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Debt financing tends to have a lower cost than equity financing and is often easier to acquire. However, because debt financing represents a fixed obligation in terms of interest and repayment, it increases the risk of the firm. Thus, some amount of equity financing is ideal with respect to keeping the firm's risk level within reason. The level of risk a firm should have will vary depending on a number of variables. In some industries, cash flow is stable so more risk is reasonable; in other industries cash flow is unstable so lower risk is preferred.
Another consideration is control of the company. Because equity represents an ownership stake, firms often wish to control the amount of ownership stake that they surrender in their quest for financing. Debt financing is therefore sometimes preferable because it does not result in the surrendering of ownership stake. In some cases, preferred shares can…
No author. (2009). Debt Financing. Investopedia. Retrieved May 9, 2009 from http://www.investopedia.com/terms/d/debtfinancing.asp
No author. (2009). Equity Financing. Investopedia. Retrieved May 9, 2009 from http://www.investopedia.com/terms/e/equityfinancing.asp
A third financing option is preference shares, one of whose principal qualitative advantages is no diminution management's interest in corporate growth or voting power (assuming that non-voting preferred stock issued). Also, any new equity sale requires the company to offer shares to preferred stockholders first to maintain their pro rata interest. This limits the flexibility to bring in new shareholders to influence operation systems. Meanwhile, preferred stock is always subject to the right to common stock conversion with its potential diminution of voting power and control. Likewise, 51-67% of preferred stockholders are required for sale, merger, liquidation, sale of shares with more privileges, issuance of debt over dollar amount, and increase in board size.
Midland Freight should be financed through long-term debt in conjunction with, the sale of $50 million in bonds. This debt alternative provides a $2 million tax shield, higher earnings per share and market price ratios, a…
Debt financing and bankruptcy
Bankruptcy: Chapter 11 versus other forms of bankruptcy
Thanks in part to concerns about childhood obesity, the low-carb diet craze, and changing consumer tastes, Interstate Bakeries Corp filed for Chapter 11 Bankruptcy in 2004. When the company did so, it was said that although the company was undergoing "reorganization and installed new management...it intended to survive. The company will continue operating its bakeries, outlet stores and distribution centers, and analysts said that its famous brands are unlikely to disappear from store shelves" (Twinkie and Wonder Bread maker files for bankruptcy, 2004, Katu). Hostess was one of Interstate's signature brands. The company showcases a wide range of products, although all fall into the same, relatively undiversified category of baked, sugary goods.
Upon reading that its products would still be offered in stores, consumers might be somewhat confused. How can a company go bankrupt, yet leave supplies…
Chapter 11. (2012). U.S. Courts. Retrieved:
Twinkie manufacturer goes bankrupt as U.S. becomes more health-conscious. (2012). Daily Mail.
.....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…
Business Financing and the Capital Structure
Generally, businesses need to make several financial decisions that have significant direct effects on their operations and success in the increasingly competitive marketplace. However, there are numerous varying options that are available to businesses regardless of the types and sizes. The concept of business financing has emerged as an important aspect in the modern business environment because of the various financial decisions to be made by different firms. The main aim of this concept is to generate enough capital for the business to meet its existing needs in order to promote the growth of the business. In addition to generating capital for the growth of the business, business financing helps firms to meet the recurring financial obligations.
Use of Financial Planning in Estimating a Corporation's Asset Investment equirements:
Financial planning can be considered as a process that is used to approximate the financial requirements…
Coplan, J.H. (2009, December 4). Raising Capital: Equity vs. Debt. Bloomberg Businessweek
Magazine. Retrieved June 2, 2013, from http://www.businessweek.com/magazine/content/09_72/s0912030511552.htm
Melicher, R.W. & Norton, E.A. (2011). Introduction to finance: markets, investments, and financial management (14th ed.). Hoboken, NJ: John Wiley & Sons, Inc.
Sharp, R. & Hua, W. (2004, January 4). International Investing: The Risks and Rewards.
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…
Cleverley, W., Song, P. & Cleverley, J. (2011). Essentials of Health Care Finance. Sudbury, MA: Jones & Bartlett Publishing
lease a financing vehicle? How leases accounted firm's financial reports? hat difference a capital lease
Essentially, leases are alternative means of gaining access to products or goods that could otherwise be purchased outright. There is a certain degree of irony in this definition, primarily due to the fact that there are forms of leases which are extremely similar to purchases, although they contain key distinctions that still make it more feasible for an individual or an organization to lease a product rather than to simply buy it. Varying leases have different effects upon financial reports and taxable standings for companies and for individuals, who largely decide to whether or not they want to lease or purchase something based upon certain factors including status of ownership, residual value, executory costs, and both means and methods of financing. The particulars of all of these aspects of the leasing process can…
Reed, Phillip. The Residual Value of Leasing. Web. 22 June 2001.
Damodoran, Aswath. Dealing With Operating Leases in Valuation. Web. 7 November 2008.
Smith, Kelvin. Service Components/Executory Costs. Web. 22 March 2010.
Author unavailable. Financial Procedures Manual. James Madison University. Financial Office. Web. 26 May 2010.
SOX Impact on Corporate Financial Reporting
The Sarbanes-Oxley Act of 2002 (SOX) led to widespread changes in how governance, risk, compliance, financial reporting and decision-making are managed in publically-held coproratio9ns today. Experts in the field of governance and compliance have concluded that the SOX Act immediately redefined the scope of financial reporting and risk definition (Hagerty, 2006). This was especially prevalent in the bond markets, where forcing greater disclosure of financial performance and material events including Section 404 of the Act (Sarbanes-Oxley Act, 2002) led to more oversight of just how bond debt instruments were structured and implemented over time (oubakri, Ghouma, 2008). The net effect of the SOX Act continues to be seen today with positive and negatives changes to corporate financing taking place, and they are analyzed in the following section.
Positive and Negative Changes to Corporate Financing from the SOX Act
The SOX Act was deliberately written…
Boubakri, N., & Ghouma, H. (2008). Managerial opportunism, cost of debt financing and regulation changes: Evidence from the sarbanes-oxley act adoption. Rochester: Social Science Research Network.
Engel, E.R. Hayes, and X. Wang. 2004. The Sarbanes-Oxley act and firms' going private decisions. Working paper. University of Chicago. May 2004.
Hagerty. AMR Research. Boston, MA. Thursday May 18, 2006.
Sarbanes-Oxley Act (2002) U.S. Senators Sarbanes and Oxley. Passed in 2002 by both U.S. House of Representatives and U.S. Senate.
GBATT Income Statement eview
GBATT has a relatively stable company. It saw revenues decline 4.4% and profits by 4.24% last year. Expenses dropped in lockstep with revenues, indicating that the company has good ability to respond to changes in the prevailing economy. The company still earned a healthy net margin of 12.6% last year, despite the apparent economic downturn.
