MABARARA UNIVERSITY OF SCIENCE AND TECHNOLOGY
FACTULTY: BUSINESS AND MANAGEMENT SCIENCES
DEPARTMENT: ACCOUNTING AND FINANCE
NAME REG NO SIGNATURE
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Coursework 1
a) What is the primary goal of a commercial bank?
b) Expound on why this goal may be translated into maximizing the firm’s stock share
price.
c) Discuss the economic role of brokers, dealers and investment bankers. In your discussion,
explain how each makes a profit.
Instructions
i) To be attempted in groups of 5 people.
ii) Not handwritten.
iii) Submission date: Friday 23rd June, 2023
Coursework 1
A commercial bank is a financial institution that offers a range of banking services to individuals,
businesses, and organizations. It serves as a bridge between depositors who have excess funds and
borrowers who require capital for various purposes. Commercial banks are profit-oriented entities that
operate with the primary goal of generating profits by providing financial services.
The primary goal of a commercial bank is to provide financial services to individuals,
businesses, and organizations. Commercial banks play a crucial role in the economy by
facilitating various financial transactions and supporting economic growth. Here are some
examples of the primary goals and activities of commercial banks:
Accepting Deposits
One of the main functions of a commercial bank is to accept deposits from customers. This
includes both savings and current account deposits. For example, individuals can deposit their
savings into a bank account, and businesses can maintain their operational funds in a current
account.
Granting Loans and Credit
Commercial banks provide loans and credit facilities to individuals and businesses. They
evaluate the creditworthiness of borrowers and disburse funds to finance various needs, such as
purchasing a home, starting a business, or expanding operations. Banks earn interest income
from the loans they provide.
Payment Processing
Commercial banks facilitate payment transactions by offering services such as check clearance,
electronic fund transfers, and issuing debit and credit cards. They act as intermediaries in
transferring funds between individuals, businesses, and institutions.
Offering Financial Products and Services
Commercial banks offer a wide range of financial products and services tailored to the needs of
their customers. These may include savings accounts, fixed deposits, investment products,
insurance, foreign exchange services, and wealth management services.
Providing Financial Advice
Commercial banks employ financial experts who can provide advice and guidance to customers
on various financial matters. This can include investment advice, retirement planning, risk
management, and assistance in making informed financial decisions.
Acting as a Custodian
Commercial banks often act as custodians for valuable assets such as securities, important
documents, and safe deposit boxes. They provide a secure storage facility for these items on
behalf of their customers.
Foreign Exchange Services
Commercial banks facilitate currency exchange and provide foreign exchange services for
individuals and businesses engaged in international trade or travel. They enable the conversion of
one currency into another at prevailing exchange rates.
Trade Financing
Commercial banks offer trade financing services to support import and export activities. They
provide instruments such as letters of credit, guarantees, and documentary collections to ensure
secure and efficient international trade transactions.
These examples demonstrate the diverse functions and services offered by commercial banks, all
aimed at meeting the financial needs of individuals, businesses, and the broader economy.
(b) Shareholder returns: Suppose a Ugandan company, ABC Ltd., experiences significant growth
and improved financial performance. As a result, its stock share price rises from UGX 1,000 to
UGX 2,000 per share. Shareholders who initially invested UGX 10,000 in the company can now
sell their shares at UGX 20,000, realizing a positive return on their investment.
Market perception and reputation: Consider a Ugandan company, XYZ Ltd. that has
demonstrated consistent profitability and strong management practices. Investors and analysts
view the company favorably, leading to increased demand for its shares. As a result, the stock
share price of XYZ Ltd. rises, attracting new investors and enhancing the company's reputation
in the market.
Access to capital: If a Ugandan company, DEF Ltd., has a high stock share price, it can leverage
this position to raise additional funds through equity offerings. For example, DEF Ltd. can issue
new shares at a premium price, generating capital that can be used for expanding operations,
investing in research and development, or pursuing strategic initiatives.
Employee incentives: Ugandan companies often use stock-based compensation programs to
incentivize their employees. For instance, a technology company, GHI Ltd., might offer stock
options to its employees as part of their compensation package. If the stock share price of GHI
Ltd. increases, employees can exercise their stock options and sell the shares at a higher price,
thereby benefiting from the company's stock price appreciation.
Mergers and acquisitions: In Uganda, a company with a high stock share price can have an
advantage in merger and acquisition deals. Suppose a Ugandan company, JKL Ltd., has
experienced robust growth, leading to an increased stock share price. If JKL Ltd. seeks to acquire
another company, it can offer its high-valued shares as a currency for the acquisition, potentially
allowing JKL Ltd. to negotiate favorable terms and exchange its shares for the target company's
assets.
These examples highlight how maximizing a firm's stock share price can be relevant in a
Ugandan context, aligning with the broader goal of maximizing shareholder wealth and
demonstrating the potential benefits associated with achieving this objective.
