrid model as well as a solidarity basis. Mutual market would allow a free floating price where it is assumed that insurers would engage in competition based on their underwriting processes and based further on the risk covered by the insurer. A solidarity type of market on the other hand would not base its price on the risk and would not base its charges on a flat rate basis or any other available variable. A hybrid market on the other hand allows certain risk factors to determine and control the market prices.

Flood Re is hybrid as it offers property insurance that is subsidized though partially subsidized. It represents a modern market in insurance. In insurance business, the intervention of the state is a normal practice in most jurisdictions which is however a political question. The involvement of state in controlling insurance business has led to several research and inquiries on the position of an insurer. Insurers prefer to be in control of insurance businesses and decisions in order to maintain it as a pure contractual relationship but Flood Re intends to introduce government supervision. Insurers’ main objective is to minimize and lower government intervention.

1.4 Council Tax bands

Flood Re intends to cap prices by referring to the Council Tax bands. These capped prices are planned to be amended over time so that they equal the market pricing. However, there are concerns how long the process of amendment will take to achieve the pricing. The problem with this is the band levels of houses which vary from region to region which represent differences in the value of the properties. This process is likely to take quite a considerable number of years making Flood Re not effective in the circumstances.

1.5 The principle of pooling risks

The insurance industry needs to seek to establish a kitty aimed at subsidizing the cost of insurance. Currently, the levy stands at £ 10.50 does not seem to have a major effect on the uptake of insurance. There is however challenges associated with this in the United Kingdom. From the ONS data up to one quarter of the residents have no access to insurance cover especially in populations that are considered as low income earners. The value of £ 10.50 therefore has a major impact on the decisions to purchase insurance perks and insurance cover. Flood Re therefore would only assist persons who are able to access insurance who in this case are the minority groups in the society who have the ability to afford to pay the premiums. Flood Re therefore is not the best idea as the majority will be left without cover when insurance is made a government’s responsibility.

1.6 Mandated Disclosure

Insurers have the mandate to make disclosures to customers on the amount or rate of subsidy that is available. This method is commonly used in regulated interventions by governments and public bodies. However, this system is ineffective as it has been ignored by insurers especially where the insured does not insist on being given the associated data. This data is important as it is applied in the evaluation process. It is therefore necessary to provide consumers with the need to take the data and use them in the valuation process. Where this is not done, it will lead to waste.

1.7 Eligibility for consumers

The water Act 2014 was designed exclusively for households. This means that business premises are not covered under the Act. The insurance scheme is left to be designed by the secretary of state and the criteria for such design mechanism or process is not clear. It has however been stated that with the introduction of Flood Re, there will be establishment of rules, laws and regulations especially on borderline premises which cannot be classified as household premises or business premises with precision. House hold premises can be described as a dwelling place under the cover of an insurance policy and this description is in line with the criterion that has been set in the FR scheme. But on a close consideration of Flood Re, nothing much has changed. The definition given to household dwelling is vague and is not regulatory. Flood Re has a novel requirement that individuals should first be integrated into household premises before submitting an application for insurance.

The issue which is likely to cause unprecedented conflict is the uncertainty that surrounds what amounts to a household dwelling. On this Flood Re has not solved any problem and has instead created confusion in flood insurance which is likely to lead to legal battles. The different categories and differentiation between households and all other properties is an important aspect that has been left out by Flood Re as it is an important consideration when it comes to pricing. Where the issue of differentiation and categorization of housing is not settled, Flood Re will not offer solutions to the people and it is likely that it will cede risk without any form of question.

The most significant problem with the adoption of Flood Re is that it attempts to formalize the previous practices in the insurance industry without taking into account the nature of the intervention it intended to introduce. The intervention no longer respects the practice of the lowest cost in the industry but is applied as a taxation measure which is not grounded around any principles. Most people remain uninsured since the insurance cost plus the guarantee introduced by the government through the Flood Re is still prohibitive.

