In short, the financial institution offered loans to virtually all customers, regardless of their ability to reimburse the loan. As the clients defaulted on their payments, the company found itself in an impossibility to recuperate its investments. Gradually, the value of its share decreased, the investors lost interest and confidence, their assets devalued and they were eventually forced to declare bankruptcy. The same situation was present and Merrill Lynch.
4. Using debt to expand the business
The scenario presented in the article, as well as the entire crisis as a whole, has had the general impact of making economic agents more prudential in terms of financial operations. This could also translate in the desire to use lower levels of debt when financing a business endeavor. Rather, one could be inclined to use more equity than debt. A first reason to explain this stand is given by the fact that shareholders are only entitled to a part of the company's profits, their capitals remaining within the company's capital structure; otherwise put, if the company does not register profits, they will not pay dividends. Secondly, the debt is pegged to collaterals; in times of asset devaluation, the cost of debt will as such increase. Equity on the other hand does not require any collateral. Finally, funding through debt does not restrict the company from pursuing any development endeavors, whereas debt could force it to stick to the core business processes which ensure revenue sustainability (Schwartz, 2009).
5. Update on the case
Urban Outfitters, like most other companies, was impacted by the financial...
This is best revealed by the revenues registered in the first three months of 2009, comparative to the last three months of 2008. While the revenues for the fourth quarter of 2008 were over $500 million, those for the first quarter of 2009 declined to $384 million; recently however, the company released information of its 2009 third quarter revenues, which increased to $504 million (Google Finance, 2009). The company continues to consolidate its global positioning strategy within U.S., Canada, and Europe. As of the 31st of January 2009, they are operating through 142 Urban Outfitters stores, 121 Anthropologie stores, 30 Free People stores and 1 Terrain garden center (Yahoo Finance, 2009). Overall, "the company also has managed its inventory and expenses well" (Cheng, 2009).
Reference:
Cheng, A., 2009, Urban Outfitters Upgraded by Barclays Capital, Market Watch, http://www.marketwatch.com/story/urban-outfitters-upgraded-by-barclays-capital-2009-08-07 last accessed on November 23, 2009
Morgenson, G., September 27, 2008, Behind Insurer's Crisis, Blind Eye to a Web of Risk, The New York Times
Schwartz, DH, 2009, Debt vs. Equity -- Advantages and Disadvantages, Small Business, http://smallbusiness.findlaw.com/banking_financing/be1_5debtvsequity.html last accessed on November 23, 2009
2009, Urban Outfitters, Inc. Financials, Google Finance, http://www.google.com/finance?q=NASDAQ:URBN&fstype=ii last accessed on November 23, 2009
2009, Urban Outfitters Inc., (URBN), Yahoo Finance, http://finance.yahoo.com/q/pr?s=URBN last accessed on November 23, 2009