(c) Discuss the economic role of brokers, dealers and investment bankers. In your
discussion, explain how each makes a profit.
Introduction
Brokers
Brokerage Commissions: Brokerage commissions are fees charged by brokers for executing
trades on behalf of clients. They can be calculated as a percentage of the transaction value or a
flat fee per trade. The commissions represent the primary source of revenue for brokers. By
attracting a large client base and generating a high volume of trades, brokers can increase their
overall revenue and profitability.
Dealers
Bid-Ask Spread: The bid-ask spread refers to the difference between the buying (bid) price and
the selling (ask) price of a financial instrument quoted by a dealer. Dealers actively buy and sell
financial instruments, such as stocks or currencies, and capture the spread as their profit. They
quote a slightly higher selling price and a slightly lower buying price, ensuring that they make a
profit on each transaction.
Market Making
Market makers are dealers who provide liquidity to the market by continuously offering to buy
and sell financial instruments. They maintain an inventory of these instruments and quote bid
and ask prices at which they are willing to transact. By facilitating trading and capturing the bid-
ask spread, market makers generate profits.
Investment Bankers:
Underwriting Fees: Underwriting fees are earned by investment bankers in capital raising
activities, such as initial public offerings (IPOs) or debt issuances. In an IPO, the investment
bank guarantees the sale of securities at a predetermined price. They earn underwriting fees as a
percentage of the total proceeds raised. The fees compensate the investment bank for assuming
the risk of buying the securities from the issuing company and selling them to the public.
Advisory Fees:
Investment bankers provide advisory services to companies in various financial transactions,
including mergers and acquisitions, debt issuances, and restructuring. They earn advisory fees
for their expertise and guidance in these transactions. The fees are typically negotiated based on
the complexity and size of the deal.
Success Fees:
Success fees are contingent fees paid to investment bankers upon successful completion of a
transaction. For example, if an investment bank assists in negotiating and closing a merger deal,
they may receive a success fee based on the deal's total value. Success fees incentivize
investment bankers to achieve positive outcomes for their clients.
It's important to note that these terms and revenue models may vary across different financial
institutions and markets. The profitability of brokers, dealers, and investment bankers depends
on factors such as market conditions, competition, client relationships, and the overall
performance of the financial industry
Here are some examples that illustrate the roles and profit generation of brokers, dealers,
and investment bankers:
Brokers:
Charles Schwab: Charles Schwab is a well-known brokerage firm that offers online brokerage
services to individual investors. They charge commissions per trade, typically a flat fee, for
executing buy and sell orders on behalf of their clients.
TD Ameritrade: TD Ameritrade is another prominent brokerage firm that provides a range of
investment services. They earn profits through transaction fees charged to clients for executing
trades and managing investment accounts.
Dealers
Market Maker at a Stock Exchange:
A market maker at a stock exchange, such as the New York Stock Exchange (NYSE), actively
participates in buying and selling stocks. They quote bid and ask prices, with the difference
between these prices being their profit. For example, if a market maker quotes a bid price of $50
and an ask price of $51, they earn a profit of $1 per share traded.
Foreign Exchange (Forex) Dealer: Forex dealers facilitate currency trading. They provide quotes
for currency pairs and make profits from the bid-ask spread. If a dealer quotes a bid price of 1.20
for the EUR/USD currency pair and an ask price of 1.21, they earn a profit of 0.01 per unit
traded.
Investment Bankers:
Goldman Sachs:
Goldman Sachs is a renowned investment bank that offers a wide range of financial services.
They earn profits through various fees in capital raising activities. For instance, in an initial
public offering (IPO), Goldman Sachs may earn underwriting fees as a percentage of the total
proceeds raised.
J.P. Morgan: J.P.
Morgan is another prominent investment bank involved in capital raising and advisory services.
They generate profits through fees charged for providing advice on mergers and acquisitions,
debt issuances, and other corporate finance activities.
These examples demonstrate how brokers, dealers, and investment bankers operate in different
sectors of the financial markets and generate profits through various fee structures, spreads, and
commissions. However, it's important to note that these examples are for illustrative purposes
and may not represent specific firms' current profit models or fee structures.
References
Read, E. W., & Gill, E. K. (1989). Commercial banking. Forth edition, New Jersey: Englewood
cliffs.
Molyneux, P., Thornton, J., & Llyod-Williams, D. M. (1996). Competition and market
contestability in Japanese commercial banking. Journal of Economics and Business,
48(1), 33-45.
Hegazy, I. A. (1995). AN EMPIRICAL COMPARATIVE STUDY BETWEEN ISLAMIC AND
COMMERCIAL BANKS'SELECTION CRITERIA IN EGYPT. International journal of
Commerce and Management, 5(3), 46-61.
