Debt and Credit Financing
While there are general rules that each company can rely on to help it determine the best strategies for determining how to finance its short-term and long-term goals. However, as this analysis shows, each company must make financing decisions based on its specific needs and market position.
Companies exist to make money. However, in order to be able to create the products or services with which they can make money, companies also have to be able to bring in money before the point of sale. Building up an inventory requires money (or other forms of capital) and no company can succeed unless it has a well-thought-out and well-defined strategy for financing its ongoing expenses as well as any extraordinary long-term expenses such as building a new factory.
Balancing long- and short-term goals is difficult enough, especially given how volatile the overall economic marketplace can be (as…… [Read More]
Debt vs. equity financing
As its name implies, debt financing involves borrowing money from a bank, individual, or company, with a promise to pay back the principle with interest. Any organization can make use of debt financing, spanning from a small single proprietorship to a large multinational. The owner of the business retains control over the organization and the only responsibility he or she has to the lender is to make the agreed-upon payments on time (McCormick 2012). These payments are also tax-deductible for the business, one of the attractions of debt financing (McCormick 2012). For this reason, it might be financially advantageous to use this form of financing, if interest rates are low enough. However, there are some drawbacks, namely the fact that when interest rates are high in relation to the business tax rate, the cost of borrowing may be prohibitive. egardless of how well the business may…… [Read More]
When the economy suddenly has more money circulating around there is the threat of inflation. "The Federal eserve is expected to hold its main short-term interest rate at a 45-year low of 1% at its last meeting of the year in December, as well as into part of 2004, economists predict. Holding short-term rates at such low levels might motivate consumers and businesses to spend and invest more, something that would lift economic growth." (Aversa)
The national debt crisis has required a new look at corporate America in regard to valuing the risks and returns of companies and instruments. Many investors apply the Warren Buffet philosophy. Buffett seems to believe that thorough analysis of each company, patient purchasing at the lowest possible price and holding for the long-term will weed out the dogs. Warren Buffet is one of the richest men in America with probably only Bill Gates ahead…… [Read More]
Debt Equity Ratio
Why is debt a comparatively cheaper form of finance than equity?
The debt of a company is sum of money owed to the company from different sources. In contrast, equity refers to the portion of a company's assets that the shareholders own. To sell stock in a company the company must be advertised publicly, if the shareholders extend beyond those of the company's immediate administrators, which can cost money, and also results in more outside control and administrative costs to the business
If debt is cheaper than equity, why do companies approach the equity markets?
In such a debt-based scenario, the different sources have the right to receive and enforce payment from the company. Also, the act of selling stock can act as a form of positive public relations for a company, generating interest in its product or service.
Can one minimize WACC when there is a…… [Read More]
How can using more debt impact a firm's capital structure?
The capital structure is comprised of debt and equity so inherently, any change to either will change the firm's capital structure. hat is being proposed is that in advance of our IPO we will take on more debt. There are no universal truths as to what all Street might want to see in a capital structure, and for each firm the decision will be different, but it is important to understand what the changes to the company's capital structure mean. For the company, increasing debt increases the firm's leverage. The firm is therefore riskier, because more of the company's cash flows are dedicated to debt repayment or interest obligations. As such, there is less money left over for the firm's shareholders. However, once the fixed debt obligations are paid off, everything that is left over does go to…… [Read More]
In addition, the state's various tax revenues would dry up by the year 2005 according to the new tax plan, and the repeal of the federal estate tax would be gradually phased out over a period of ten years. (the Impact of the Bush Tax Cut on Working Families)
In general, all state taxes are based on an equation that says that all credit must be based against a federal tax liability, and this would in effect mean that the federal government would benefit immensely by the very fact that all the money that was originally intended for the states would be accessible to them from the year 2006 to 2011, and the states would inevitably feel the immeasurable loss. The 'National governor's Association' estimates that the windfall for the federal government in this case would be in the amount of, at a rough estimate, $36.5 billion over a period…… [Read More]
2004-2010: The Building of a Crisis
Greece's admittance into the Eurozone had its skeptics at the time it happened, and the controversy increased with the admission in 2004 that the deficit figure was fudged in order to allow Greece to join the exchange rate mechanism on January 1, 2000, which was key to the country being allowed to use the Euro when the currency was first introduced on January 1, 2002.
Between 1999 and 2007, the three Eurozone countries with the highest rates of inflation were Ireland, Greece and Spain respectively, each topping 3% per year (de Grauwe, 2009). This inflation was the first sign of the bubble that would eventually become a significant contributor to the debt crisis. Those economies each expanded rapidly in the middle part of the last decade. The following table illustrates the real GDP growth rate of the study countries in the years 2004-2010, the…… [Read More]
AMSC had announced a letter of intent for secured debt financing in July of 2003 (AMSC 2003 Annual Report) when the stock was trading in the range of $8 per share. The blackout gave the firm's stock considerable momentum, and it finished the month of August up over 50% at $12.19 per share (MSN Moneycentral, 2010). Equity issues normally result in dilution of the stock price, since the issue must be offered at a discount to the current price in order to attract investors. ith the stock price spike, however, such a discount would still be above the July price, or indeed any price the company's stock had seen in the previous 18 months. Thus, the impacts of the dilution would be minimal to the existing shareholders.
