I. Issue
Analyzing the pros and cons of structuring the additional capital funding as a debt rather than equity.
II. Conclusions:
From U.S. tax and business perspectives:
1. Tax Consequences to SJKII- the WOFE is a disregarded entity and therefore there is no preference in structuring the capital funding one way or another.
2. Tax consequences to Fosun- in the case of insolvency, the bad debt loss may be treated as an ordinary loss, while the worthless stock deduction is be treated as a capital loss.
3. The form of the additional capital funding (i.e. equity vs loan) has no tangible impact on SJKII and Fosun’s voting power since Fosun and SJKII are the majority shareholders and the debtors.
From China tax and business perspectives:
1. China maintains a strictly regulated system of foreign exchange controls, meaning funds flowing into and out of China are tightly regulated. Accordingly, many multinational corporations have adopted certain implicit policies, such as minimizing their profits in China in a legitimate manner via intercompany payments, i.e., charging their Chinese unit
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One of the conditions is that the liquidating subsidiary must be solvent so that the parent company is deemed to receive something of value in return for surrendering its stock in the subsidiary upon liquidation. Treas. Reg. §1.332-2(b) provides, “Section 332 applies only to those cases in which the recipient corporation receives at least partial payment for the stock which it owns in the liquidating corporation.” When IRC §332 is not applicable, normally IRC §331, relating to taxable corporate liquidations, would be applicable. However, when an entity is deemed to be insolvent, IRC §331 does not apply and instead, IRC §332 points to IRC §165(g), relative to the allowance of losses on worthless
We started our research by reading through the discussions posted within the Topic of Research. From there we read the recommended pages of the text, 20-2, 20-3, and 20-4 regarding the liquidation process. Using the CCH Tax Research Network, we used a selected content search, Federal Tax--Federal Tax Editorial Content--Standard Federal Tax Reporter (2014), to research the following laws: Section 331(a), 336(a), and 6901(a). We also used the Citator in CCH to review the facts and decisions shown in the liquidation cases of Kennemer and Al Zuni of Arizona.
Laux, R. C. (2013). The Association between Deferred Tax Assets and Liabilities and Future Tax Payments. Accounting Review, 88(4), 1357-1383. Doi: 10.2308/accr-50417
Answer: WACC covers computation of SIVMED’s cost of capital in which each category of capital is proportionately weighted. All capital basis - common stock, preferred stock, bonds or any other long-term borrowings – should be listed under SIVMED’s WACC. We determine WACC by multiplying the cost of the corresponding capital component by its proportional weight and then adding: where: Re is a cost of equity Rd is a cost of debt E is a market value of the firm's equity D is a market value of the firm's debt V equals E + D E/V is a proportion of financing that is equity D/V is a proportion of financing that is debt Tc is a corporate tax rate Broadly speaking, SIVMED’s assets are financed by the choice of debt or equity. WACC is the average of the costs of these sources of financing, each of which is weighted by its respective use in the given situation. By taking a weighted average, SIVMED can determine how much interest the company has to pay for every dollar it uses. Shareholders are interested into cash flows available to them, after corporate taxes have been paid. Consequently, we have to use After-Tax WACC. The cost of capital is used above all to make decisions that involve getting new capital. Hence, the applicable component costs are present marginal costs but not than historical costs.
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.
approach was to be utilized as a framework for financing (Kronenfeld, 2011). In 1972, benefits
... Additionally, the hurdles imposed by the government agencies will impact the cost of sourcing from China adversely and will have a negative impact on the profitability for the company.
only make up 16.7% of the capital structure. Thus, the credit risk for any credit commitment was not too high
When discussing the cost of equity capital, or the rate of return required by investors for their share expenses, there are three main models widely used for analyzation. These models are the dividend growth model, which operates on the variable of growth and future trends, the capital asset pricing model (CAPM), which operates on the premise that higher returns are a result of higher risk, and the arbitrage pricing theory (APT), which has a more flexible set of criteria than CAPM and takes advantage of mispriced securities
What is the difference between a. and a. The argument of the debt financing being a risky venture since the proposition was to pay out to a sinking fund does not make sense. Over the course of the next seven years, CCI had a historical growth. in revenue of 9%. This growth along with the $2M tax shelter would.
...es almost zero involvement by the loaner. Equity financing is an exchange of an asset for stock between owner or partner and investor. A repayment is not required but involvement of the investor is which has some benefits and only a few drawbacks. Depending on which option the company chooses to use, the accounting can be different in a few different ways. Equity requires capital contributions and dividends to be distributed while debt financing requires note receivables, note payables, and any accrued interest. Companies have more options than before; the small, medium and big corporations. Businesses usually fiannce when expanding, recovering, or starting up; Debt financing and equity financing both have many advantages and disadvantages along with a variance in accounting methods that should be considered when a business is attempting to make a finance decision.
Higher leverage is very likely to create value for a firm considering capital structure change by exerting financial discipline and more efficient corporate strategy changes.
According to Teagarden & Cai (2009) Chinese companies have expanded abroad for three reasons. Firstly, ‘to secure natural resources to satisfy the demand of their home costumers for raw and fuel; secondly to identify and secure foreign technology and know-how; finally, to escape home market saturation and ruthless price wars’ (Teagarden & Cai, 2009: 73). In addition, Teagarden & Cai (2009) noted that in order to become multinational firms, Chinese companies followed a pattern of four phases:
Capital Asset Pricing Model (CAPM) is an ex ante concept, which is built on the portfolio theory established by Markowitz (Bhatnagar and Ramlogan 2012). It enhances the understanding of elements of asset prices, specifically the linear relationship between risk and expected return (Perold 2004). The direct correlation between risk and return is well defined by the security market line (SML), where market risk of an asset is associated with the return and risk of the market along with the risk free rate to estimate expected return on an asset (Watson and Head 1998 cited in Laubscher 2002).
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.
Pucek, CPA, and Glenn E. Richards, CPA, “in circumstances outside of troubled debt restructuring, the relevant accounting guidance (FASB ASC Section 470-50-40, Debt Modifications and Extinguishments) states that “extinguishment transactions between related entities may be in essence capital transactions.” If the extinguishment of debt is realized to be a capital transaction then it cannot recognize a gain or a loss. It is difficult to clearly differentiate between a capital transaction and recognition because there are little measures for this