There are several factors to consider when making the decision to enter the Brazilian market. If the decision to enter has already been made, then the company still has to consider the method of financing for the expansion. Debt better aligns the cash inflows incremental to the project with the outflows. However, debt may come with restrictive covenants, and furthermore depending on the method of debt financing the company might be exposed to different types of foreign exchange rate risk. Equity, on the other hand, comes at a higher cost than…
Global Rates.com (2016) BACEN SELIC rate, Brazilian central bank's interest rate. Global Rates.com. Retrieved November 19, 2016 from http://www.global-rates.com/interest-rates/central-banks/central-bank-brazil/bacen-interest-rate.aspx
Investopedia (2016) Floating interest rate. Investopedia. Retrieved November 19, 2016 from http://www.investopedia.com/terms/f/floatinginterestrate.asp
Picardo, E. (2016) Exchange rate risk: Economic exposure. Investopedia. Retrieved November 19, 2016 from http://www.investopedia.com/articles/forex/021114/exchange-rate-risk-economic-exposure.asp
Financing, and Marketing a Business
An idea for a business can come suddenly or after years of trying to identify a niche in which to market a product or idea. In either case, the process of starting and developing a business is often an arduous and complicated one that requires astute planning long before implementation. There is a difference between those who merely manage an already existing business and those who develop ideas and their own businesses and become entrepreneurs. Entrepreneurship is defined as "the process of identifying opportunities for which marketable needs exist and assuming the risk of creating an organization to satisfy them" (Hatten, 2012, p.24). Once and entrepreneur has established a need for a product or service there are several considerations that must be taken into account, including what type of business to establish and how to market the product to the world. Successful entrepreneurs are able…
Drury, C. (2008). Management and cost accounting (7th ed.). Mason, OH: South-Western
Hatten, T.S. (2012). Small business management: Entrepreneurship and beyond. Mason, OH:
South-Western Cengage Learning.
" (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…
Debt vs. equity -- advantages and disadvantages. http://smallbusiness.findlaw.com/banking_financing/be1_5debtvsequity.html
Equity financing. http://www.answers.com/topic/equity-financing
Small-business financing: Debt vs. equity. http://finance.yahoo.com/how-to-guide/career-work/12825
What are the advantages and disadvantages of debt financing? (2007). http://bondsdebt.net/Debt/debt-financing-advantages/
Business Financing and the Capital Structure
In finance, capital structure is used to refer to the manner in which a corporation finances its assets through some mixture of equity, debt, or hybrid securities (Atrill & McLaney, 2011). A firm's capital structure is the configuration or structure of its long-term liabilities and each firm can choose a different configuration depending on its industry and/or its specific needs. Basically, a company has two choices in traditional capital financing.
The company can either sell equity, usually through the issuance of stocks or bonds, or it can sign a note with more of a traditional lender such as a bank in which a specific payment structure will be associated with the loan. Each manner of financing capital has different strengths and weakness that be relevant to a company depending on their circumstances and their goals. This analysis will briefly outline some of…
Atrill, P., & McLaney, E. (2011). Finance and accounting for managers. Harlow, UK: Pearson Custom Publishing.
Kuhn, R. (2011, June 21). What Do Investment Banks Do? Retrieved from Chief Executive: http://chiefexecutive.net/what-investment-banks-do
To, H. (2006, October 22). The Importance of the "Roll Return" in Commodity Futures Returns. Retrieved from Market Thoughts: http://www.marketthoughts.com/z20061022.html
Consultant, I starting a business developing business plan. I'm advice start forming business. I financed I partners. I interested learn intricacies options determine proceed plan.
Dear Mr. Owner:
Business financing is naturally one of the most important concerns of any individual beginning a new enterprise. In general, business owners have two available options: to seek out loans from a variety of available sources or to seek out equity financing from investors. There are advantages and disadvantages to both choices.
Many business owners first seek out loans from friends and family members. This has the advantage of a (usually) low interest rate: however, the cash supply is limited and owners do not always want to create bad blood between themselves and their relatives. Another option is seeking out loans from a bank. "To secure this loan, financial institutions will require several years of financial information on both the business and the…
Allen, S. (2014). Startup business financing. About. com. Retrieved from:
Deducting business-related interest loan payments. (2014). Nolo. Retrieved from:
Global Financing and Exchange ate Mechanisms
oles of International Financial Institutions: IMF, World Bank, and ADB
All international financial institutions have their different goals, objectives, varying expertise, and areas of specialization. This study will focus on the role African Development Bank, World Bank and International Monetary Fund on global finance. The partnerships enhanced are geared towards poverty reduction and economic growth that can be maintained. This is according to the recent announcements made by global financial institutions. The International Monetary Fund mainly focuses on promotion of international financial support and macroeconomic stability together with the growth of the member states.
On the other hand, the World Bank has diverted more attention on assisting member states to see a reduction of poverty levels by emphasizing on the development and social, structural, and institutional dimensions. Evidently, the reform for the financial sector is a key role promoted by international financial institutions. Collaboration…
Bakker, A. (2009). International financial institutions. London: Longman
Jeanne, O., Zettelmeyer, J., & International Monetary Fund. (2007). "Original sin," balance sheet crises, and the roles of international lending. Washington, D.C.: International
Olokesusi, F., & National Emergency Management Agency (Nigeria). (2006). The role of international financial institutions in disaster risk management. Ibadan: Nigerian
Existing Funding Infrastructure
Education financing in Florida is at a crisis point. The current system for K-12 financing in Florida features a combination of state and local funds. Approximately $7.75 billion is contributed by the state. This comes from general revenues, which puts this financing at risk should there be significant changes to state revenue levels. There have been stories in the news media in the past year where different bodies of expressed concern about the sustainability of Florida's ability to finance its K-12 system (Times-Union, 2012). The education system has seen its funding cut several times in recent years. As a result, the performance of Florida's schoolchildren has been poor.