The decision may also have been made on the basis of capital structure. At the time, AMSC did not have any long-term debt.…… [Read More]
4 million during its most recent quarter before the decision to take on equity financing (American Superconductor opts for secondary offering, 2003). Therefore, with cash reserves of only $12.1 million, there's some concern that the company could not make regular monthly debt payments on an ongoing basis. In particular, a forecast for a reduction in the cost of funding operations from $48 million to $13-$15 million is pretty drastic for a growth company and AMSC may end up with more operational costs than it is currently anticipating. Even if it could meet the regular debt payments, AMSC can use the money that would have gone towards those debt payments to further invest in its business which appears to have exciting growth potential.
With the equity financing choice, payment distribution to shareholders occurs on a yearly basis at which time the company can determine appropriate dividend payments after it's fully aware…… [Read More]
Few students are prepared for the relatively easy availability of credit after they enter college. In many cases, they may have had no experience managing their own credit. Many are encountering their first period of significant debt accrual with student loans, whether directly from the government or through private lending institutions. A student should regard him/herself as an asset, and make some financial assumptions about how much he/she will earn in the future, and what his/her debt capacity is at present.
Although credit card offerings are tempting, it is best for the student to ignore the come-ons and attempt to live on his/her own resources during college. This will insure that the student does not take on short-term debt which he/she cannot cover through current income.
lock, S. (2006, February 22). Students suffocate under tens of thousands in loans. USA Today, p. n.p.
Carnahan, I. (2003, August 11).…… [Read More]
European sovereign debt crisis has quickly become one of the main topics in today's news and more specifically in business and finance news. The European governments are struggling to not only bring back stability but also maintain it with relation to their finances. John Nugee from State Street Global Advisors has described this European sovereign debt crisis in a very clear and concise manner stating that "economically, it is clear that several EU countries -- most notably Greece, Portugal, Spain, Ireland and Italy within the Eurozone -- have been running very large deficits for some time, and are reaching or have already reached levels of debt-to-GDP that are above 100% GDP." It is important to note, however, that the reasons behind the deficits and large debt levels and in turn the sovereign debt crisis differ between countries. So, we need to begin by taking a closer look at each individual…… [Read More]
U.S. Debt Crisis
Financial crisis is not a totally new concept. It is a fact that more than three quarters of the entire members of the IMF, whether they are developed or developing countries have been affected by a serious financial crisis ever since the year 1980, demonstrating the instability of the world wide global economy. he origins of the financial crises may be different, but what all these crises have in common is the fact that they were all preceded by a phase in which large amounts of foreign capital flowed into their country, and this resulted in the support of current account deficits. he stock markets soared downwards, the price of consumer goods fell and serious constraint in the government finances observed to have occurred all over the world. his phase demonstrates a decline in the imports of United States and simultaneously affecting the countries relying on exports…… [Read More]
In most countries, a rise in debt would have a series of economic consequences leading to the devaluation of the currency and a return to an equilibrium. This has not happened with the U.S. dollar because of a unique externality -- its role as the world's currency. However, that role itself dependent on a number of factors, including but not limited to domestic resources stocks, strong legal and political systems and sound economic policy. It is conceivable that a shift in these underlying qualities -- such as the decline in foreign confidence in U.S. accounting systems -- could signal a shift to other currencies such as the Euro as the world's default. ithout that key externality, the U.S. dollar would be subject to collapse. This may take more time to occur with the dollar than with other currencies, but ultimately market forces will prevail, meaning that the U.S. debt situation…… [Read More]
When you seeing, consistent amounts of deficits or surpluses, this will have an impact on the debt level. As, this will cause the sum to: rise or fall, which is a sign of the underlying trends. Over the course of time, these patterns can cause the amounts of debt to increase (if there are large deficits). While the debt, will decline when the government is reporting consistent surpluses. This is significant, because it is showing how these two factors will have an impact on the size of the debt. (Cashell, 2010)
Discuss the Impact on Interest Rates and Future Tax urdens
If the debt is allowed to increase it will mean that interest rates and taxes will rise. The reason why, is because the creditworthiness of the federal government will be brought into question. This will cause interest rates for a wide variety of loans to multiply. At the same…… [Read More]
Convertible Debt: elevance and Features
In basic terms, a convertible debenture can be viewed as a means of financing in which case the debt-holder is given an option of converting the debt to stock. Like an ordinary debt, convertible debentures pay the debt-holder an interest. Companies including but not limited to small "dot-com" companies have in the past used convertible debentures to not only raise the capital they require to grow but to also maintain their businesses. Such companies choose to use this means of finance for a variety of reasons.
To begin with, it is important to note that unlike ordinary debentures, convertible debentures have a conversion feature. This feature should be likened to a sweetener. For any small business, attracting capital could prove really difficult. This is more so the case for small startups with unproven profitability and limited operating history. It is important to note that although…… [Read More]
U.S. Deficit, Surplus and Debt
In the last three years, the deficit in U.S. budget has increased enormously. When the governments spends more than what has been earned as revue the economy has to face deficit. The amount of money spent by the U.S. government minus the revenues is considered to be the federal budget deficit. Surplus occurs when the government takes in more money that what has been spent in a year (Hall, 2012).
