PRINCIPLES OF FINANCE

1. BAFN200 PRINCIPLES OF FINANCE
Semester 1 2017
ASSIGNMENT 1: INDIVIDUAL ASSIGNMENT
Assessment Information – Semester 1; 2017
Subject Code: BAFN200
Subject Name: Principles of Business finance
Assessment Title: Individual Assignment
Word count: 1500 words ±10% words (excluding references and appendices)
Weighting: 30%
Due Date: 9 April 2017 23.00 hours
Assessment Description
You are required to complete the assessment task noted below as a word document and
submit your answer electronically through turn it in within LEO;
Instructions are on LEO.
Any work which has been copied or shared among students will result in a Fail grade for all
students concerned. This assignment must be in your own words and not copied directly
from any source.
Cash Converters is the biggest payday lender in Australia which is also a
public company listed on the Australian Stock Exchange.
In November 2015, a class action was launched against Cash Converters for exploiting
and trapping thousands of vulnerable low-income customers in a cycle of debt by
charging extortionate interest rates up to 633% per annum and excessive fees on
short-term loans.
You are required to:
(i) Provide an analysis of the issue faced by Cash Converters under the
relevant ethical theories, and code of ethics for professional accountants.
(ii) Explain how this unethical practice was portrayed in the annual report of Cash
Converters, and how the company’s share price was affected?
(iii) Discuss the social responsibility and sustainability of a financial institutions,
in general and of Cash Converters, in particular.

2. BAFN200 Individual assignment marking guide
Student ID Name
Maximum
marks
Introduction 2
Analysis of the issue, faced by Cash Converters under the relevant ethical
8
theories, and code of ethics for professional accountants.
Explain how this unethical practice was portrayed in the annual report of Cash
8
Converters, and how the company’s share price, was affected?
Discuss the social responsibility and sustainability of a financial institutions, in
8
general and of Cash Converters, in particular.
Conclusion 2
Presentation (referencing, spelling, grammar, spacing, proper use of tables, 2
figures, etc.)
Total 30

3. APPENDIX 1
Rubric – Individual Assignment
Standards
ILOs Criteria
Below Expectations Meets Expectations Exceeds Expectations
Level 1 (NN) Level 2 (PA) Level 3 (CR) Level 4 (DI) Level 5 (HD)
LO1 Financial
Displayed a poor grasp of financial Displayed some basic understanding of Displayed above-average grasp of Displayed good understanding of Displays an excellent grasp of
management, sustainability and sustainability and social responsibility of sustainability and social responsibility of sustainability and social responsibility sustainability and social responsibility
management and social responsibility of organisations organisations, and the interplay among organisations, and the interplay among of organisations, and the interplay of organisations, and the interplay
sustainability and and the interplay among them. them. Arguments are generally them. Arguments with reasonable support. among them. among them. Demonstrates
Arguments are implausible and plausible with some evidence. Adequate research Demonstrates high standard of insight exceptionally insightful and interesting
social responsibility unsubstantiated. Fails to address the Basic research and originality. arguments. A highly-structured and
of organisations question posed. Limited and/or More than adequate research comprehensive response to the task.
irrelevant research. Extensive and relevant research.
LO2 Role of accounting
Displayed a poor grasp of the role of Displayed some basic understanding of Displayed above-average grasp of the Displayed good understanding of the Displays an excellent grasp of the role
accounting and financial information. the role of accounting and financial role of accounting and financial role of accounting and financial of accounting and financial
and financial Arguments are implausible and information. information. information. Demonstrates high information. Demonstrates
information unsubstantiated. Fails to address the Arguments are generally plausible with Arguments with reasonable support. standard of insight and originality. exceptionally insightful and interesting
question posed. Limited and/or some evidence. Basic research Adequate research More than adequate research. arguments. A highly-structured and
irrelevant research. comprehensive response to the task.
Extensive and relevant research.
LO2 Use of financial
Displayed a poor grasp of the use of Displayed some basic understanding of Displayed above-average grasp of the use Displayed good understanding of the Displays an excellent grasp of the use
financial information in making the use of financial information in of financial information in making use of financial information in making of financial information in making
information for decisions. Arguments are implausible making decisions. Arguments are decisions. Arguments with reasonable decisions. Demonstrates high decisions. Demonstrates exceptionally
making decisions and unsubstantiated. Fails to address generally plausible with some evidence. support. Adequate research standard of insight and originality. insightful and interesting arguments. A
the question posed. Limited and/or Basic research More than adequate research. highly-structured and comprehensive
irrelevant research response to the task. Extensive and
relevant research.
LO1 Report organisation
Poorly-written with errors in spelling Written according to the academic and Very well-written and adheres to Expertly written and adheres to
and grammar. Mistakes in citations. adheres to academic genre (e.g., with Well-written and adheres to academic academic genre (e.g., with academic genre. Extraordinarily
(Genre, pagination, introduction, body of the text, and genre. There are no mistakes in citation. introduction, body of the text, and organised presentation with respect to
format, spacing, conclusion). Has accurate spelling, conclusion).There are no mistakes n organisation, clarity of expression,
grammar and sentence construction. citation. grammar, punctuation, pagination,
grammar, spelling, spacing
punctuation,
referencing)

