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Theories on How Companies Deal With Debt and Financial DistressCompanies can use two popular theories to conceptualize their capital structure. Pecking Order (POT) and Trade-Off (TOT) are always used interchangeably when proving organizations are seeking to ease their way of making capital structure decisions. The following study elucidates the differences between the two theories.
The Pecking Order vs. Trade-Off
The Trade-Off Theory refers to the concept that a company chooses how much equity finance and how much debt finance to use through balancing the benefits and costs (Agarwal, 2013). This theory explains that organizations are often financed partly with equity and partly with debt. Pecking Order Theory argues that the cost of financing increases with asymmetric data. There are three sources of financing for a company: internal funds, new and debt equity. Firms prioritize their financing sources. First, they prefer preferring internal financing, and then debt, lastly equity is used as the last resort. This implies they use internal financing first when this is depleted; they use debt, and when it is no more sensible to solicit debt, they turn to equity (Puntaier, 2010).
The TOT addresses the limitations seen as inconsistent with the advantage behavior provided some level of information (Agarwal, 2013). This theory postulates that organizations would naturally finance new investments using debts as against equity; first to trade-off tax liabilities and then second to cause some level of scarcity on the stock...
However, opponents of the TOT claim that it failed to explain the cause of a decline in stock prices as seen when companies announce new issues. The ensuing discussion evidence that debt financing correlated to periods in positive direction especially about economic boom and rates. Conversely, the POT disagrees on the degree of simplicity postulated by the TOT. POT explains that the availability of unequal data and the projected cost of bankruptcy or distress will adversely affect managers' choice of financing (Parrino, 2011). The concluding consideration of the POT is that companies are most likely to issue equity following a share price increase. This is explained by the fact that if there were a fixed target leverage ratio, companies would prefer to issue debts.
Specific Businesses Following the Trade-Off Theory and the Pecking-Order Theory
Coca-Cola uses debt when financing its operations. The company maintains debt levels, which they consider prudent depending on interest coverage ratio, cash flows and percentage of debt to capital (Parrino, 2011). This approach benefits the company because it allows them to lower their overall cost of capital thus increasing their return on shareholder's equity. Coke's debt management strategies, in combination with their share purchase policies and an investment activity results in current liabilities surpassing current assets. Payments and issuances of debt include both long- and short-term financing activities. For…
Human Resources Managing Organisational Culture The values and behaviors that contribute to the unique social and psychological environment of an organization make up the organizations culture. Organizational culture is the summation total of an organization's past and current suppositions, incidents, viewpoint, and values that hold it together, and is articulated in its self-image, inner workings, connections with the outside world, and future prospects. In dealing with the management of organisational culture, it is
While the first chapter was brief, it is important to explain what will be studied and then move forward into the literature review. In Chapter 2, the literature review provides a review of academic literature by way of journals and textbooks. This information is placed into separate sections which allow for ease of understanding. An introduction is made to capital structure, and information is given on the Indian capital structure
76). As automation increasingly assumes the more mundane and routine aspects of work of all types, Drucker was visionary in his assessment of how decisions would be made in the years to come. "In the future," said Drucker, "it was possible that all employment would be managerial in nature, and we would then have progressed from a society of labor to a society of management" (Witzel, p. 76). The
1). Little study has been conducted of Indian firms debt-to-book rations before Rajagopal, but he indicates that, given the relatively recent expansion of India's economy, the difference between the U.S. And India, for example,, is not nearly as prohibitively large a one might suspect. This is not to deny that India faces persistent challenges unique in its place in the world: the nation has been "traditionally weighed down by heavily regulated
The last century has seen an increase in the level of international purchases which has been supported by the developments in transportation and technology. Goods can move faster than before with developments in logistics. The negotiation and forming contracts for purchase with companies and communicate with potential suppliers in distant countries is also easier than in the past with the internet and tools such as video conferencing and emails.
Pedagogic Model for Teaching of Technology to Special Education Students Almost thirty years ago, the American federal government passed an act mandating the availability of a free and appropriate public education for all handicapped children. In 1990, this act was updated and reformed as the Individuals with Disabilities Education Act, which itself was reformed in 1997. At each step, the goal was to make education more equitable and more accessible to