When the economy of a country is weak, as a result the income of the people tends to decline. Thus, the government started to collect less tax revenues and spends more on the safety-net programs, including the unemployment insurance. This can be considered to be one of the major reasons for an economy's deficit to grow during the period of recession. On the other hand, in instance when the economy is strong the deficit shrinks…… [Read More]
Federal Debt and Deficit Reduction Plans
Federal debt is a public debt which represents the federal securities owned by individuals or institutions outside the United States government and United States Treasury securities that are administered by the United States government. The United States government has to take some action to reduce the Federal debt as it is rapidly increasing. The Federal debt is represented by the Treasury of United States.
The total outstanding public debt as on 6th May 2011 is $14.32 trillion which is approximately 98% of the GDP (Gross Domestic Product) of $14.66 trillion. The rising level of federal debt may cause the fiscal crisis in the United States. Investors may not finance government if they are not compensated with very high interest rates for their money. Thus, interest rates will also rise with the debt. This problem can be solved only if the economy recovers. This recovery…… [Read More]
What are the probable proceeds of the Debt Swap program for Jack's $50,000?
There are probable proceeds since the university will be getting sucre denominated bonds to show for their original investment. Of course in the long-run, bonds do not match an investment in another market such as stocks, but there are still perks to holding this medium.
First, there is a type of capital preservation. Unless Ecuador completely defaults on the bond payments or the sucre completely loses its total value, the bonds should provide a return equivalent to the amount they originally invested, in this case $50,000.
Second, these bonds will pay interest in intervals and that will continue to provide income for the OSSHE and exchange programs. In other words, the bonds provide ready cash fro a cash poor system.
The bonds may also provide some tax advantages for the programs and university. For example,…… [Read More]
U.S. NATIONAL DEBT
The national debt of the United States is at an all-time high in dollar terms.
What is national debt?
National debt just like personal debt can be defined as the obligations that the government has to other parties with regard to money. It can also be defined as the claims of other nations and institutions on the assets of a country. A situation of national debt occurs when internal revenue collection does not generate enough to cover its expenditure thus raising the need for additional funds from other sources. Normal sources of revenue for federal governments include taxes, levies for various services such as issuance of travel documents and licenses.
US Debt history- The Trend
The option to incur debt has been adopted by the U.S. since its inception as a nation. The budget for the nation has thus always exceeded the resources at hand. Some factors,…… [Read More]
U.K university students who are debt ridden.
Survey on Student Debts
University students today are facing increasingly high levels of debt because of the credit card and the various student loan institutions available to them. This leads to them suffering from anxiety and depression when they are unable to pay it off.
A national survey that was conducted by the academics at various universities in the U.K came up to the conclusion that students have no trust in banks and other loaning institutions, meanwhile nearly two thirds of parents of university students are opposed to the government's current student support system called top fee. The survey also concluded that the current fees and loans system is detested among the student body as well.
Margaret Hodge also accepted that system of loan schemes would pose to be a nightmare for the students in the future.
The students want the prime minister…… [Read More]
Interest Rates and Inflation
The macroeconomic variable that corporate financial managers should be preparing for in the next 5 to 10 years is the interest rate. If rates rise, markets are going to turn downward quickly. Low rates makes it easier to borrow, easier for companies to issue cheap debt, and easier for the government to do the same (Hall, 2019). If rates rise, debt becomes expensive and if the economy is carrying too much debt and individuals and companies are over-leveraged a serious crisis could occur in the market. The downside to keeping interest rates low is that it encourages risky borrowing and investment in risk assets like equities. If people cannot earn a decent return on investment by putting their money in savings, they will put their money into equities, which will cause a bubble in stocks—like what can be seen today. Stocks are historically overvalued and yet…… [Read More]
.....debt and equity has a number of different implications, including some significant tax implications. Debt is repaid from earnings prior to taxation, where equity payouts typically occur on an after-tax basis. This is because debt repayments take priority over the payment of dividends or even to stock buybacks or retained earnings. Debt capital is thus repaid before the company is taxed -- debt lowers taxable income. Thus, debt will also lower the total tax burden that the company faces (FindLaw, 2017).
If the company opts for equity financing, it will face a higher tax burden. The taxable income will be higher, which means that the total tax payable will also be higher. Then, the equity that flows to shareholders will do so on an after-tax basis. The shareholders of course will also pay tax on whatever flows they receive. For the corporation, even though it doesn't pay that tax, it…… [Read More]
The nation of Greece is currently in debt to its creditors to the amount of 321 billion Euros -- "approximately 180% of its annual economic output" -- effectively making the nation a debt-colony (Rankin). As of 2015, the IMF had pledged nearly 50 billion Euros to Greece (and had leant the nation more than 30 billion up to that point -- with the rest contingent upon Greece making payments that were already due). By May 2016, Greece's creditors -- known in the media as the Troika (European Commission, the ECB, and the IMF) -- were meeting to discuss the issue of loaning another 10 billion Euros to the embattled nation (Rankin).