4. Table of Contents
1. Introduction......................................................................................................................................................2
2. The issue face by Cash Converters under ethic view...........................................................................2
3. The display of unethical practice in annual report and the impact on share price.......................3
3.1 The display of unethical practice in the Cash Converters annual report.....................................................3
3.2 The impact on share price..................................................................................................................................3
4. The social responsibility and sustainability of Cash Converters and financial institutions......4
5. Conclusion........................................................................................................................................................6

5. 1. Introduction
Besides banks, borrowers, especially low credit one for customer wish to get small amount, quick loan
often find payday lender as a financial providers. However, due to the low credit of customers as well
as the loan does not have collateral so the payday lender often charge very high effective annual rate.
Cash Converter is an international limited company, head quarter in Australia and provide small
financial loan in many countries such as the United States, United Kingdom, Spain, Canada....In 2016,
this company was discovered by The Australian Securities and Investments Commission (ASIC) due to
the treating interest rate. There was a discovery that Cash Converter charged customer extortionate
interest rate up to 633% per annual and excess fee on short-term loan. The purpose of this report is to
analyse the issues faced by Cash Converter by the view of violation of code of ethics for professional
accountant. In addition, the unethical practice was also portrayed in the annual report and the effect of
this issue on the share price of a company. Moreover, the report also discuss about the social
responsibility and sustainability of a Cash Converter in particular and for a financial institutions in
general.
2. The issue face by Cash Converters under ethic view
The payday loan is a short-term loan and customers often borrow a small amount without collateral, so
the loan often has a very high interest rate. The advantage of this loan for borrower is very quick and
most of borrower is very low-credit so they hardly access to bank to borrow at a low rate. Even though
the federal Truth in Lending Act requires lenders to publish the information about their finance charges
but such payday lenders as Cash Converters did not publish this rate. Therefore, there is a convert from
a daily rate to very enormous annualized rate.
Cash Converters International (CCV) is the biggest payday lender in Australia, listed on the Australia
Stock exchange and London Stock Exchange. CCA trades internationally in 16 countries in the world.
According to Nicole Chettle, 2015, CCA did charge a cash loan of 633% and a personal loan of 145%
annually. This is applied to a loan that took from June 2010 to July 2013. First of all, from the ethical
theory, this action of CCV violated the ethical theory of care ethics. This ethic of care promotes the
relationship between people, developed by feminists and promotes the well-being of both care-givers
and care receiver. But in this situation, CCV just care about their self-interest of maximizing profit and
ignore the well-being of borrowers. This company did take the advantage on vulnerable people.
Secondly, the issue of CCV also violated the code of ethics for professional accountants. According to
ACCA, accountant must follow five fundamental codes of ethics: Integrity, Professional competence
and due care, Confidentiality, Professional behavior and Objectivity. Therefore in this issue, CCV
2

6. accountant did violate the integrity and professional and objectivity as a professional accountant, they
must recognize the wrong charge of high interest rate to customer in the process of preparing a
financial statement. There was an enormous and abnormal high income from such cash loan but
accountants did not raise their own opinion. They did record accounting for the benefit of a company
and ignore all the objectivity of an accountant.
3. The display of unethical practice in annual report and the impact on share price
3.1 The display of unethical practice in the Cash Converters annual report
Due to an unethical practice of charging very high interest rate in Australia so in the annual report, the
company announce that the divisional EBITA in 2015 was $71.3m, rose up of 26.4% compared to last
year. For financial services- administration, this generates an EBITDA of $12.5 million, rose up to
20.3% compared to 2014 result of just $10.4 million. In addition, for the financial services, the
EBITDA rose of 18.5% over two years from $40.9m in 2014 to $48.5m in 2015.
Graph 3.1 The Financial service EBITDA of CCV over 10 years
(Source: Cash Converter Annual report 2015)
As can be seen from the table above, the period from 2010 to 2013, the EBITDA rose quite sharply,
from just over $20m in 2013 to over $50m in 2015. This time was also the time when CCA did charge
an extortionate interest rate.
3.2 The impact on share price
The graph below shows a movement of share price of CCV over three years period, during this time
CCV reached a peak period in 2014-2015 before falling down significantly from Feb 2015 to Jul 2015.
The share price moved around $0.5/share after July 2015, falling down to a lower level recently in Jan
2017. According to Bredan, 2015, there were some reasons that lead to a sharp decrease of CCV share
3

