The purpose of this memo is to explain the conclusion reached to determine whether or not to call the bond before maturity and to offer recommendations if the decision is made to call the bond. This report will also include the advantages and disadvantages of using a long-term loan instead of a bond. Upon reviewing the contents of this memo, along with the calculations included in the appendix, the Finance Director should be able to make an assessment.
… Brigham and Houston (2016) study found the following:
“Most corporate bonds contain a call provision, which gives the issuing corporation the right to call the bonds for redemption. The call provision generally states that the company must pay the bondholders an amount greater than the par value if they are called.”
The task was to
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Barbour, (2013).
Companies usually have the option to decide whether to choose a long-term loan or a bond when they are considering expanding their business. Long-term loans and bonds are somewhat similar because they both carry interest rates. Loans are borrowed from a bank with a set interest rate, while bonds are issued from the public with the company issuing semiannual payments which are done at the end of the term.
The advantages and disadvantages of using a long-term loan instead of a bond are as follows:
…in research by Barbour (2013),
Long-term commercial financing can have a positive on business growth as well as the state 's overall economy.
Having access to capital enables companies to take advantage of new opportunities.
Long-term debt can also be a tool that can help a business manage and improve its financial performance.
According to Michael Wolfe retrieved from http://thefinancebase.com
The advantages of Long-term loan and bonds are:
Choosing a Long-term loan, borrowers have a larger option of lenders, interest rates, and payment
...ancial positions of the borrowers, their lack of knowledge as well as the superior bargaining power of the lender to get the borrowers to agree to these loans. The lenders should bear the major responsibility of these loans, as they are aware of the ramifications of such transactions. The borrowers are also responsible, as they should not enter into contracts without adequately understanding the consequences of such actions. In many cases, the lenders do not provide the information that would assist the borrower in making rational decisions. There are instances when the borrower does not care about the increased penalties, they just want to get their hands on the money, and worry about the consequences later. Some borrowers just live beyond their means but once they get sucked into a predatory loan, they begin a cycle of debt that they just cannot get out 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
It would matter because a callable bond, a bond which can be bought back by the issuer before its maturity, can reduce the cost of debt when the interest rate decreases.
...nt interest. The company wanted to invest extra mortgage-backed securities with $100 million and get 7 percent interest. Then the company borrows a short term loan for $100 million at 4 percent interest. The leverage of company is $10 in a debt for every $1 of equity. The return on equity would be 3.7million on equity of $10million. Hence, investor was willing to obtain short term loan in the bank while they would be given a higher premium. Diamond and Rajan (2009) suggest that the short term debt is seemed like cheaper compared to the future illiquidity’s cost and the long term capital. Therefore, heavy short term leverage market becomes more common in the market of bank capital structure. While the risk-averse banker is unlikely bear the excessive risk, the illiquidity’s costs would be more salient. This had enforced the market into a heavy capital structure.
"Debate on Student Loan Debt Doesn 't Go Far Enough." Applebaum, Robert. Hill (2012). Print.
However, financial situation of the firm plays a very important role in the decision of the bondholder and this company has been one of the most profitable companies America in terms of ROE, ROA ad gross profit margin. Apart from decrease in earnings and cash flow in 1997, UST had continuous increases in sales (10-year compound annual growth rate of 9%), earnings (11%) and cash flow (12%). They are generating their cash flows out of the operations. Thanks to their premium pricing, they are achieving more than average gross profit margin. So, over the years UST's revenues are stable and positive, and generally its statements are positive. The company does not have any problems with its cash flow.
approach was to be utilized as a framework for financing (Kronenfeld, 2011). In 1972, benefits
Designed for the people having a large sum of loan to pay, compared to your monthly income.
Students will fall between the two different options based on how they weighed the information. Every answer should take into consideration paying the loan and or monthly bills as well as turning a profit.
The second type of loan has an adjustable rate. These rates are often unpredictable, and even though the initial monthly rates might appear to be lower than with fixed rate mortgages, rest assured, you won’t be paying less in the long-run.
Organizations that decide to issue bonds generally go through a series of steps. Discuss the six steps.
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.
In order to reach a decision on which method of raising finance would be appropriate for Barra Airlines an analysis of the benefits and drawbacks of both the debt and equity method must be undertaken.
Maintaining a company’s financial assets is a daunting task. Cash management techniques and short-term financing provide accounting executives with the tools needed to survive the constant changes within the economy. The combination of these tools and the knowledge of the world economy will assist companies in maintaining current assets and facilitates growth.
The first advantage of interest income is interest income is more sustainable and high quality of earning to a bank from loan, share financing, hire purchase and others. The interest from a loan is a fixed interest agreed to charge by a bank to the borrower with a certain period of time. If the borrower is responsible, the repayment will be made in a due date with the actual amount. The hirer, the person who has option to buy goods in accordance is required to pay the monthly installment to the bank under the hire purchase agreement. This kind of payment is sustainable as the hirer has already signed the agreement with the bank. The goods will be obtained by bank if the hirer