The nature of the crisis that prompted Greece to apply for aid was this: it had become a member of the EU in spite of having less than stellar fiscal discipline. It had a trade deficit and when the…… [Read More]
According to Cleverley, Song and Cleverley (2011), there are four options for health care organizations for finding long-term debt financing. These four options are tax-exempt revenue bonds, Federal Housing Administration (FHA)-insured mortgages, public taxable bonds and conventional mortgage financing. Tax-exempt revenue bonds are issued against the facility's revenue and these are a low-cost source of debt financing. FHA-insured mortgages need to be approved, which is a tricky process. The approval allows the hospital to have mortgage insurance that lowers the cost of borrowing for hospitals. Public taxable bonds are a typical corporate bond issued with an investment bank as underwriter to the public markets. Conventional mortgage financing often involves placing the mortgage with an investor, but the drawback is these usually cannot cover entire projects.
A health care firm can increase its equity in three ways. The first is through retained earnings, the second from contributions…… [Read More]
External Debt Crisis of Developing Countries
Past studies on external debts have been done for two reasons. First, is that while borrowing from external sources can increase a nation's access to funding, borrowing from internal sources only transfers the existing resources within a country from one party to another, thus, only external borrowing can result in a 'transfer' problem (Keynes, 1929). Second, is that since financial regulatory authorities cannot just print hard currency that is required to repay debt from external sources, only external borrowing is associated with the vulnerabilities that may bring about debt crises. In terms of external debts, most countries don't know who specifically holds their debts, and thus, they categorize all debts from the international market as external, and all debts from internal markets as domestic (ECESAUN, 1999), thus, so-called external debt is, but a poor proxy for the transfer of financial resources between nations.
Foreign…… [Read More]
" (Small-business financing: Debt vs. equity) Venture capital is a better route than an initial public offering for an early stage startup such as Active Reasoning that lacks the size and stability required for becoming a public company.
y taking on equity financing, the company's executives are well aware that they will be giving away partial ownership of the business in exchange for money and that this will have a significant impact on management's ability to make certain decisions (Equity financing). Even so, management considers debt financing too risky at this point in time when it is not certain if the company will have stable cash flows to make monthly debt payments. Management fears that high interest costs during difficult financial periods could potentially lead to insolvency (Debt vs. equity -- advantages and disadvantages) and does not need the tax write off for the interest on debt since it does…… [Read More]
Of late, an alarming hike is being witnessed in college tuition fees. This, coupled with books, housing, supplies, transport and food expenses, leads to unmanageable debt for college students. A majority of financial experts suggest maximum borrowing to amount to one’s anticipated earnings during one’s first year following graduation. But the hike in tuition fees renders this suggestion hard to follow. Nearly 50% of collegegoers today consider quitting college midway owing to debt incurred. Unable to meet these expenses, an increasing number of pupils are actually quitting college. Meanwhile, other pupils have no option but to seek full-time employment, besides attending college full-time. Hardly any student graduates without being burdened by debt. In this paper, the issue of college campus debt, its prevention, and potential solutions if one cannot escape it, will be addressed.
Normally, the highest-risk group isn’t that of pupils having the biggest debt; rather, it…… [Read More]
United States Deficit, Surplus, and Debt Have an Effect on the United State's Financial Reputation on an International Level
The objective of this study is to examine how and why the United States deficit, surplus and debt have an effect on the United States' financial reputation on an international level.
The United States has been historically viewed as a country that is financially sound. In 2011, as the United States government appeared it was going to default on its debt it is reported that there was a great deal of "bitterness, division and dysfunction that resounded around the world." (Sanger, 2011, p.1) It is reported that the United States is experiencing a diminishing of its "aura as the world's economic haven and the sole country with the power to lead the rest of the world out of financial crisis and recession." (Sanger, 2011, p.1) Additionally, the United States debt levels…… [Read More]
U.S. Department of Commerce
South Africa’s population of 50 million enjoys the most sophisticated, mature and productive economy on the African continent today (U.S. commercial service, 2014). The country’s GDP represents approximately 33 percent of the sub-Saharan total and the South African economy has experienced sustained growth of 3.2 percent over the past 5 years (US commercial service, 2014). According to the U.S. Department of Commerce, “The U.S. Commercial Service in South Africa is co-located with the U.S. Consulate General [with the] mission to create jobs in the United States by advancing commercial opportunities in South Africa and strategically assisting firms export U.S. products and services” (U.S. commercial service, 2014, para. 2).
World Trade Organization
The World Trade Organization’s (WTO’s) most recent policy review (2008) shows that during the period from 2003 through 2008, the percentage of trade in goods and services to South Africa’s GDP rose from 53.8% to…… [Read More]
British Age of Austerity and the Debt Crisis
Currently, the United Kingdom is going through a period of intense economic turmoil where the fundamental questions of monetary and fiscal policy are major political issues. As Europe finds it's way through the ongoing sovereign debt crisis, Britons find themselves on the cusp of a recession and their government is enacting unprecedented budgetary cuts to weather the storm. This paper will analyze the macroeconomic policies of the Cameron government in response to the sovereign debt crisis and the associated recession here in the United Kingdom.