Additionally, it will be difficult to adjust the price caps since the purchasing patterns normally differ substantially and as a result, it is difficult to set a national pricing plan. The aggregate annual liability for Flood Re is said to be capped to a value that is equal to a loss of 1 to 200 in a year. This capping cast doubts on the ability of Flood Re to compensate victims as the source of funding is not clear. There is also a proviso that Flood Re could request funding from the Insurance industry as a levy or a contribution which is not certain. The cap on the liability therefore raises questions that relate to lack of funding and the inability to satisfy claims.

There are insurers who do not have any form of association with Flood Re. it is difficult in the circumstances for insurers to limit their services exclusively to those policyholders who have a reinsurance arrangement with Flood Re. there is therefore a lot of uncertainties in the mode of operation of the scheme under the Flood Re as well as their relationship with insurers.

The Flood Re program has in effect created unnecessary exclusion of properties leaving certain properties not covered by insurers. The program has in effect excluded properties that were built after January 2009. It is said to be a measure that discourages investors from building in flood prone areas so as to limit the damage likely to be occasioned by floods. This action is however arbitrary, reflecting the failure by the government and other regulatory authorities on preventing constructions and buildings in areas prone to flooding.

1.8 Advantages associated with Flood Re

It is said to reduce the cost of flood insurance for persons who live in flood prone areas by cutting costs of insurance against the risk of floods.

It enables the insured to access a competitive market in the insurance industry and thus reducing significantly the cost of premiums payable for insurance cover.

It has established a scheme from where compensation claims will be payable without following the tedious processes required by insurers before a claim is paid.

Flood Re makes it easier and faster to find an affordable insurance plan for homes for individuals living in areas that are prone to flooding.

1.9 Disadvantages associated with Flood Re

The cost remains expensive since it is the insurer who is charged with the role of setting the retail prices. The effect of the subsidy brought about by Flood Re therefore is not felt by the insured. They continue to pay premiums set by the insurers as before.

The scheme has been accused of discriminating on small business owners as well as homes on leasehold properties as it does not cover them. This has been a major disadvantage of the Flood Re scheme.

2.0 Conclusion

In conclusion therefore, Flood Re was a good idea at inception. However, its application has not been uniformly applied. The monopoly given to the insurers to set the retail prices has not contributed to cut prices for insurance. More people are left out of the scheme as they cannot afford even after the subsidy claimed by Flood Re.

Bibliography

Statute

Water Act 2004

Flood Re Insurance Regulations Scheme

Secondary sources

Baker T and Logue KD, Insurance Law and Policy: Cases and Materials (Wolters Kluwer Law & Business 2017)

Burling J, Burling JM and Lazarus K, eds. Research Handbook on International Insurance Law and Regulation (Edward Elgar Publishing 2012)

George C, “Federal Government Tightens Live-in Caregiver Regulations” (2011) 183 E539-E540

Kousky C and Kunreuther H, “Addressing Affordability in the National Flood Insurance Program” Journal of Extreme Events (2014) 1: 1450001

Law MR, Kratzer J, and Dhalla IA, “The Increasing Inefficiency of Private Health Insurance in Canada” Canadian Medical Association Journal (2014) 186 E470-E474

North D, “Private Drones: Regulations and Insurance” (2014) 27 Loy. Consumer L. Rev. 334

Penning-Rowsell EC, Priest S, and Johnson C, “The Evolution of UK Flood Insurance: Incremental Change Over Six Decades” International Journal of Water Resources Development (2014) 30 694-713

Petrolia DR, Landry CE and Coble KH, “Risk Preferences, Risk Perceptions, and Flood Insurance” Land Economics (2013) 89 227-245

Stempel JW, Swisher PN and Knutsen ES, Principles of Insurance Law (LexisNexis 2011)

Surminski S, “The Role of Insurance in Reducing Direct Risk: The Case of Flood Insurance.” International Review of Environmental and Resource Economics (2014) 7 241-278

Thoyts R, Insurance Theory and Practice (Routledge 2010)

Dear Student, I have had the following query about the assessment and

Dear Student,

I have had the following query about the assessment and I have added my reply:

 Q – Could we use websites as sources? I was researching on my topic and found articles on westlaw and lawteacher.net. Can I list them in my reference sheet?