At the state level, the Florida Education Finance Program (FEFP) is "the primary mechanism for funding the operating costs of Florida school districts (FLDOE, 2012). The formula on which Florida state financing is organized is based on…
FLDOE. (2012). 2012-2013 funding for Florida school districts. Florida Department of Education. Retrieved November 13, 2012 from www.fldoe.org/fefp/pdf/fefpdist.pdf
Stiefel, L. & Schwartz, A. (2010). Financing K-12 education in the Bloomberg years, 2002-2008. Wagner and Steinhardt Schools, NYU. Retrieved November 13, 2012 from https://steinhardt.nyu.edu/scmsAdmin/media/users/lah431/StiefelSchwartz_AIR_Nov2010_presentation.pdf
Times-Union. (2012). Florida's education funding still lags. Jacksonville Times-Union. Retrieved November 13, 2012 from http://jacksonville.com/opinion/editorials/2012-04-20/story/funding-floridas-education-still-lags
S. is regulated by both state and federal regulations. Both the Securities Act of 1933 and the Securities and Exchange Commission Act of 1934 are federal laws that govern security issuing. he Security Act of 1933 requires that companies fully disclose information regarding their company as well as the security being issued to all potential investors (Megginson & Smart, 2009). he Security Act of 1993 called for the creation of the U.S. Securities and Exchange Commission (SEC) as well as defining what procedures are necessary for the public sale of securities and for the oversight of public companies. his includes the requirement of companies to file a disclosure form, which is referred to as a registration statement, with the SEC prior to beginning to solicit potential investors. Further, this form must be distributed to all potential investors. he SEC must approve the final registration statement before companies can execute sales…
The issuing of securities to the public in the U.S. is regulated by both state and federal regulations. Both the Securities Act of 1933 and the Securities and Exchange Commission Act of 1934 are federal laws that govern security issuing. The Security Act of 1933 requires that companies fully disclose information regarding their company as well as the security being issued to all potential investors (Megginson & Smart, 2009). The Security Act of 1993 called for the creation of the U.S. Securities and Exchange Commission (SEC) as well as defining what procedures are necessary for the public sale of securities and for the oversight of public companies. This includes the requirement of companies to file a disclosure form, which is referred to as a registration statement, with the SEC prior to beginning to solicit potential investors. Further, this form must be distributed to all potential investors. The SEC must approve the final registration statement before companies can execute sales to the public.
4. What are the benefits to the corporation of going public?
There are several advantages to making the choice to go public including the amount of equity capital that would become available to the company therefore creating a more secure financial situation. The company may also utilize this increase in capital to explore additional investment options and will increase their borrowing capacity for future endeavors. The company would also have other added benefits such as the ability to utilize stock as a part of compensation packages for employees, therefore potentially increasing the caliber of employee that they are able to recruit and retain. Another benefit is the potential attention that the company may receive
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.
Chowdhury, A. R. (2001). "External Debt and Growth in Developing Countries; A Sensitivity and Causal Analysis." WIDER Discussion Paper No. 2001/95
Cunningham, R.T. (1993): "The Effects of Debt Burden on Economic Growth in Heavily Indebted Nations," Journal of Economic Development, pp 115-126
ECESAUN, 1999. ISBN: 92-1-121239-1 Finding solutions to the debt problems of developing countries. Chile: United Nations Publications United Nations.
ESCWA, 2008. Consultative Preparatory Meeting For The Follow-Up International Conference On Financing For Development. Doha: Economic and Social Commission for Western Asia United Nations.
We do not anticipate success is securing a non-voted debt issue. Given the time frame for the completion of the Commons project, the city will weigh our request vs. The upcoming needs for school repairs and roadwork. Education is a touchstone issue for voters, and roadwork affects all voters in the city. hould council decide to issue any of their remaining non-voted debt capacity, it is unlikely they would choose to use it for the Commons project ahead of those two other priorities.
Voted debt, however, they can issue. If the public votes 60% in favor, council will not face the same concerns about opportunity cost. We will not be competing for money with schools. A voter-approved special levy would function in much the same way (financed through property tax increases) but requires only a 50% vote in favor. Although the capacity for such special levies is only $90 million,…
Johnson, Gerry. (2005). New Life Emerges in the Wake of Seattle Commons Failure. Seattle Post-Intelligencer. Retrieved June 20, 2008 at http://seattlepi.nwsource.com/opinion/272622_focus04.html
Jacobson, Arthur Lee. (1995). The Seattle Commons, an Editorial Opinion. Olmsted Parks. Retrieved June 21, 2008 at http://www.arthurleej.com/a-commons.html
No author. (1995). The Commons: Time Line. Seattle Times. Retrieved June 21, 2008 at http://community.seattletimes.nwsource.com/archive/?date=19950911&slug=2141092
History of Washington State votes at http://www.historylink.org/essays/output.cfm?file_id=7536
This can subsequently result as the massive benefits to the commercial contestants devoid of the incurring of the extra cost that pertaining to such commercial participants. The participation of the export credit agencies accompanied by the existing multilateral developments institutions normally results to the lofty stage of the ecological, employment and other supplementary social standards, which are extremely expensive and cumbersome to, accomplished.
The application these existing social standards are normally highly significant to these multilateral institutions concerning the outline policy perspectives accompanied by the chief structures and the existing projects.
These policies perspectives and the chief aims enhance the best practice that pertains to the execution of communications and the whole projects. Numerous leading private sponsors and the existing commercial lenders have finally commenced the process of incorporating of these standards. These standards include the equator principles and the other existing ecological requirements that are aimed at safeguarding of…
Al-Jassar Ahmed & Massachusetts institute of technology. 2005. International project finance.
Cambridge: Massachusetts Institute of Technology, Department of Civil and Environmental Engineering. Pages 21-234.
Dewar John. International Project Finance: Law and Practice. (Oxford: Oxford University
Publishing Press 2011)
IMF and World Bank in global financing and exchange rate fluctuations
he International Monetary Fund plays a crucial role in the world's economy, especially in global financing and exchange rate fluctuations. However, its influence ranges well beyond those disciplines.
he main responsibility of the International Monetary Fund is to provide loans to nations experiencing balance of payments difficulties. he International Monetary Fund's involvement allows these countries to stabilize their currencies, rebuild their international reserves, continue to import much needed goods, and generally set the stage for strong economic growth.
A country can only ask for International Monetary Fund assistance when it has a serious balance of payments deficit, as in, more money goes out than comes in, and it cannot get financing to meet its international obligations.
he general understanding is similar to the United States Bankruptcy Code, which is, no one benefits from insolvency, neither the debtor nor the…
The Bank gets about 10% of its funds from taxpayers, in the form of direct contributions from member governments.
The IFC operates partly with funds contributed directly by its member countries but mainly with funds borrowed from the IBRD. The IFC is the fastest growing part of Bank operations, with IFC investments having grown to $2.1 billion last year. Among the transnational corporations represented on the IFC Business Advisory Council are the Bank of Tokyo, Credit Lyonnaise, Treuhandanstalt, SG Warburg.