Before we can analyze the current situation it is important to define terms. According to the Office for National tatistics (2011), the British government is in the midst of a recession. This is defined as a period of general economic decline, defined usually as a contraction in the GDP for six months (two consecutive quarters) or longer.…… [Read More]
Yet, such measures ignore not only debt, but the impact on economic growth, with rescue measures tied to austerity and tax increases. While Adam Davidson's The Other eason Europe is Going Broke attempts to place Europe's economic crises into a debt component and an economic growth component; the reality is that they are one and the same. European economic growth has lagged the U.S. considerably since the early 1970's largely due to government involvement in the European economic model. Heavy spending on the entitlement state, financed by higher tax rates has sapped economic strength from Europe. For the U.S., the sovereign debt crisis in the EU highlights the dangers of an expanding entitlement state, which weakens economic growth through ever increasing drains on the private sector.
The U.S. economic future will be one of slow growth, as with Japan and Europe, as the U.S. debt to GDP ratio increases.…… [Read More]
Ukrainian bond market, specifically seeking to determine the factors that are restraining its development. The Ukrainian bond market is underdeveloped, with relatively poor liquidity. Several different factors contributing to this are examined.
What we know already is that there is a low level of liquidity in the Ukrainian debt market. This serves to suppress demand for the nation's debt, and it increases the cost of borrowing because low liquidity means higher risk for buyers. We also know that the country's banking sector has also been a contributor to the slow growth of the debt markets. The main issue with the banking sector is that it is a barrier to investors to buying these bonds -- the banks should act as intermediary but does note.
What we need to find out is what other factors are contributing to the overall sluggishness of the Ukrainian debt markets. Some of the specific issues…… [Read More]
S. collapsed. It had been riding a speculative bubble fueled by low interest rates and creative financing. Lending to "subprime" borrowers was encouraged, in part by the liquid secondary market for subprime mortgages that was created by the popularization of CDOs. The widespread defaults in the U.S. mortgage market created a situation where CDOs were subject to considerable default risk. hile individual-specific risk had been eliminated, market risk had not. hen the market tanked, the value of the CDOs did as well. That many viewed them as investment grade products only complicated the issue -- now these investors needed to sell their CDOs because their risk profile was skewed. A European study of banks that held CDOs and banks that did not found that the banks with CDOs were riskier in the long-run than those that did not have CDOs (Hansel & Krahnen, 2007). Fender and Kiff (2004) determined that…… [Read More]
There are a number of financing options for small business. The two major categories are debt and equity. Debt comes in a variety of forms. Bank loans are common. Credit cards are used sometimes by startups; bond issues by larger firms. Debt is an attractive option for a number of reasons. Debt has a lower cost of capital, which is beneficial to many small businesses. As well, debt financing allows the owners of the company to maintain control, and this is usually considered to be quite important for many small businesses in particular. The downside to debt is that the company is then obligated to pay that debt back before it can reinvest profits back into the business - debt repayment is more important than reinvestment in terms of financial obligations (Parker, 2012).
Equity comes at a higher cost than debt. Equity is also means that some control is…… [Read More]
Long-Term Financial Planning
FedEx Corporation was established in 1971 and the company has four distinct business segments that include FedEx Express, FedEx Ground, FedEx Office and FedEx Freight. Over the years, the company has obtained 6-year of CAG (compounded annual growth of 5%). However, the company is likely to obtain similar CAG of 5.9% over the next 8 years based on current economic environment. (FedEx Corporation .2010.
The WACC (weighted average cost of capital) is the average interest rate that a company should pay in order to secure a project. Moreover, WACC is the average rate of return that a company must earn from its current assets to satisfy investors, shareholders and creditors. Since FedEx Corporation is always trying to create value for shareholders, the paper calculates the WACC of the FedEx to evaluate the company ability to generate returns from its assets.
Estimation of WACC of the…… [Read More]
The newly independent states were generally rated according to high level of political, economic or social risk (not entirely untrue), which meant that the levels of interest were generally extremely high. Even more, the sums paid for interest would generally surpass the actual funds that had been received. This meant that, instead of focusing the country's resources on development and internal projects, most of it had to be spent paying off debts which were not even viable and extremely costly.
On the other hand, from an international perspective, international debt is something fundamentally essential to the financial markets. Money is made to circulate and move around, which means that entities need to be connected to the financial markets, borrow on the open markets and use that money to create added value and generate more cash flow. The fact that, in many cases in the developing world, this mechanism was in…… [Read More]
Hamilton's Arguments in Favor of the Debt and the Bank
Jefferson would have no position against witch to argue had not Hamilton made the argument for the national debt so eloquently and so forcefully. Essentially, Hamilton and Jefferson entirely disagreed on the proper course to put the nation on a prosperous track. The greatest issue was whether the multitudinous colonial debts piled up by the individual colonies during and since the war with England should, in the spirit of e pluribus unum, be taken on by the federal government.