7. price in 2015 period but mainly were due to the class action of CCV. Cash Converters had to pay
$23million to settle this violation of cheating customer (James Eyers, 2015). Besides, this company
was seriously affected by the Westpac Banking Corp as they said that they would stop funding the
payday lending sector. Moreover, CCV is also under the government review as this violates the micro
credit rate cap law which effect since mid-2013.
Graph 3.2 The CCV share price over 3 years from 2014-2017
(Source: http://www.theaustralian.com.au/business)
4. The social responsibility and sustainability of Cash Converters and financial institutions
The social responsibility or often known as corporate social responsibility is emphasized as the
responsibility of a firm to follow legislations, commit to ethical behaviour, human right, consumer
right, involving in environmental protection and contribute to social well-fare. So currently, beside the
financial result that displayed in the financial reports, many shareholders, investors, customers,
governors... also concerns about the corporate social report of a company. The social responsibility of
financial institutions in general can be displayed as the pyramid below:
Graph 3.3 The Corporate social responsibility pyramid
(Source: Caroll 1991)
4

8. According to Lentner, Szegedi, & Tatary, (2015), the CSR pyramid differentiates different layers of
responsibility of financial institutions. The first layer is economic responsibility, indicating that
financial institution must follow the legislation, operate according to government rule. So for the case
of Cash Converters, this company must follow the law of Australia cap rate on personal loan which
effect since mid-2013. This law applied to all loans up to $2,000 and tenor from 16 days to 365 days.
This law does not allow loan of smaller than 15 days and here is the cap rate in Australia compared to
the UK and the US:
Graph 3.4 the cap rate of payday loan in Australia, the UK and the US
(Source: https://www.finder.com.au/australian-payday-landscape)
The second layer is ethical responsibility, defined as the obligation to do the right things, going more
than rule required. The role of financial institutions as an intermediary to connect between source of
fund and use of fund so they need to conduct ethical behavior to make thing transparent for both
depositors and borrowers. The operation of financial sector is considered as complex and very sensitive
compared to other industry so there are many strict and complex laws that need banks and other
financial institutions need to follow. So the ethical behaviors in this financial sector can be understood
as integrity, respect, transparency, fair conduct. In case of Cash Converters, this company must
announce an annual rate, a monthly fee, establishment fee…etc according to law to express the
transparency in its operation. Moreover, this company must conduct an ethical behavior, provide
customers a cash when they in need and provide them a condition to repay that debt.
The sustainability of financial institutions is mentioned as the ability to sustain over a long time. So
financial institutions must create a profit and create a value in social and environmental dimensions for
stakeholders. Hence, the external business environment and the internal factors of each own financial
5

9. institution affect whether a company can exist or not. If a company follow the corporate social
responsibility as mentioned above, there is a high possibility that a company would exist in the hard
condition. However, there are many opportunities and risks that affect the sustainability of financial in
the future.
Graph 3.5 the sustainability opportunities and risks
(Source: https://www.pwc.lu/en/sustainability/docs/pwc-fsbanks.pdf)
For the Cash Converters, they operate in very sensitive financial service so they must assure that their
product is competitive and follow with laws. The opportunity for payday lenders is that the demand of
the market is quite high so this company can widen the market in many other countries. But the risk is
that it must follow with rule and requirements of payday lender in each countries and
5. Conclusion
In conclusion, this report analyzes the case of Cash Converters, the biggest payday lender in Australia,
trapping customers of charging a very high interest rate on short-term loan. Through this case, the Cash
Convertors violate seriously the code of ethic as charging extortionate rate for vulnerable customers as
well as a company’s accountant did ignore the professional code of ethics such as integrity, objectivity.
In addition, the unethical practice was displayed in the Annual report of this company by sustainable
high earning before interest and tax. Due to the class action, this company share price reduced
dramatically during the period, especially from July 2015. Moreover, this report also mention about the
social responsibility and sustainability if financial institutions in general and
6

10. Cash Converters in particular. Cash Converter would face a lot of both opportunities and challenges in
the future as it operates in very sensitive financial sector.
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11. Reference
Bredan, 2015, [online] Available at: http://www.fool.com.au/2015/07/07/is-cash-converters-
international-limited-a-bargain-at-current-prices/ Access 23 March 2017
Cash conveter Annual report 2015, [online] Available at: http:
https://www.cashconverters.com/Investors/AnnualReports, Access 23 March 2017
James Eyers, 2015, [online] Available at: http: http://www.smh.com.au/business/banking-and-
finance/bad-news-sees-cash-converter-shares-plunge-20150922-gjrzp9.html, Access 23 March 2017
Nicole Chettle, [online] Available at: http://www.abc.net.au/news/2015-06-18/cash-converters-
reach-settlement-partial-refund-loans/6556018 , Access 24 March 2017
Lentner, C., Szegedi, K., & Tatay, T. (2015). Corporate social responsibility in the
banking sector. PÉNZÜGYI SZEMLE/PUBLIC FINANCE QUARTERLY,60(1), 95-103.
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