www.imf.org www.worldbank.org http://www.atu2.com/news/article.src?ID=294
Construction Project Financing/Valuation
A brief search of Internet-listed one-bedroom apartments in Abu Dhabi confirms a current yearly rental price of AED 75,000 for most properties in the city (Justentals.com, 2012). Many apartments located in different buildings and in different [arts of the city are listed for exactly this amount, though some were also found for lower (AED 60,000) and several were found that were higher (approx. AED 85,000), however as an average current price AED 75,000 seems quite accurate (Justentals.com, 2012). Likewise, an estimation of AED 120,000 as the current annual average rent for a two bedroom is also fairly accurate; there is a greater variance observed in prices for two bedrooms that is likely reflective of differences in actual size and also appears to be neighborhood- and building-driven to a greater degree than is the pricing of one-bedroom apartments, however AED 120,000 does seem to be a…
Jones, M. (2011). CEO Magazine Interview. Accessed 10 April 2012. http://www.ceoqmagazine.com/economicoutlook/gcceconomicoutlook.htm
JustRentals.com. (2012). Accessed 10 April 2012. http://www.justrentals.com/abu-dhabi-rent/1-bedroom-abu-dhabi-apartments-for-rent.html
PropertyWire.com. (2012). Downturn for property rents in Abu Dhabi as market is flooded with new supply. Accessed 10 April 2012. http://www.propertywire.com/news/middle-east/abu-dhabi-rental-prices-201203286352.html
Reuters. (2011). S&P keeps Abu Dhabi outlook. Accessed 10 April 2012. http://www.emirates247.com/business/economy-finance/s-p-keeps-abu-dhabi-outlook-2011-05-24-1.396898
With respect to cash flow, many firms rely on revolving credit to smooth out the cash flow inherent in their businesses. Under normal circumstances, this credit is available. However, when it is not available, firms need to figure out new ways to create cash flow. The use of a credit card as a substitute for a line of credit highlights the downside of losing cash flow and not having a stockpile of cash available. It also highlights the need for budgets to include variables such as a higher cost of capital that will accrue from tightening credit markets.
The credit crunch has impacted businesses in a number of negative ways. The business owners in this case have alluded to the improvements they have been forced to make in their operation in order to survive without credit. However, with these improvements there is little left to improve. That calls into…
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…
Barnett-Hart, a. (2009). The story of the CDO market meltdown: An empirical analysis. Harvard College. Retrieved May 3, 2011 from http://www.hks.harvard.edu/m-rcbg/students/dunlop/2009-CDOmeltdown.pdf
Deng, Y.; Gabriel, S. & Sanders, a. (2008). CDO Market implosion and the pricing of CMBS and sub-prime ABS. Real Estate Research Institute. Retrieved May 3, 2011 from http://www.reri.org/research/article_pdf/wp150.pdf
Fender, I. & Kiff, J. (2004). CDO rating methodology: Some thoughts on model risk and its implications. BIS Working Papers No. 163. Retrieved May 4, 2011 from http://www.bis.org/publ/work163.pdf
Hansel, D. & Krahnen, J. (2007). Does credit securitization reduce bank risk? Evidence from the European CDO market. Gothe University Frankfurt. Retrieved May 4, 2011 from http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID967430_code120211.pdf?abstractid=967430
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…
Boone, L.E. And Kurtz, D.L. 2011. Contemporary Business (14th ed.). Hoboken, NJ: John Wiley & Sons.
Kuratko, D.F. And Hodgetts, R.M. 2008. Entrepreneurship: Theory, Process, Practice (8th ed.). Mason, OH: Cengage Learning.
Longenecker, J.G., Moore, C.W., Palich, L.E. And Petty, W. 2005. Small Business Management: An Entrepreneurial Emphasis (13th ed.). Mason: Thomson.
Moles, P., Parrino, R. And Kidwell, D.S. 2011. Fundamentals of Corporate Finance. West Sussex: John Wiley & Sons.
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…
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…
pay back period" is the length of time that is required to cover the cost of an investment. I would use this in order to make a good financial decision.
The calculation that I would do is as follows:
For instance, if a project costs $100,000 and is expected to return $20,000 annually, the payback period will be $100,000 / $20,000, or, in other words, $20 per 5 years.
The better investment is the one that has the shorter pay back period.(Investopeida)
Another tool that I would use to measure the time value of money to assess long-term projects is Net present value (NPV). Businesses use it to measure the value of a time series of cash flows both incoming and outgoing. For instance, when all types of cash flows are incoming (such as bonds or coupons), and the only cash outflow is the purchase price, the NPV…
About.com Debt and Equity Financing
Benzinga. Com Understanding Stocks: The Concept of Betahttp://www.benzinga.com/general/psychology/12/01/2300328/understanding-stocks-the-concept-of-beta
Cuckke.com. Systematic risks and unsystematic risks.
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,…
Brigham, E.F., & Ehrhardt, M.C. (2011). Financial management: Theory and practice.
Mason, OH: South-Western Cengage Learning.
Debt vs. equity financing: Which is the best way for your business to access capital? (2013).
NFIB. Retrieved January 21, 2012 from:
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…
Mahmood, D. (2013). How to choose the right investment banker. Inc. Magazine. Retrieved May 31, 2014 from http://www.inc.com/david-mahmood/how-to-choose-the-right-investment-banker.html
Parker, T. (2012). Small business financing: Debt or equity? Investopedia. Retrieved May 31, 2014 from http://www.investopedia.com/financial-edge/1112/small-business-financing-debt-or-equity.aspx
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…
1) Myers, Stewart C.; Majluf, Nicholas S. (1984). "Corporate financing and investment decisions when firms have information that investors do not have." Journal of Financial Economics 13 (2): 187 -- 221
2) Baker, Malcolm P; Wurgler, Jeffrey (2002). "Market Timing and Capital Structure." Journal of Finance 57 (1): 1 -- 32.
3) Lyandres, Evgeny and Zhdanov, Alexei, Investment Opportunities and Bankruptcy Prediction (February 2007) Available at SSRN: http://ssrn.com/abstract=946240
4) Timmer, Jan (2011). Understanding the Fed Model, Capital Structure, and then Some.
The first scenario represents a diversifiable risk. The rate of inflation has an effect on the whole economy, but the nature and direction of that effect is something that will be different for each firm. Some firms may suffer more than others from the effects of a higher rate of inflation, depending on their business model, their capital structure and their strategy. In addition, inflation rates are a national phenomenon. It is easy to diversify beyond the borders of the United States. There are American companies that do over half of their business overseas. There are also ADRs of foreign companies that are traded in New York. It is easy enough to diversify out of the effects of even a broad-based economic factor like the inflation rate.
A major recession in the U.S. is something that might affect the whole market, but again how it affects each individual firm…
Esposito, A. (2003). American Superconductor switch; Westboro company plans to raise money through a stock offering. Telegram & Gazette. Aug 26, 2003, pg. E1
Investopedia. (2011). Capital asset pricing model -- CAPM. Investopedia. Retrieved December 6, 2011 from http://www.investopedia.com/terms/c/capm.asp#axzz1fLzGjBGk
MoneyChimp. (no date). CAPM calculator. MoneyChimp. Retrieved December 6, 2011 from
Initial Investment = $450,000
The Present Value = -$457,630
Net Present Value= -$672,409
Payback = $1,130,039
Annual Depreciation costs = $90,000/year
It appears that Bender should not go ahead with this expansion as they will appear to lose nearly $130,000 on this investment. The net present value decision suggests that this project does not stand to make any significant amount of money. If the facility could somehow be salvaged at the end of five years, this move would make more sense .
WACC = E/V x e + D/V x d x (1 - Tc)
e = cost of equity
d = 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…
Fundamentals of Corporate Finance, 10th edition.