Hamilton postulated that the assumption of these colonies' - now states' - debts was essential to make the nation a credible, operating reality, deserving of trust in seeking credit from other countries. Also, Hamilton felt that "monied men" - those wealthy Americans who had made the loans to the state governments and how had in many instances not been paid yet…… [Read More]
A preview of capital structure issues
In regards to the overall business environment, capital structure has profound implications of the business, irrespective of its industry. For one, a firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells $40 billion in equity and $160 billion in debt is said to be 20% equity-financed and 80% debt-financed. The firm's ratio of debt to total financing, 80% in this example is referred to as the firm's leverage. This leverage has implications on the entire firm. For example, leverage in many respects is a double edges sword. On one hand, leverage can amplify gains for firms. However, if used incorrectly, leverage can also amplify loses. As such, firms must be cognizant of its capital structure as complacency can hinder overall business performance. Debt and equity financing, can have a profound implications on the…… [Read More]
Since their introduction in the early 2000s, the tax cuts have diminished the nation's tax bill by hundreds of billions every year. Over the next ten years, they are expected to add $3.6 trillion to the debt. Without these cuts, our medium-term budget (say, over the next decade) would be sustainable. As long as new revenues are off-limits, attacking the deficit is equivalent to attacking the functions of government. That gives the anti-deficit argument strong ideological support from small-government advocates. But there are others who are not motivated by anti-government ideology but are misguided nevertheless. The ecovery Act, with a price tag of about $800 billion, was a historically large stimulus, and it was wholly paid for by borrowing. But by 2012 it will add less than 0.5% to the deficit-to-GDP ratio, and nothing to the growth in the debt (it does add to the level of debt, of course;…… [Read More]
Tax Deductions: Are Unpaid Loans Tax Deductible?
John loaned his friend Jack $1,000. Jack did not repay the debt and left town. John wants to know if he can claim any tax deduction, and, if so, what is the character of the deduction? However, to answer John's question, one must first find out more information about the nature of the loan. This is critical because there are two broad types of loans and debts: business loans and personal loans. Furthermore, under the correct circumstances, it is possible for people to take tax deductions for certain types of business loans and personal loans. Knowing whether John made Jack a loan from his personal money or from his business money is the crucial first step in determining which, if any, Internal evenue Service (IS) regulations or tax laws will permit John to deduct the unpaid debt.
If John is a business owner…… [Read More]
Calculate Touring Enterprises' weighted average cost of capital (WACC).
Work as follows: first, compute the after-tax cost of debt, then compute the cost of equity.
WACC = E/V x Re + D/V x Rd x (1 - Tc)
Re = cost of equity
Rd = cost of debt
E = market value of the firm's equity
D = market value of the firm's debt
V = E + D = firm value
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate
Cost of equity 5%
Cost of debt 10%
Total Equity- 7 million
Total debt- 18 million
Total 25 million
Determine the weightings of debt and equity in the capital structure.
Equity -28% (7 divided by 25)
Using your answers to the above questions, calculate the WACC
WACC = E/V x Re + D/V x Rd…… [Read More]
al-Mart's capital structure is relatively debt-heavy. For the end of fiscal 2008, Target had a debt/equity ratio of 0.4, indicating a capital structure more oriented towards equity financing. Costco had a debt/equity ratio of 1.25, again lower than that of al-Mart (MSN Moneycentral, 2010). These competitors provide interesting comparables in that neither is as heavily leveraged as al-Mart. They are very large companies with stable cash flow, just like al-Mart, but have chosen to take on less debt in their capital structure.
The financial crisis has also had an impact on al-Mart's capital structure. hen planning the optimal capital structure, firms need to consider the ability of the company to whether economic slowdowns. In al-Mart's case, the impacts of the slowdown were delayed somewhat, but eventually sales began to slump. The company increased its long-term debt in both 2009 and 2010. The debt/equity ratio increased to 1.50 in 2009 but…… [Read More]
One of the most important decisions that businesses have to make when sourcing for funds is whether to use equity or debt financing. Debt and equity financing happen to be the primary sources of capital for entities. In this text, I discuss these sources of financing in significant detail. In so doing, I will amongst other things highlight the main differences between them as well as the various business characteristics that make one source of financing better than the other.
Debt and Equity Financing: Key Differences
A business seeking capital has to choose from a wide range of funding sources. Such a business can either seek to borrow from banks, issue corporate bonds or get private loans from other investors with a higher risk appetite than banks. All these can be classified broadly as sources of debt financing. Commercial banks however remain the commonest debt financing sources (Kuratko and…… [Read More]
There are a number of financial ratios that will be valuable to a small business person. A small business is often concerned with cash flow, so ratios that are the most concern fall into three categories -- liquidity, profitability and efficiency. Liquidity ratios measure the ability of the company to meet its upcoming financial obligations. These ratios are important for ensuring that there is enough cash on hand to pay the bills. The profitability ratios are important because the business will be more successful if it is able to manage its margins. Efficiency ratios are concerned with how fast items like inventory or accounts receivable are turned over. These ratios are a direct reflection of the company's working capital, and improvements in these ratios improve the working capital flow.
These ratios are going to be slightly different from those that a large corporation values. The large corporation actually…… [Read More]
Bernstein also makes the point that government debt is not the same as household or business debt, and that is a valid point to make. There are a few differences of note. The first is borrowing -- government has much better ability to borrow than either business or households, the United States in particular. The size and diversity of the economy is one factor, the difficulty of putting a government into default is another, but also the U.S. has control over the value of its currency. It can devalue its way out of debt if need be, like Iceland did. Households and businesses do not have this luxury -- they are usually on very short leashes with their creditors, with grace periods measured in weeks and months, rather than decades.
