Corporate Finance Essay
Most corporate financing decisions in practice reduce to a choice between debt and equity. The finance manager wishing to fund a new project, but reluctant to cut dividends or to make a rights issue, which leads to the decision of borrowing options. The issue with regards to shareholder objectives being met by the management in making financing decisions has come to become a major issue of recent times. This relates to understanding the concept of the agency problem. It deals with the separation of ownership and control of an organisation within a financial context. The financial manager can raise long-term funds internally, from the company’s cash flow, or externally, via the capital market, the market for funds
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Any profits remaining after deducting operating costs, interest payments, taxation, and dividend are reinvested in the business and regarded as part of the equity capital. The finance manager will monitor the long-term financial structure by examining the relationship between loan capital, where interest and loan repayments are contractually obligatory, and ordinary share capital, where dividend payment is at the discretion of directors. This is known as gearing. There are two basic types of gearing, they are capital gearing which indicates the proportion of debt capital in the firm’s overall capital structure; and income gearing indicates the extent to which the company’s income is pre-empted by prior interest charges. Both are indicators of financial gearing.
Now, the advantages of debt capital centre on its relative cost. Debt capital is usually cheaper than equity because, the pre-tax rate of interest is invariably lower than the return required by shareholders. This is due to the legal position of lenders who have a prior claim on the distribution of the company’s income and who in liquidation precede ordinary shareholders in the queue for the settlement of claims. Debt is usually secured on the firm’s assets, which can be sold to pay off lenders in the event of default, i.e. failure to pay interest and capital according to the pre-agreed schedule;
Finally, in order to complete a more accurate comparison between the two projects, we utilized the EANPV as the deciding factor. Under current accepted financial practice, NPV is generally considered the most accurate method of predicting the performance of a potential project. The duration of the projects is different, one lasts four years and one lasts six years. To account for the variation in time frames for the projects and to further refine our selection we calculated the EANPV to compare performance on a yearly basis.
1.What are conversion factors? Why were conversion factors developed? How do they impact on which bond is cheapest to deliver? Under what conditions would there be no cheapest to deliver? Explain in detail.
Debt capital: borrowing someone else’s money to finance the business under the condition that the money plus accrued interest must be paid back in full by an agreed upon date in the future
It is not uncommon to become accustomed to the way business is conducted in the United States. It’s a fair assumption that many young, inexperienced business executives are unaware of international cultures in business. Each country has particular customs and practices. It certainly goes without saying that Corporate America has an understanding when it comes to the terms of a standard workweek.
ITC Ltd.’s strategy plan for compliance with the current acceptable standards or norms relative to social responsibility today is well thought out, especially for a company that sells potentially dangerous products, and try to meet and listen to all demands and laws in place since the start of their business. Even though in 2014 a new bill was passed for the majority of companies to build accountability and also have the government looking over the private sector (Banerjee, 2013). “The CSR provision requires affected companies to spend at least 2 percent of their average net profits made in the preceding three years on CSR” (Banerjee, 2013). Even though this bill has caused a lot of uproar for companies, ITC has actually already been
Life insurance is meant to provide funds to replace a breadwinner's to protect and support dependents. Chad and Haley are dependents, not income providers. Therefore, the purchase of life insurance is unnecessary and not recommended. The Dumonts should use the money they would spend on policies for the children to increase their own coverage.
The Oxford English Dictionary defines ‘governance’ as ‘the act, manner, fact or function of governing, sway, control’. ‘To govern’ is ‘to rule with authority’, ’to exercise the function of government’, ‘to sway, rule, influence, regulate, determine’, ‘to conduct oneself in some way; curb, bridle (one’s passions, oneself)’, or ‘to constitute a law for’.
The need for clarification on the board requirements for a majority of independent directors as it relates to corporate governance is of great importance and would be discussed in this write up.
Brenda Franklin had been serving Allied Tech for the past 8 years. As any other organisations, Brenda used to be a part of the lunch hour conversations with her colleagues. One day when her colleagues were discussing about corruption and politics, something occurred to her. As a result she prepared a list called “Ethically Dubious Conduct” and pasted it on the common notice board. Her colleagues were taken by surprise. Brenda was now anticipating the next lunch where she was expecting her list to be analysed among her colleagues.
We are providing below the assumptions and other calculations we used while computing the WACC and the cash flows.
Firstly, interest on debt is tax deductible, therefore, debt is the least costly source of long-term financing as this is a tax saving for the frim. Thus, creditors or bondholders require a lower return on debt as it is considered a reflectively less risky investment. Secondly, the capital structure of a firm is flexible due to debt financing. Ultimately, bondholders are creditors and they do not have voting rights, hence, they are not involved in decision making and business operations. Additionally, the major advantages of equity finance are as follows. Firstly, the capital provided is to finance the businesses short term needs and future projects. Secondly, the business will not have to pay any additional bank expenses such as interest on loans, thus allowing the business to use the money for business activities. Lastly, investors anticipate that the business will develop thus they help in exploring and executing thoughts. Certain sources, for example, venture capitalists and business angel can bring significant skills, abilities, contacts and experience to businesses and they can also provide expertise advice to businesses (Hofstrand,
The company is financed both by equity and debt, there is no perfect combination of the debt and equity, and still finance managers believe that every firm has an optimized value of creation of funds through both the sources which capitalize on shareholders fund as well as the financial value added by the firm.
A firm can choose a mix of three modes of financing i.e. issuing shares, borrowing from the market and use of retained earnings. The ratio of this mix of funds purely depends on the firm and known as optimal capital structure of the firm. This leads to the different capital structure theories. These theories explain their
What type of financial investments would you invest in if you were given 10,000 dollars, what made you choose these investments, as well as; how did your choices affect your decision as to tracking these financial investments through the usage of financial strategies and trends. While finding the right pecuniary investment to finance in is never an easy decision, one must first do their research as to what type of financial resources are available on the market to invest in; then apply those financial decisions and strategies to their financial market plan. Let’s begin with what a financial market does, “financial markets perform a vital function: they transfer funds from savers (individuals and organizations willing to defer using some
Harris and Reviv (1990) gave one more reason of using debt in capital structure. They say that management will hide information from shareholders about the liquidation of the firm even if the liquidation will be in the best interest of shareholders because managers want the perpetuation of their service. Similarly, Amihud and Lev (1981) suggest that mangers have incentives to pursue strategies that reduce their employment risk. This conflict can be solved by increasing the use of debt financing since bondholders will take control of the firm in case of default as they are powered to do so by the debt indentures. Stulz (1990) said when shareholders cannot observe either the investing decisions of management or the cash flow position in the firm, they will use debt financing. Managers, to maintain credibility, will over-invest if it has extra cash and under-invest if it has limited cash. Stulz (1990) argued that to reduce the cost of underinvestment and overinvestment, the amount of free cash flow should be reduced to