Capital Structure Decision and Cost of Capital
My SLP Company of choice is Wal-Mart Stores. The other two companies I will be relying on for purposes of this discussion are Target Corp. And Costco Wholesale Corporation. Both companies happen to be in the same industry as Wal-Mart Stores. Most specifically, this text will compute the debt ratio and the debt-to-equity ratio of Wal-Mart Stores and discuss whether or not these ratios could be regarded too large or too small. Further, comparisons will be made between the debt-to-equity ratio of Wal-Mart Stores and that of its two competitors - Target and Costco.
The debt ratio in the words of Graham and Smart (2011, p. 44) is "a measure of the proportion of total assets financed by a firm's creditors." It is computed by dividing the total debt figure with the summation of equity and total liabilities. All the dollar figures below…
Borowski, A. (2010). Financial Management: The Role and Importance of Capital Markets and EMH. Norderstedt Germany: GRIN Verlag.
Graham, J. & Smart, S.B. (2011). Introduction to Corporate Finance (3rd ed.). Mason, OH: Cengage Learning.
Porter, G.A. & Norton, C.L. (2010). Financial Accounting: The Impact on Decision Makers (7th ed.). Mason, OH: Cengage Learning.
Quiry, P., Fur, Y.L., Salvi, A., Dallochio, M. & Vernimmen, P. (2011). Corporate Finance: Theory and Practice (3rd ed.). Chichester, West Sussex: John Wiley & Sons.
American Superconductor Case Study
Founded in April 1987 with $4.5 million in seed capital from an investment consortium (Google imeline. American Superconductors. 2010); American Superconductor has grown into a "global leader in renewable energy, providing proven, megawatt-scale wind turbine designs and electrical control systems" (American Superconductors: Investors. 2010). he company works to "develop solutions and manufacture products to dramatically improve the cost, efficiency and reliability of systems that generate, deliver and use electric power" (AMSC. Annual Report 2003). hroughout its two decades of operation the company has needed capital to expand its operations, develop innovative technologies, and invest in capital projects with a design on profitability for the company and its shareholders; a feat the organization achieved for the first time with "$16.2 million, or $0.36 per diluted share, in net income for full year fiscal 2009" (AMSC. Annual Report 2010). he long road to profitability though is marked by…
The advantages and disadvantages of debt and equity are fairly straightforward however, their implications are critical to business success. In understanding the choice of American Superconductors it is necessary to look at the core differences between debt and equity: ownership of the business, assumption of debt load and required repayment or expected return, and tax deductibility of interest (Kansas Technology Enterprise Corporation. N.D.). These three pieces can then be analyzed in the context of the CEO Gregory Yurek's three factors leading to the decision to use an equity capital strategy: revenue momentum, profitability of the temperature superconductor motor and generator business unit, and the national energy grid upgrade debate (Esposito, A. August 26, 2003).
Ownership of the business is perhaps the most critical component in the differences between debt and equity financing. The public offering of 4,975,000 shares of common stock is the sale of a portion of company ownership held by the majority stock owners to potential buyers (MarketScreen. October 3, 2003). The stock issuance has two effects. First a reduction of the majority's percentage ownership of the firm and second a dilution of existing common stock outstanding as a result of the 4,975,000 increase in total issued shares to 26,359,920 (MarketScreen. October 3, 2003). Management "estimates the net proceeds to us of this offering to be approximately $44.0 million based on the public offering price of $9.50 per share" (MarketScreen. October 3, 2003). With expanded ownership of the business by additional shareholders, management will necessarily have to consider organizational decision making in the context of increasing shareholder value. Counter equity and its ownership position with debt which constitutes no ownership stake for the lender, and therefore the business owners are responsible only for repayment of the loan or bond offering according to the terms of the agreement.
Assumption of debt load underscores the financial liability which a firm undertakes with a loan or bond commitment in contrast to a scenario of no new debt if the firm pursues the equity route. With a debt transaction the borrower is legally obligated to pay the bank, lender, or bondholder an agreed upon sum, with interest, over a specified amortization period until the loan or bond is paid in full, called in, or refinanced. American Superconductor would consider whether their operating cash flow would cover the interest generated by the borrowing agreement. A particularly useful analytical tool for this purpose is times interest earned "a metric used to measure a company's ability to meet its debt obligations. It is calculated by taking a company's earnings before interest and taxes (EBIT) and dividing it by the
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…
MSN Moneycentral. (2010). Retrieved November 23, 2010 from http://moneycentral.msn.com
Wal-Mart 2008 Annual Report. In possession of the author.
Financial Management: atios, isk and Diversification
Financial atios elevant to Small Businesses and Large Corporations
In an attempt to determine the performance of his or her business, a small business owner can utilize ratios such as the current ratio and the profit margin ratio. The profit margin in the words of Needles and Powers (2010) "shows the percentage of each sales dollar that results in net income." For a small business owner, this ratio would be an appropriate measure of the profitability of his or her business. The current ratio as Stickney et al. (2009) point out helps in the measurement of a firm's ability to settle its short-term debts/obligations. A small business owner interested in determining the ability of the business to settle its everyday bills and other obligations would find this ratio useful. On the other hand, a manager of a large corporation would be interested in ratios…
Graham, J. & Smart, S.B. (2011). Introduction to Corporate Finance (3rd ed.). Mason, OH: Cengage Learning.
Needles, B.E. & Powers, M. (2010). Financial Accounting (11th ed.). Mason, OH: Cengage Learning.
Stickney, C.P., Weil, R.L., Schipper, K. & Francis, J. (2009). Financial Accounting: An Introduction to Concepts, Methods, and Uses (13th ed.). Mason, OH: Cengage Learning.
Shim, J.K. & Siegel, J.G. (2008). Financial Management (3rd ed.). Hauppauge, New York: Barron's Educational Series.
Overall, at&T is the more profitable of the two companies. That Verizon has the stronger gross margins and at&T the stronger net margins indicates that at&T does a better job of controlling its cost structure than does Verizon.
The telecommunications industry is highly competitive in both the landline and wireless segments. By 2006, wireless spending had match wireline spending. hile this presents significant opportunities for telecommunications, much of that spending comes in the form of cannibalizing, as wireline revenues have been decreasing steady over the past decade, matching the steady increases in wireless spending.
There are four major wireless operators in the U.S. And over 170 regional players (Megna, 2009). Competition is based on coverage area (capital investment), price and customer service. Both firms can be considered industry leaders. As of 2007, at&T had a subscriber base of 65.7 million and wireless revenues of $10.9 billion. Verizon had…
MSN Moneycentral Verizon. Retrieved October 24, 2009 from http://moneycentral.msn.com /investor/invsub/results/statemnt.aspx?Symbol=VZ&lstStatement=Balance&stmtView=Ann
MSN Moneycentral at&T. Retrieved October 24, 2009 from
Bull Run, Virginia
Pleasant Valley Estates is envisioned as an upwardly mobile community - located in Bull Run, Virginia - and targeted toward the young, single professional and young families.