A- You can use websites but be cautious in using them to make sure they have sufficient authority. Lawteacher.net is an essay writing business and is not necessarily authoritative so you should avoid using what they say directly.  This is true of many websites which may just be a lawyer’s summary of the law and which will be of very low authority.  You can use them to get understanding and to find authorities but you must check what they say against the standard texts and consult the cases etc rather then just repeat what they say about them.  If you have found an online publication of an academic paper which in a publication which is also given a reference you should try to mention the publication and not just the general website.  E.g don’t just mention westlaw for articles you have found but name the author and publication (you don’t need the full citation but just e.g. Smith in Harvard Law Review).

Introduction to Learning Language Part A The questions in assignment 1 were

Introduction to Learning Language

Part A

The questions in assignment 1 were well answered. However, the feedback received indicated that there were several issues that needed to be attended to. The issues are listed below.

Clear explanation of points given.

It is always advisable to clearly explain an answer given to boost one’s understanding of the concept. This entails exploring more about the subject matter so that one can avoid misunderstanding and misleading others. Therefore, everything needs to be clearly explained and more explored.

The use of target language.

It is significant to always use target language when teaching. It is the language being studied by learners as well as the individual items of language one desires to learn or the teachers intends to test.

Citation is necessary in every question.

It is important to cite sources used when carrying out the research. It shows the readers that the research was properly done by listing the sources where one got the information. Similarly, it shows some responsibility in the scholar by giving credits and acknowledging other researchers’ ideas.

Use of metal language

The use of metal language was not enough. The symbols used to talk about learning and teaching of the English language were not satisfying.

PART B

Step 1: Identifying and Reformulating

Mr. and Mrs. Small took their children to the park to feed the pigeons. They carried along a basket which was full of bread crusts. As soon as the family threw the bread crusts, the pigeons started to flock around. In a short time, approximately thirty to forty pigeons were feeding on the bread crusts.

Suddenly, the pigeons took to the air. Everyone was surprised. A shot from a gun had frightened the pigeons away. Then, a man carrying a gun, walked over to the family.

“They are pests. I don’t like pigeons at all,” he said.

“You may not like them, but we do. Now, leave us to enjoy feeding the pigeons or I call the police,” said Mr. Small.

The man muttered a few words and then disappeared behind the bushes. The family was very unhappy that the birds had been frightened away.

“Well, we’ll wait for a while to see if the pigeons will return. If they don’t return, we will make our way back home,” said Mr. Small.

They waited for many minutes. After sometime, a few pigeons flew in and came closer to the family. Within a few minutes, the pigeons that had been frightened by the gunshot and flown away flew in. Soon, most of the pigeons had returned to be fed by them. The pigeons they appreciated by puffing out their chests and chirping.

“Oh look! All our bread crusts have been eaten. It has been great fun though, hasn’t’ it? We will come again next week, but this time, we must bring more bread. Let us hope that nasty man will not come to the park again,” said Mrs. Small.

“I think I’ve frightened him away, just like he frightened the pigeons away,” said Mr. Small, laughing.

Step 2: Describing, explaining, exploring, and arguing.

Mr and Mrs Small took their children to the park feed the pigeons

Correction: Mr. and Mrs. Small took their children to the park to feed the pigeons

Issue: wrong use of tense.

Explanation: The verb “took” as used in the sentence indicates that this sentences is written in past tense. For the sentence to make sense or be grammatically correct, we need to add “to” to the verb “feed” to make the sentence correct (Shigurov & Shigurova, 2015 p.58). “To feed” becomes an infinitive verb where “to” is part of the verb and no longer a conjunction.

They took with them a basket was full of bread crusts

Correction: They took with them a basket which was full of bread crusts

Correction: They took with them a basket full of bread crusts

Issue: Lack of a preposition

Explanation: The sentence is incomplete without the preposition “which”. This pronoun helps to connect the noun basket to the past tense of the verb “be”. Either way, elimination of the word “was” would also render the sentence correct. The pronoun “which” shows the relationship between the basket and bread crusts.