Ultimately, the only logical choice in the face of a recession is to increase government spending in order to offset…… [Read More]
Google and Microsoft are competitors in two different businesses, search engines and mobile operating systems. Google is the industry leader in search engines, garnering massive amounts of traffic on its different sites. Google has a number of different search sites (maps, scholar, images, translate) that are in line with its mandate to make information more freely accessible. The company's Android mobile operating system has become a major product for the firm, spurring strong growth in the past few years. Android is licensed by OEM companies (smartphone and tablet makers) to use as an operating system. Much of Google's revenue comes from advertisement sales, which are based on search terms and customer information that has been gathered. The company holds a dominant position in this market.
Microsoft's main business is in the indows operating system and in the company's suite of software. These generate revenues both from OEM…… [Read More]
Scott Equipment Organization is trying to determine between short- and long-term debt for its operations next year. The company wants to examine three different scenarios to determine the rate of return on equity, the net working capital position and the current ratio that each of the options will deliver. The different scenarios are as follows.
$24 million STD
$18 million STD
$12 million STD
This paper will analyze these different scenarios to determine the effect that each will have on the company's finances. The givens in the scenario are $30 million in current assets, $35 in long-term assets, $40 million in equity, sales of $60 million, EBIT of $6 million and a tax rate of 40%. The paper will not only analyze the three financial metrics but will examine the three scenarios in terms of the tradeoffs that they offer.
Return…… [Read More]
As a small business owner determine the financial ratios that are important to the business, and compare them with those that are important to a manager of a larger corporation.
For a small business, the most important financial ratios are those in the profitability and efficiency classes. These include profit margin, return on assets, asset turnover, and fixed asset turnover. For the most part, small businesses are able to be more efficient and have higher profitability ratios than larger companies (Upneja, Kim, & Singh, 2000, p.28). Small businesses would be especially concerned with profit margin and return on assets, while a larger corporation would focus more on earnings per share and return on equity, which are concerned with shareholder equity, something that does not concern many small businesses.
Small business owners would also be interested in the liquidity ratios that measure the cash available to pay off debt,…… [Read More]
The three major categories for the federal government's revenues include: individual incomes taxes, corporate income taxes and social insurance taxes. Individual income taxes accounts for the largest amounts of spending for the federal government. As, these figure increased from: $1.1 trillion in 2010 to $1.3 trillion in 2011. While social insurance taxes are the second largest source of revenues with them providing at total of: $938 billion for 2010 and $978 billion for 2011. Then, there are corporate income taxes that are accounting for revenues of: $252 billion for 2010 and $292 for 2011. ("The udget and Economic Outlook," 2011)
What are the three major categories of expenditures for the federal government? Please comment on each and indicate their relative importance to each other. Relative importance can be indicated by dollar amounts, percent of total revenue or expenditure or, though less informative, by ranking.
Three categories for the…… [Read More]
isk, eturn and Their Evaluation
isk & Performance Indicators
Since this is a small business, therefore raising equity capital through public stock issue is less likely than debt or whatever form of paper issued to angel or venture investors. Therefore while a larger, publicly traded firm would consider the return on equity version of the short form DuPont equation, a small, more closely-held concern would focus on return on assets (OA). If OA is net income over sales times sales over total assets, i.e. net income over total assets, then any action that could increase the numerator, total income, or shrink the denominator(s) should increase OA compared to past performance within the firm and the competition outside it. If competitors all use the same (best) plant, then maximizing efficiency of the same assets through process or brand innovation; input cost reductions, and also financial performance like minimizing payables days over…… [Read More]
U.S. Government Deficits
hy is it that the U.S. Government can spend more than it brings in through taxes and other revenue? hat are the specific reasons why the U.S. can consistently and constantly operate its programs and conduct official business while running a huge deficit? These questions and others will be reviewed in this paper.
The Deficit -- why and by how much is the U.S. In debt?
A May, 2012 article in the Economist quotes Republican presidential candidate Mitt Romney saying that the U.S. Government has "…a moral responsibility not to spend more than we take in" (Economist, 2012, p. 1). The article reminds Romney that if what he is saying is true then America is "…a thoroughly depraved and immoral country" because in 76 of the past 100 years "the U.S. government has spent more than it has taken in" (Economist, p. 1). In fact in 26…… [Read More]
The FedEx capital structure is mostly in common equity. The company does have some long-term debt, but this is only a quarter of the capital structure, indicating that FedEx is not a highly leverage firm.
The key economic variable for FedEx is the GDP, in particular the GDP growth rate. The GDP is the broad measure of economic activity. This is an important measure because FedEx has a broad corporate customer base, and as such its success is highly correlated with the broader economy. When the GDP is rising, this is good for FedEx's business. Now, if we are talking about expanding in Canada, then the key is to know where it might be useful to expand, as in finding out where the GDP is growing. That way, the new capacity will be filled more quickly. That is simply a matter…… [Read More]
The philosophy behind Frank-Dodd is to minimize the risk to the taxpayer of trade in these instruments, but this is to be balanced against the needs of the industry. Arguably, however, there is no particular need for synthetic CDOs, so tight regulation that restricts their manufacture and use should be sufficient.
