CHAPTER 1
1.0 Introduction
The discussion on how firms raise capital with regards to instruments used to finance investment decisions have generated a lot of academic debate amongst scholar’s in finance in recent past with scholar’s examining plausible reason why listed firms raise capital through primary listing, secondary listing or issuing debt using different combinations of instruments such ordinary equity, debt, hybrid securities such as preference shares, convertible and warrant debt etc.
Raising capital can be done through initial public offerings by private firms that have just gone public or by listed firms to raise additional equity through seasoned equity issue. The preference of raising new financing through stock and bond offerings presents firms with the choice of selling these securities with underwritten general subscription (offering of stock and bonds to the public at an offering price guaranteed by an investment bank), placing bonds and stock privately with institutional investors or issuing these stocks and bonds directly to investors without the services of any middlemen. The impact of these financing decisions on firms is crucial in determining the cost of capital (debt-equity mix), value of the firm and ultimately firms financing demeanor.
The management of a firm has to decide what appropriate level of borrowing will be given its equity capital base. To assist in this decision, it would be useful to know if by varying the debt-equity ratio it could increase shareholders wealth. A firm, in financing its operations will use combination of debt and equity that best maximises the value of the firm.
Firms financing decision in this context plays an integral part in sustaining its value-maximization objec...
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...so applied to corporate bonds. The new rules now issued are specifically to guide issuance of corporate bonds.
7. Also new rules have been issued for the regulation of money market funds.
8. One major new rule just issued is rule 234 C which is in furtherance of the anti competition powers of the Commission under section 128 of the ISA. The section empowers the Commission to order the breakup of a company where its business practices are capable of restraining competition or creating a monopoly in its line of business.
9. Finally the new rules require public companies to make additional financial reporting such as quarterly reports, half yearly report and to file annual reports with the Commission in accordance with the requirements of sections 60 – 65 of the ISA.
These recommendations had since been implement by the commission.
These ratios can be used to determine the most desirable company to grant a loan to between Wendy’s and Bob Evans. Wendy’s has a debt to assets ratio of 34.93% while Bob Evans is 43.68%. When it comes to debt to asset ratios, the company with the lower percentage has the lowest risk. Therefore, Wendy’s is more desirable than Bob Evans. In the area of debt to equity ratios, Wendy’s comes in at 84.31% while Bob Evans comes in at 118.71%. Like debt to assets, a low debt to equity ratio indicates less risk in a company. Again, Wendy’s is the less risky company. Finally, Wendy’s has a times interest earned ratio of 4.86 while Bob Evans owns a 3.78. Unlike the previous two ratios, times interest earned ratio is measured on a scale of 1 to 5. The closer the ratio is to 5, the less risky a company is. From the view of a banker, any ratio over 2.5 is an acceptable risk. Both companies are an acceptable risk, however, Wendy’s is once again more desirable. Based on these findings, Wendy’s is the better choice for banks to loan money to because of the lower level of
Net working capital represents organization’s operating liquidity. In order to compute the net working capital, total current assets are divided from total current liabilities. When there is sufficient excess of current assets over current liabilities, an organization might be considered sufficiently liquid. Another ratio that helps in assessing the operating liquidity of as company is a current ratio. The ratio is calculated by dividing the total current assets over total current liabilities. When the current ratio is high, the organization has enough of current assets to pay for the liabilities. Yet, another mean of calculating the organization’s debt-paying ability is the debt ratio. To calculate the ratio, total liabilities are divided by total assets. The computation gives information on what proportion of organization’s assets is financed by a debt, and what is the entity’s ability to pay for current and long term liabilities. Lower debt ratio is better, because the low liabilities require low debt payments. To be able to lend money, an organization’s current ratio has to fall above a certain level, also the debt ratio cannot rise above a certain threshold. Otherwise, the entity will not be able to lend money or will have to pay high penalties. The following steps can be undertaken by a company to keep the debt ratio within normal
Another observation is that GM looks to use more debt financing that equity financing for funding their activities. The debt to equity ratio has steadily decreased over the past five years and is higher that the industry average. Also, the current and quick ratios are much lower than the industry averages. This again can pose so...
Stein, J. (1992). Convertible Bonds As Backdoor Equity Financing. Retrieved on June 12, 2006, from the World Wide Web at: http://www.financeprofessor.com/summaries/Stein1992ConvBond%20paper.htm.