As soon as the family threw the bread crusts onto the grass, the pigeons started flock around

Issue: wrong use of tense

Correction: As soon as the family threw the bread crusts onto the grass, the pigeons started to flock around

Explanation: Given that the adverb “started” is in the past tense, there is need to make the next verb an infinitive verb by adding “to” for the sentence to be grammatically correct (Hoye, 2014 p28). Also, some verbs are followed by the to-infinitive whereas are not. In this case, it is okay to right ‘to’ before flock.

Soon, thirty or forty pigeons feed on the bread crusts.

Issue: Wrong use of tense

Correction: In a short time, approximately thirty to forty pigeons were feeding on the bread crusts.

Explanation: The adverb “soon” should not be used in this sentence as it bring an aspect of the future yet the story is being narrated in the past tense. Also, when stating the number of things or living things present in a place it is not right to say a number or the other one(Nelson & Greenbaum, 2015 p.8). It is always advisable to give an approximation of the number and in this case, the learner should say “approximately thirty to forty” instead of “thirty or forty”. The verb “feed” is converted to the past continuous tense which is “was feeding”. Past continuous is formed by combining the past tense of “to be” with the verb’s present participle ( -ing word).

Everyone was surprising

Issue: Wrong use of tense

Correction: Everyone was surprised

Explanation: It is grammatically wrong to say everyone was surprising (Hummel & Valera, 2017 p.25). As much the past continuous tense is formed by combining the past tense of to be with a verb’s present participle, the rule does not work on all verbs.

A shot from a gun had frightened away them

Issue: Inappropriate positioning of the pronoun

Correction: A shot from a gun had frightened them away.

Explanation: The third person pronoun “them” should come right after the main verb which describe what happened to be birds. In this case, “them” should come after the word “frightened” so as to indicate who or what was frightened before showing the direction or place they went to. Therefore, correct order of words in a sentence matters a lot as it ensures a sentence does not lose meaning.

Then a man, carry a gun walked over to the family

Issue: Wrong use of tense

Correction: Then, a man carrying a gun walked over to the family

Explanation: For the sentence to be grammatically correct, the verb “carry” should be conjugated in the participle present tense which changes the verb to “carrying” (Kratzer & Shimoyama, 2017 p.128). The present participle verb ends ing. In this sentence, there was the wrong placing of the comma. The comma should be placed after the word “then”.

“Their pests. I no like pigeons at all,” he said

Issue: Wrong use the pronoun ‘their’

Correction: “They are pests and I do not like pigeons at all”

Explanation: The learner has used the pronoun ‘their’ instead of ‘they are’. ‘Their’ is a possessive case of a pronoun ‘they’ whereas ‘they’re’ is a contraction of the words ‘they’ and ‘are’. Therefore interchanging the two can change the meaning of the sentence. When showing dislike for a thing, one does not use the determiner ‘no’ only. They should combine the verb ‘do’ with ‘not’ so as to successfully negate something.

The pigeons showed they were thankful by puff out their chests and make happy bird noises

Issue: use of poor English

Correction: The pigeons appreciated by puffing out their chests and chirping.

Explanation: Appreciation simply means showing that one is thankful. Similarly, instead of saying they made happy bird noises, one can say the birds were chirping.

Within a few minutes, more of the pigeons which the family had been feeding and which had been frightened by the man with the gun and had flown away flew in

Issue: Mixing of tenses and wrong use of the conjunction ‘and’.

Correction: Within a few minutes, the pigeons that had been frightened by the gunshot and flown away flew in

Explanation: It is wrong to mix all tenses in the same sentence. In this case, the learner has used the present perfect, past participle, and past perfect tenses in the same sentence. This creates confusion and makes the sentence to lose meaning.