Cash Flow Statement Overview
The cash flow statement constitutes a financial document, which details the exchange of cash between a business and the outside world while strategically demonstrating the in and outbound logistics. Flow is traditionally categorized as:
flow "in" from Operations - the cash the entity or company makes by selling goods and services, flow "in" from Financing - the cash the entity or company raises by selling stocks and bonds, and flow "out" to Investing - the cash the company spends toward investing in future growth
Each of these flows can move bi-directionally. Investors generally like to see that the company covers its spending with cash from operations rather than resort to financing. The cash flow…
Jordan, B. "Homeownership Alliance." Banc One Investments Advisor.
Freddie Mac Reports Strong Multifamily Lending Volume: New Product Lines Boost Production and Position Freddie Mac as Industry Leader." Freddie Mac News and Information Report. Nov. 2000.
Some hospitals create a "contingency" budget, which can be offset by a few of these patients.
The percentage of non-paying patients can vary a good deal, particularly in a city- or county-owned hospital. This number may not vary, and typically in a budget the hospital CEO and/or CFO negotiates with the governmental bodies for regular subsidies to cover.
The billing cycles can be difficult to predict, particularly for Medicare and Medicaid patients, where there are famous irregular delays on payment. It is possible, as noted above, to go to outside banks or other bodies to get a/R funding to cover these contingencies
Particularly in older hospitals, the amount in the depreciation account may not be enough to cover unforeseen expenses, such as asbestos removal or deterioration. Hospitals can address this by auditing their depreciation accounts and making a better assessment of what might be needed in coming budgets.
MedCath. "MedCath Corporation." 2006. medcath.com. 15 November 2007 www.medcath.com.
Mullins, D.W. "Financial Leverage, the Capital Asset Pricing Model and the Cost of Equity Capital." Harvard Business Review (1980): n.p.
Schneider, EC, Zaslavsky, AM and Epstein, AM. "Use of High-Cost Operative Procedures by Medicare Beneficiaries Enrolled in for-Profit and Not-for-Profit Health Plans." NEJM (2004): 143-150.
Shah, BR, Glickman, SW, Lian, L, Gibler, WB, Ohman, EM, Pollack, CV, Roe, MT and Peterson, ED. "The Impact of for-Profit Hospital Status on the Care and Outcomes of Patients With Non-ST-Segment Elevation Myocardial Infarction." JACC (2007): 1462-1468.
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…
Investopedia. (2012). Reading the balance sheet. Investopedia. Retrieved March 5, 2012 from http://www.investopedia.com/articles/04/031004.asp#axzz1oHefP0yK
Loth, R. (2012). Understanding the income statement. Investopedia. Retrieved March 5, 2012 from http://www.investopedia.com/articles/04/022504.asp#axzz1oHefP0yK
MSN Moneycentral (2012). Google MSN Moneycentral. Retrieved March 5, 2012 from http://investing.money.msn.com/investments/stock-balance-sheet/?symbol=us%3AGOOG&stmtView=Ann
MSN Moneycentral. (2012).
Independent dealers must sign a contract that sets forth the manner in which they will operate their rental centers. Often a small business owner will supplement their income be adding U-Hauls to their market mix. Independent contractors earn a commission on their sales.
Each division of AMERCO has it own president. All of them must report to a Board of Directors. The Chairman of the Board and overall President is Edward Shoen, descendent of the original founders of the company. Many members of the Shoen family still control much of the company (Google Finance). Little information is available about the company, aside from their financial statements. Although they have a Board of Directors, the company continues to operate as a family-style operation, with the family members occupying many positions in upper management. The company structure is simple and little is available beyond basic information.
Purchasing Contract Analysis and the UCC…
Ceh v. UHaul International, Inc., 11th district court of appeals, No. 04-10031.
A www.ca11.uscourts.gov/opinions/ops/200410671.pdf. Accessed January 22.
Company News; U-Haul's Parent Seeks Bankruptcy Protection." June 21, 2003. New
York Times. http://query.nytimes.com/gst/fullpage.html?res=9800EFDF173BF932A15755C0A9659C8B63 . Accessed January 23, 2007.
Davis enter the mass market with the Eggsercizer? Why or why not?
The three types of marketing strategies available to any company are mass marketing, niche marketing and skimming. The method that Davis at the moment is adapting is skimming. Why? He seems to rely on the trade shows and the occasional retailer who is interested in the product and skims the surface of the market potential. His product is a niche product that has applications in more than one sector. Thus the company has not been able to establish a niche yet. The aim of mass marketing is to capture a large segment of the market and retain it, either by a slow penetration process or by a rapid program where the market is captured by creating a mass awareness and demand. (Avlonitis; Papastathopoulou, 2006)
The methods of the rapid or the slow penetration requires many variables that build…
Avlonitis, George J; Papastathopoulou, Paulina. (2006) "Product and services management"
Burke, W. Warner; Lake, Dale G; Paine, Jill Waymire. (2008) "Organization Change: A
Comprehensive Reader" John Wiley and Sons.
Medical Associates is a large for-profit group practice. Its dividends are expected to grow at a constant rate of 7% per year into the foreseeable future. The firm's last dividend (D0) was $2, and its current stock price is $23. The firm's beta coefficient is 1.6; the rate of return on 20-year T-bonds currently is 9%; the expected rate of return is 13%. The firm's target capital structure calls for 50% debt financing, the interest rate required on the business's new debt is 10%, and its tax rate is 40%.
You are to write a report that answers the following:
Calculate Medical Associates' cost of equity estimate using the DCF method.
Next years expected dividend = $2 * 1.07 = 2.14
Current Stock Price = $
E (Rc) = 2.14/23 + .07 = .1630 = 16.3%
Calculate the cost of equity estimate using CAPM.
R (Rc) = .09 + (1.6…
Nortel Case Study
Nortel Networks Corporation, more commonly referred to as Nortel, was a global company of Canadian origin that at its peak in the early 2000's had comprised of one-third of the total valuation of the companies listed on the Toronto Stock Exchange (TSX). Nortel was founded in 1895 in Montreal, Quebec, with its manufacturing headquarters currently located in Mississauga, Ontario. The company manufactured data networking equipment along with offering telecommunication services. It employed over 94,500 employees worldwide.
Nortel's troubles began in the 1990's when under CEO John Roth, the company expanded into the internet technology market. Roth used media to alter public perception of the company. The sale of the optic fibre networking gear by the company from then on was hyped up by the speculators in the market, driving the share price of the company up, even though the company failed to produce overall annual profits. This…
Deluxe Corporation is a leader in the check printing industry. However, recent times have struck Deluxe with financial structure problems associated with obtaining the most optimal capital structure. Therefore, the objective of this summary is to assess the recommended capital structure alternative and its impact on the current capital structure.
The current problems with the capital structure are the equity-based financing to which the company will not have the free-cash flow necessary to repurchase the company stock at the accelerated rate projected by Singh. The cash on hand that Deluxe does generate will have to go to maintaining the operating capital to finance daily operations.