We defined several criteria to determine our choice – return, risks and other quantitative and qualitative factors. Targeting a debt ratio of 40% will maximize the firm’s value. A higher earning’s per share and dividends per share will lead to a higher stock price in the future. Due to leveraging, return on equity is higher because debt is the major source of financing capital expenditures. To maintain the 40% debt ratio, no equity issues will be declared until 1985. DuPont will be financing the needed funds by debt. For 1986 onwards, minimum equity funds will be issued. It will be timed to take advantage of favorable market condition. The rest of the financing required will be acquired by issuing debt.
The consistent high spending of capital equipment is the first reason why one would recommend reducing the debt to equity ratio. A company with higher levels of debt is less flexible in being able to adjust to new market demands and conditions that require the company to make new products or respond to competition. Looking at the pecking order of financing, issuing new shares to fund capital investing is the last resort and a company that has high levels of debt, must move to the equity side to avoid the risk of bankruptcy. Defaulting on loans occur when increased costs or bad economic conditions lead the firm to have lower net income than the payments on loans. The risk of defaulting on loans and the direct and indirect cost related to defaulting lead firms to prefer lower levels of debt. The financial distress caused by additional leverage can lead to lower cash flows available to all investors, lower than if the firm was financed by equity only. Additionally, the high debt ratio that Du Pont incurred also led to them dropping from a AAA bond rating to a AA bond Rating. Although the likelihood of not being able to acquire loans would be minimal, there are increased interest costs with having a lower bond rating. The lower bond rating signals to investors that the firm is more likely to default than if it had a higher (AAA) bond rating.
The company is heavy on assets, the debt ratio will only grow to 0.40. with the added $50M in debt. Also, the firm will benefit from an added $2M in a tax shield and be able to return $12.7M a year to its. stockholders and investors, instead of $8.9M if equity is raised. finance the acquisition of the company.
There is a range of criteria relevant for a decision of financing a new venture. To construct my list for the evaluation of a new company as an opportunity I have selected to refer to t...
Credit rating agencies take a wide range of factors – debt raising purpose, industry outlook, corporate profile and financial measures into account when performing corporate bond rating service. Debt is raised to repurchase shares rather than the normal case of capturing expansion opportunities to strengthen cash flow. This is not going to be regarded favorable to debt holders since the debt coverage ability in terms of cash or collateral is not strengthened. UST is characterized positively by commanding market share position in the moist smokeless tobacco market, strong brand name recognition, premium product offering, pricing flexibility; negatively by lack of geographical and product diversification, market share erosion, lackluster non-core investment performance, and recent key executive reshuffle and anti-trust dispute with Conwood Co.. Besides its cash generative nature, smokeless tobacco market still is faced with legal challenges (legislation, litigation, marketing ban), slowing down growth and possibility of future health research negatively influencing customer behavior. Financial measures will be conducted in the form of pro-form income statement, key data and...
Finding the perfect capital structure in terms of risk and reward can ensure a company meets shareholder expectations and protects a firm in times of recession. Capital structure refers to how a business puts its money to “work”. The two forms of capital structure are equity capital and debt capital. Both have their benefits and limitations. Striking that perfect balance between the two can mean the difference between thriving versus trying to survive.
Brealey, Richard A., Marcus, Alan J., Myers, Stewart C. 1999, Fundamentals of Corporate Finance, 2nd edn, Craig S. Beytien, USA.
Loos, N. (2006). Value creation in leveraged buyouts: Analysis of factors driving private equity investment performance. Wiesbaden: Deutscher Universitäts Verlag.
For an organisation to rise fund, they usually tend to look at the stock market and capital market to do it so. This is two markets are usually seemed similar by the investors as they both contributes to the development of an economy. But there are significant difference between them. The capital market is a market that consist of stock market as well as the bond market. As a result, the capital market provides a long-standing finance using the debt capital and the equity capital. Capital markets divided into two sectors known as primary markets and secondary markets. The primary market is where securities are issued for the first time whereas the secondary market is where securities that have been already issued are traded among investors (Difference...
The capital structure of a firm is the way in which it decides to finance its operations from various funds, comprising debt, such as bonds and outstanding loans, and equity, including stock and retained earnings. In the long term, firms seek to find the optimal debt-equity ratio. This essay will explore the advantages and disadvantages of different capital structure mixes, and consider whether this has any relevance to firm value in theory and in reality.
The primary importance of the stock market is to increase the country’s economy as well as the global economy. When investors invest their money in stocks, they are contributing to the growth and development of the economy. Most companies choose to get listed in order to be able to issue shares to the public to generate funds for their growth and expansion. Besides that, issuing shares to the public is less risky compared to taking loans from financial institutions where there are higher charges for interest. If the company is developing well with these inv...