The Frank-Dodd Act imposes significant regulatory burden on synthetic CDOs and the use of credit default swaps to create synthetic CDOs. The full extent of the burden has yet to be defined, in part because the terminology in the risk retention rule has yet to be adapted to these products. Adapting the wording of Section 941 would further regulate and control the use of these instruments. By providing clarity, improved wording would allow regulators to create a tighter framework with fewer loopholes. The regulator would also be able to craft the wording the way it wants, as opposed to…… [Read More]
There are several standpoints to justify this position:
First of all, as mentioned in the Life and Debt documentary, and as stipulated in the legislation, the free zones are not regulated by the Jamaican government
Secondly, this condition leads to the inability of workers to become organized in unions and ask for their rights to be respected
This means that the American contractors, who in effect play the role of employers, minimize all costs, including those with work safety and security, personnel wages and so on; as a parenthesis, the salary of a Jamaican employee in the free zones if of $120 a month
The employees put in extra, unpaid hours and ever work six day weeks. When some of them rebel to ask for more money or the protection of their rights, they are fired.
All the above findings lead to the unfortunate conclusion that the United States of…… [Read More]
It is, in this sense, a question of security and risk avoidance. In a financially insecure environment, an environment where state budgeting and financing for hospitals may be influenced by issues such as a change in the governing party, a change in the state priorities or anything like this, it is important to know that, while on one hand your sources of financing are variable, including here the possibility that sponsorship contacts may be less important in some years, your financial obligations remain stable and are not subject to modifications.
A second important advantage for the two types of conventional mortgage schemes I have mentioned is the fact that they seem to be more addressed to long-term activities than the adjustable rate conventional mortgage. Indeed, the adjustable rate advantages people who will prefer to change their asset after the first years and will benefit form the lower interest rate and…… [Read More]
Google is a better value than Yahoo. This is because the company is involved in many different segments of the technology marketplace. They have a lower price earnings ratio and price to EBITDA. At the same time, the firm has a larger market capitalization, greater amounts of cash, low levels of debt and a management structure / strategy which are encouraging continuing innovation. In the future, this means that the firm will remain a dominant player inside the marketplace.
The Balance Sheets of Google vs. Yahoo
The balance sheets of Google and Yahoo reveal a number of different factors which are illustrating the financial strength of both firms. In the case of Google, it has a market capitalization of $292 billion, revenues of $53.10 billion, $50.10 billion in cash and $9.7 billion in debt. Moreover, the company has a price to book value of 2.28, a PE ratio of 16.56…… [Read More]
blow the whistle" on what you heard in the garden? If so, how will you blow the whistle? If you decide to blow the whistle, what are your reasons for doing so? Your discussion should reflect knowledge of what Boatright says about issues, problems and justifications for whistle-blowing. Also, in discussing the answers to these questions you should include the following: 1) you should evaluate real and potential conflicts of interests that confront you in your decision 2) you should explain how your reasoning is consistent or inconsistent with the three following moral theories: Kantian moral theory, utilitarian moral theory and virtue theory.
Our MBA is not really aware of what is going on; all he has is assumptions, guesses. He has no actual proof. In the first case, he has had suspicions of several transactions -- their accounting practices seem suspect - and he has pointed out…… [Read More]
Lowe's Companies, Inc.
Lowe's Companies Inc.
Lowe's Companies, Inc.
Lowe's Companies, Inc.
This report discusses the home improvement retailer, Lowe's Companies, Inc. The report profiles Lowe's, providing information about its background, operations, size, and relative industry position, as well as lists key competitors. The report also includes a profile of the home improvement retail industry and discusses the current economic outlook and sales forecasts through 2015.
The report also analyzes Lowe's consolidated cash flow statements and discusses the company's sources and uses of cash. Lowe's cash inflows and outflows include the issuance of common stock, repurchase of common stock, repayment and issuance of long-term debt, and investments in property and store information technology.
In addition to reviewing Lowe's cash flow, financial analysis reviews Lowe's performance by comparing Lowe's key ratios to industry ratios. In general, ratio analysis shows Lowe's needs to improve its efficiency and generate more sales. Even though…… [Read More]
David Jones a Welsh immigrant, founded this departmental store in 1838 in Australia. With a vision to trade in the best and most exclusive goods as well as stocking goods tha embraces everyday wants of mankind at large, his store performed well. This store was located along the main street of Sydney and attracted both gentry and country settlers. They purchased goods such as buckskins, ginghams, fabrics, silk and other goods. David Jones later retired and handed the running of the store to his partners. This move was unsuccessful as the store underperformed with his exit. He came back from retirement borrowed heavily and recreated the stores success. At present David Jones is the oldest department store in Australia as well as in the world still in business using the original trade name (David Jones, 2012).
The board of directors as at March 2012 comprised 8 members under…… [Read More]
Fist, the WACC depends on the capital budget. A company calculates the retained earnings breakpoint, or the capital raised beyond which new stock must be issued, and compares it to the capital budget. A capital budget smaller than the breakpoint would use the lower cost retained earnings and therefore a lower WACC. A capital budget higher than the breakpoint would use a higher cost of equity, and would result in a higher WACC (Pareja, 2005).
Further, since the WACC is used to calculate the risk of investment and purchasing, a company must choose a combination of projects, investments, and purchases that yield the highest returns when adjusted for the cost of capital. Thus, when budgeting expenditures for any given time frame, the WACC becomes an important component for calculating what investments and other projects to undertake. Further, since it relies somewhat on capital budget, any given area of a corporation…… [Read More]