Secondly, the firm does not maintain or manage flexibility in financing well. The optimal choice is to issue debt as the company as the 37% tax shield that makes the cost of debt financing very attractive due to the 1/3 reduction in cost. However, this…
funds has its own advantages and disadvantages. In that regard therefore, debt financing could in some instances be more appropriate than equity financing. The reverse is true. This text concerns itself with some of the benefits FedEx Corporation would experience were it to raise funds through debt. The text also highlights some of the drawbacks of such a move.
Debt Financing: Focus on FedEx
FedEx, as it points out on its website, "provides customers and businesses worldwide with a brand portfolio of transportation, e-commerce and business services" (FedEx, 2014). As it further points out, it has in the past been ranked amongst some of the most trusted and admired companies in the world (FedEx, 2014). The company's current chief executive officer is Frederick W. Smith.
Costs and Benefits of Debt Financing
To begin with, it is important to note that as Peavler (2010) points out, debt financing could benefit a…
FedEx. (2014). About FedEx: Overview and Facts. Retrieved from http://about.van.FedEx.com/FedEx-overview
Peavler, R. (2010). Debt and Equity Financing: The Advantages and Disadvantages of Debt and Equity Financing. Retrieved from http://bizfinance.about.com/od/generalinformatio1/a/debtequityfin.htm
Seidman, K.F. (2005). Economic Development Finance. Thousand Oaks, California: Sage Publications.
Modigliani and Miller famously argued that all other factors being equal, capital structure is irrelevant. In the real world, however, things are not equal. So the different assumptions that underlie the core of MM, as the theory is known, do not exist in real life. The implication of this for businesses, then, is that they need to examine the different factors that can affect their choice of capital structure and then make a decision about how they want to finance their business. This paper will analyze these factors in relation to Starbucks, and then make a determination about the optimal capital structure for the company.
Modigliani and Miller
Villamil (n.d.) outlines the different assumptions in the MM theorem that should be evaluated. These assumptions are neutral taxes, no capital market frictions, symmetric access to credit markets, and that firm financial policy reveals no information. By ruling out all of these…
Huang, R. & Ritter, J. (2009). Testing theories of capital structure and estimating the speed of adjustment. Journal of Financial and Quantitative Analysis. Vol. 44 (2009) 237-271.
Kim, E. (1978). A mean-variance theory of optimal capital structure and corporate debt capacity. The Journal of Finance. Vol. 33 (1) 45-63.
Llewellen, J. & Llewellen, K. (2006) Internal equity, taxes and capital structure. Dartmouth College. Retrieved March 27, 2012 from http://mba.tuck.dartmouth.edu/pages/faculty/jon.lewellen/docs/Taxes.pdf
Titman, S. & Wessels, R. (1988). The determinants of capital structure choice. The Journal of Finance. Vol. 43 (1) 1-19.
Business -- Corporate Finance -- Capital Structure Decisions and the Cost of Capital
Based on the readings of the module and upon reviewing total debt/equity ratios, company betas, profitability ratios, company revenue, assets, and liabilities, and the nature of the operations of the companies, including the nature of their customers and products, what would you recommend to be the capital structure (total liabilities or debt and equity proportions) for each of the three companies?
a) eBay, Inc.
The nature of eBay's business is global online retail connecting more than 124 million buyers and sellers for the sale and purchase of more than 500 million items (eBay, Inc., 2013). As of September 30, 2013, measured in thousands, eBay's: total current assets are $23,476,000 (Yahoo! CA Finance, 2013); long-term assets are $40,067,000 (Yahoo! CA Finance, 2013); current liabilities are $12,028,000 (Yahoo! CA Finance, 2013); long-term liabilities are $17,300,000 (Yahoo! CA Finance, 2013);…
Alaska Air Group, Inc. (2013). Historical overview. Retrieved December 1, 2013 from www.alaskaair.com Web site: http://www.alaskaair.com/content/about-us/history/overview.aspx
Damodaran, A. (2005). Finding the right financial mix: The capital structure decision. Retrieved December 1, 2013 from pages.stern.nyu.edu Web site: http://pages.stern.nyu.edu/~adamodar/pdfiles/cfovhds/capstr.pdf
eBay, Inc. (2013). One company | ebay inc. Retrieved December 1, 2013 from www.ebayinc.com Web site: http://www.ebayinc.com/who_we_are/one_company
Peavler, R. (2013). Debt and equity financing. Retrieved December 1, 2013 from bizfinance.about.com Web site: http://bizfinance.about.com/od/generalinformatio1/a/debtequityfin.htm
The year of 2010 was not a good year for Amgrow. hen considering the three financial measures listed, none demonstrated good performance. The change in cash position is not a good measure of financial performance so should be considered without a thorough examination of the statement of cash flows. The net income was poor in 2010. hereas in 2009, Amgrow turned a profit of $63,057, it lost $68, 801. Any loss is considered poor performance, but the fact that the company was profitable in the year before highlights just how poor a year that 2010 was, as net income declined by $131,858 over the two years (p.91).
The third measure, total assets, also saw a decline for Amgrow. There are times when the assets should decline -- the sale of an operating division for example -- but nothing like that occurred for Amgrow. Instead, the company simply saw the…
Amgrow Corporation. (2011) About Us. Amgrow Corporate. Retrieved December 18, 2011 from http://amgrow.com.au/about-us/
Bernstein, L. (1999). Analysis of Financial Statements. 5th edition. McGraw-Hill, 2000.
Boehme, R. (no date). Chapter 15: Capital structure (the classic Modigliani-Miller model). www.rdboehme.com. Retrieved December 18, 2011 from http://www.rdboehme.com/MBA_CF/Chap_15.pdf
Cassar, G. (2011). Discussion of The Value of Financial Statement Verification in Debt Financing: Evidence from Private U.S. Firms. Journal of Accounting Research 49(2): 507-528.
Theories on How Companies Deal With Debt and Financial Distress
Companies 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…
If this investment was financed entirely with debt, the new capital structure would be 67.2% debt and 32.8% equity. If this investment was financed entirely with equity, the new capital structure would be 30.5% debt and 69.5% equity.
One rule of thumb for making such a decision is to match the asset type with the financing. Therefore, an asset that is expected to have a service life of five years would be financed with a five-year bond issue, so that the cash flows from the asset can be used to cover the costs of financing. In this case, the asset life is not known, so any financing type can be used.