PART C Teaching

Vocabulary – limousine

The teacher shows the learners a limousine parked in front of a luxurious apartment. The teacher points at the vehicle in the image and says, “What you are seeing here is one of the most lavish vehicles whose size is longer than that of normal cars. It carries many passengers compared to normal cars and in some cases, parties are held in the car. The automobile is commonly owned by rich people. Then the teacher now brings in the noun by saying, “this is a limousine.” He repeats the word four times so that the class can get it clearly.

The teacher then evaluates the students to determine whether the students have comprehended the vocabulary by asking the concept checking question: CCQs

Is it a car? – YES

Does it look like normal cars? – NO

Is it owned by poor people? – NO

Is it costly? – YES

The teacher then asks the students to pronounce the word in chorus form then asks each student to try and pronounce it.

He then asks one of the students to help spell the vocabulary.

The teacher then inquires which type of word is it and one student answers as he indicates on the board:

Limousine (n)

Structures

Step 1. The last train leaves before the show ends.

The teacher shows the students a picture of a train. He then draws a timeline and puts an “X” very close to “NOW” in the past. Teacher writes ‘departure’ above the “X”. This indicates the time the train will leave which is presumed to be before the show ends. The teacher asks the students when they think the show is likely to end after showing them a picture indicating when the show is likely to start and end. The students then give him an answer.

Concept Checking Questions (CCQs): Write at least three questions (and provide answers) to check students have understood:

Is the train leaving anytime soon? YES

Do you know the exact departure time? NO

Do you know the time the show will end? YES

Step 2 I will give you a call when I’ve landed.

The teacher shows an image of a girl at the airport who is on a mobile phone. The teacher says “This is Christine at Jomo Kenyatta Airport”. He again draws a timeline where he writes ‘now’ on the right side then indicates a plane landing on the left side in the future. Then the mother to Christine calls and asks her “where are you.”

The teachers asks the students, “What does Christine answer the mother?” The teacher then indicates on the whiteboard.

I ……. Jomo Kenyatta Airport.

One of the students answers the teacher and he stresses the point using his hands.

Concept Checking Questions (CCQs): Write at least three questions (and provide answers) to check students have understood

Is she still at the Airport? YES

Is this in the past? NO

Is the exact time known? NO

Step 3- My house’s been burgled three times this year

The teacher shows the students a picture of an apartment whose door and windows are broken. He then asks the students what they can see in the picture. Students are expected to answer the question but if they don’t, the teachers should tell him what he intends to teach them. The teacher will then indicate on the board

“The doors and windows of ……. apartment…… broken

One student will answer the question and the teacher will fill in the gaps.

Concept Checking Questions (CCQs): Write at least three questions (and provide answers) to check students have understood:

Do you understand the noun burgle?’ YES

Is the time when this destruction was done known? NO

Are the windows broken? YES

Step 4. Surely, you will pass the exam

The teacher will show the students an exam paper and ask them what it is. He then will ask the students to discuss amongst themselves for five minutes about their experiences when they last had an exam. After the discussion, he will ask one of the students to narrate her experience. He will then write on the board

I ……… pass my exams.

He will ask one of the students to answer the question and after it has been answered, he will repeat the sentence three times so as to assure the students and create confidence in them

Concept Checking Questions (CCQs): Write at least three questions (and provide answers) to check students have understood:

Do you need to fear examination? NO

Will you pass your exams? YES

Are you always ready for exams? YES

References

Hoye, L. (2014). Adverbs and modality in English. Routledge.pringer, Cham.

Hummel, M., & Valera, S. (Eds.). (2017). Adjective Adverb Interfaces in Romance (Vol. 242). John Benjamins Publishing Company.

Kratzer, A., & Shimoyama, J. (2017). Indeterminate pronouns: The view from Japanese. In Contrastiveness in Information Structure, Alternatives and Scalar Implicatures (pp. 123-143). S

Nelson, G., & Greenbaum, S. (2015). An introduction to English grammar. Routledge.

Shigurov, V. V., & Shigurova, T. A. (2015). Modalation of verbal adverbs in the Russian language. European journal of natural history, (4), 57-59.