Unit 4 Discussion

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The auto company is in a market that relies heavily on the status of the economy and the ability of consumers to purchase such an expensive need or want. Each car sitting on the lot represents a cost that has already been paid, which is basically a debt. The car company does not expect to make a profit until the car is sold which can be a difficult process or market to conduct that type of business. It could be taking more risk when purchasing or manufacturing new cars that might not sell in time to turn into profit. A utility company is more stable and can better increase financial leverage due to the demand and general understanding that utilities are required by nearly every household. Risks taken at a utility firm do not carry as much turmoil and concern as they do at a car manufacturing company because of the constant flow of profit. The choice of manufacturing facilities can affect the break-even point and the operating leverage. The labor- intensive company will focus on costs associated with personnel while the capital-intensive firm will have more costs associated with machinery and equipment (Block et al., 2022). According to Figure 5-1 and 5-2, we can see that the break-even point (BEP) of a leveraged firm is usually higher than that of a conservative firm. The leveraged firm has a high break-even point, but enjoys an exponential profitable range when going beyond the BEP. With less fixed costs, as with the conservative firm, the BEP is reduced but so is the possibility of exponentially earning past the BEP. This is favorable because of the small losses that incur if the firm has not met the BEP, as compared to the hefty price of not meeting the BEP for a leveraged firm. Financial leverage can be beneficial to firms seeking an increase in profit without selling more shares. Still, there are some drawbacks or limitations to financial leveraging. Debt ratios can cause concerns with a company’s ability to perform in the future or pay back requests on a short notice. Taristy (2023) suggests that firms have a difficult time finding a sweet spot between debt moderation and heightened risks that avoid high interest rates. Though a company could be investing and experiencing positive returns, the interest rate to support the risks of debt could cause future issues. In my opinion, financial leverage is helpful but can be poorly managed by companies that require significant upfront costs. They may not be sustainable and endure hardship when attempting to use financial leverage to support increasing operating costs. Saul (2023) notes that 516 companies filed for bankruptcy in the first three quarters of 2022. Rising interest rates appear to be a problem. Following the pandemic’s extremely row rates we saw a significant and dramatic increase in interest rates which many companies could not keep up with. Firms on the list that filed for bankruptcy in 2022 include Bed Bath & Beyond, WeWork, and RiteAid (Saul, 2023). Loan costs and future debt payments all increased which caused catastrophe to firms unprepared for the arrival of intensely higher rates. References Block, S., Hirt, G., & Danielsen, B. (2022). Foundations of Financial Management (18 th ed.). McGraw-Hill Saul, D. (2023, November 7). WeBankrupt: 15 notable companies to go under since 2022. Forbes. www.forbes.com/sites/dereksaul/2023/11/07/webankrupt-15-notable-companies-to-go-under-since-2022/? sh=5f635c6d77e6 Taristy, D. (2023). Moderation analysis of company size and capital structure on the influence of liquidity, corporate governance, and business risk on financial performance. Technium Social Sciences Journal, 45 (1), 222-239. www.doi.org/10.47577/tssj.v45i1.9162

Rob, I’m interested to hear your thoughts on the electric power company you are with. Living in California, many people are becoming increasingly frustrated with the utility companies available to us. It seems like SDGE maintains a contract with a majority of households and apartment complexes which may result in the company continuing to increase the price of services and fees. But as you mentioned, a utility company does have or expect more cash flow from revenue than an automotive company. Have you experienced a significant price increase of raw materials or the cost of operations? Additionally, we recently encountered flash flooding and extreme rainfall this week, in San Diego. Thousands of San Diego residents were without power on Monday afternoon (Nieto, 2024). I’d say this storm has caused an increase in repair and maintenance for the SDGE power system equipment. Because SDGE is a capital-intensive firm, it requires that cash flow to support its upgrades and repairs. Best, Madison References Nieto, B. (2024, January 22). SDG&E power outages affecting thousands in San Diego after storm. NBC 7. www.nbcsandiego.com/news/local/sdge-outage-affecting-thousands-amid-storm/3411746/ Angelo, You mentioned a barrier to entry and upfront costs, so I did a little research to understand your post and perspective. I agree that a new auto company may not see the light of day or begin to produce profits because of the barriers to enter the market. Buying a car is a significant purchase and it could be difficult to convince consumers to buy a name brand they aren’t familiar with and feel uncomfortable laying down large amounts for. Maybe the same could be said for utility companies? Then again, when you go to rent a home or apartment, you normally aren’t choosing from a list of utility providers. It’s inherent to the location and wiring/plumbing so it’s not the same as picking out a car. Still, I anticipate that there are barriers to entry for utility companies as it does take plenty of capital to start up a new company and provide services to a widespread area. Looking more into the idea of “barrier to entry”, I came across an article that mentioned the idea of a new type of “Venmo”. FedNow is expected to be the U.S.’s first regulated instant payment network, with all of the protections that banks currently offer (Santos, 2023). Venmo and Zelle don’t have the same protection and regulation as established banking facilities, but with FedNow our instant payments and transfers will have the backing it requires. The barriers to entry include slow processing systems that won’t allow instant transfers and the fact that consumers are currently unaware of the service and security FedNow provides. Similar to the automotive company’s concerns, these barriers could be keeping the new product from being successful in a well-established market. Best, Madison References

Santos, M. (2023, July 6). Three barriers to U.S. banks will face as they adopt FedNow. Forbes. www.forbes.com/sites/forbestechcouncil/2023/07/06/three-barriers-to-entry-us-banks-will-face-as-they-adopt- fednow/?sh=1cdadefd7f28

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