Internal cash is not possible because the firm likely does not have $10 million in cash if it only has $17.2 million in assets and $17.5 million in annual revenues. A debt issue will leave the firm with a…
Investopedia. (2010). Net present value -- NPV. Investopedia. Retrieved October 2, 2010 from http://www.investopedia.com/terms/n/npv.asp
Wang, J. (2003). Capital asset pricing model. MIT. Retrieved October 2, 2010 from http://web.mit.edu/15.407/file/Ch11.pdf
Yahoo! Finance. (2010). Advanced bond screener. Yahoo!. Retrieved October 2, 2010 from http://reports.finance.yahoo.com/z1?b=1&so=a&sf=m&tt=1&stt=-&pr=0&cpl=-1&cpu=-1&yl=-1&yu=-1&ytl=-1&ytu=-1&mtl=6&mtu=24&rl=-1&ru=-1&cll=-1
MSN Moneycentral. (2010). Magna International financial statements. MSN Moneycentral. Retrieved October 2, 2010 from http://moneycentral.msn.com /investor/invsub/results/statemnt.aspx?Symbol=MGA&lstStatement=Balance&stmtView=Ann
9 million beyond the First Mortgage loan. In order that the company does not dilute its equity, it is recommended that the convertible and debenture issues are made. If the convertibles are taken as equity, the capital structure will be around 28.6% in two years not counting new retained earnings, and this is close to the target capital structure that UniHost has. It is recommended therefore that those two options are undertaken in order to finance the expansion of UniHost. The convertible will need to be more than the $75 million -- more is possible so a this issue should net around $85 million. The company is unable to finance with just equity and convertibles, so some amount of debenture will be required, so it would be difficult for UniHost to undertake its growth strategy and avoid the restrictive covenants that will prohibit it from further growth. Future expansion needs…
business proposition business competition chain. Word count: 400 words B) Based idea produced question 1 part A, explain main difficulties/barriers? Word count: 400 words Question 2 A) eflect possibility finance business.
In the current context of the unstable economy, more and more people and firms have come to lose their activity and their savings. In such a context, they seek to become engaged in new opportunities, to create new business ventures and to ensure their functioning and living. In other words, despite the still ongoing effects of the economic crisis, fact remains that some business ideas could turn into successful ventures. One example in this sense is that of providing child care services.
The small firm would operate in its own facility, but would provide a series of services outside its facilities, as well. For instance, the company could pick the children up in the morning and drive them to…
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investment banker is a person working for an investment bank. Investment banks finance both public and private companies. They arrange for debt financing and they can help put together equity deals as well. A startup company will often seek partnerships with investment bankers in order to secure the financing needed to expand or to make acquisitions. Investment bankers do not normally work with companies that only have an idea.
The stock market is a secondary market where equities are traded. A company does not turn to the stock market per se to acquire capital. The company gets its equity financing from an investment banker, who may then place the shares on the stock market. The company only sees money from the issue of the stock -- the price on the stock market does not go to the company. Investors on the stock market, however, have votes on aspects of the…
An example of a short-term project that Wal-Mart undertakes is opening a new store. The company regularly opens new stores, and it takes several months from start to finish for the project. New stores have a relatively infinite life, so they are a capital project, but they are short-term in nature before they begin earning revenues of their own. The life span of the project indicates that equity may be more appropriate for this project. For a short-term project, equity typically comes from working capital by way of retained earnings.
For a short-term project at Wal-Mart financing should be done from cash. The financing decision should be made on the basis of a company's ideal capital structure and the cost of capital, but also should be made with consideration for the company's existing balance sheet. For Wal-Mart, the balance sheet has sufficient capital - $7 billion in cash for…
To increase effective demand, Keynesians believe the government must balance the economy with deficit and increase expenditure. However, the constant alternation between booms and recession is causing the booms to get shorter while the recessions become longer. This phenomenon is the result of empirical evidence that indicates that in the end, the interest rates decrease.
However, this situation creates a problem of capitalism as the rich increase their wealth while financial deficit worsens. Minsky adopted the perspective of Keynesians, hypothesized financial instability, as the finance and money that connects the present with the future, but the future is uncertain. Minsky finds the problem of financial stability is in financing. However, financial instability increases under contemporary capitalism, which increases economic crisis. This leads to the conclusion that to solve economic crisis, there is a need to reduce financing and take up investments in real economy.
This is in contrast to the…
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Nike's current ratio slightly improved, indicating higher liquidity and an improvement in its ability to meet short-term debt obligations. This did not reflect an increase in inventory, because the company's Quick ratio grew by approximately the same percent.
Nike's Quick ratio improved by approximately 3.5%, indicating an improvement in the company's cash position or a decrease in its short-term debt obligations. This might have a lot to do with the fact that Nike derives a significant portion of its income from international sales. Because its revenues are denominated in dollars, money in cash and short-term instruments may have increased in value if they are held overseas in non-dollar currencies. According to Nike's 10-k SEC filing, "Our largest international region, Europe, Middle East and Africa (EMEA), reported 20% revenue growth in fiscal 2003 compared to fiscal 2002. This growth reflected a 15 percentage point improvement due to changes in currency…
There may be dramatic differences in the Beta on other stock exchanges. In this case, one must be certain of what comparison is being made. In addition, differences in currencies may produce different results. The beta, in this case, is not a reliable means of assessing company performance. However, it can be valuable from the standpoint that it reflects the connection between andstad and it dependence on the global economy.
The Shareholder Value Added approach defines value as the corporate value, less the value of debt. It focuses on the change in value over time. It is usually calculated for several periods of time, using he debt and equity in each period. However, like the other methods, it becomes less accurate over the long-term. The more distant it becomes from the event, the less accurate this method tends to be.
Each of the valuation methods mentioned earlier has drawbacks in…
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The short-term liabilities of Starbucks are $2.075 billion. The long-term debt is $549.5 million. Total long-term liabilities -- not the same thing as long-term debt -- are $899.7 million.
The market value of equity of Starbucks (market cap) is $31.17 billion.
The debt ratio of Starbucks is as follows: 2975.5 / 7360.4 = .404
The debt to equity ratio of Starbucks is as follows: 2975.5 / 4384.9 = 0.678
The short-term debt to equity ratio is as follows: 2075.8 / 4384.9 = 0.473
The short-term debt ratio is as follows: 2075.8 / 7360.4 = 0.282
The long-term debt to equity ratio is as follows: 899.7 / 4384.9 = .205
The long-term debt ratios is as follows: 899.7 / 7360.4 = .112
I believe that this debt ratio is healthy. There are two reasons for this. The first is that Starbucks has a low degree of leverage with a debt…
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MSN Moneycentral: McDonalds (2011). Retrieved November 28, 2011 from
The success rates of this venture are increased as investors are willing to risk their money in the hope of increased gains. Otherwise put, shareholders "can accept downside risks because they fully share the upside as well" (Dynamic Equity, 2002). egardless of the sources used in contracting the necessary money, the organization would still have to retrieve a minimum of $40 million revenues during the first year in order to be profitable.
7. Exchange ate isk
Some managers at the Wilson Company argued that the organization should contract its loans in enminbi, or the Chinese currency. The measure would, according to them, help the company protect itself against currency exchange risks. Considering that the company comes to disregard this suggestion, the situation would present itself as follows:
the exchange rate is of one M to 0.2 USD, meaning basically that a United States dollar can be purchased for 5 enminbis…
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