Corpfin W6 Ass

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University Of Chicago *

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21609

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Finance

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Nov 24, 2024

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docx

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Uploaded by BrigadierViper1363

1 Assignment Name University Course Prof Due Date

2 Question 1 Three Advantages 1. Regulation. A fresh line of credit is only introduced temporarily. The relationship will stop after the debt is paid off, and the loan specialist will no longer have any influence over how the owner runs his business. 2. Taxes. Loan interest is always subject to tax deductions, although dividends given to shareholders are not taxed. 3. Consistency. It is simpler to convert bonuses and primary payments into revenue because they are always paid in advance when made. A long, short, or medium-term loan is possible. Two Disadvantages 1. Payments are fixed; interest and principal must be paid on time, without exception, on the dates stated. Other companies' cash flow will make it difficult for them to pay their loans. Meeting payment deadlines becomes difficult when a company's sales fall. 2. Payment. The majority of lenders will demand the assets of the other company as security and will want the owner to personally guarantee the loan. Question 2 If the business is unable to pay its debts, it may file for bankruptcy, which raises the possibility of a financial catastrophe. There are agency, direct, and indirect costs associated with bankruptcy filings by businesses. Direct costs are the administrative and legal fees incurred in liquidating a business. Direct costs include things like accounting fees, legal fees, losses from selling assets for less than they are worth, and higher borrowing rates as a result of bad credit ratings. Indirect costs are expenses that cause a cash outflow but make it challenging for a business or individual to exist. Rent and electricity costs, staff pay, department costs, human resources expenditures, and security costs are a few examples of indirect costs.

3 Agency costs are several kinds of internal expenses incurred by a business as a result of an agent acting on behalf of a principal. Typical causes of agency expenses include major inefficiencies, failure, and unhappiness. Expenses incurred by a management while reserving the priciest hotel for a business trip are a couple of examples, as is the income of an agent employed to collect payments from the principal. Question 3 Positive covenants, which refer to the preservation of the operational soundness and stability of the company's borrowings, are also known as positive covenants. Due to the fact that the contract requires the borrowing party to maintain a specific level of quality or stability of the business, which guarantees the company's financial health and prosperity (Henry, 2019). Positive covenant violations typically result in specific control rights for the lender, such as the power to demand repayment of the entire loan, the right to take possession of assets or collateral as compensation for the violation, or the right to increase the loan's interest rate. The debt exceeds what he already owed. Negative covenants, often known as negative covenants, forbid one party from taking specific actions. In some cases, a contract stipulates that damages party who agrees to restriction. Negative contracts are regarded as lawful, however it has been shown that some of their clauses restrict the parties' capacity to engage in typical business activity. Negative covenants can be included in land use agreements, bond documents, mergers and acquisitions agreements, and employment contracts. A type of debt refinancing known as debt consolidation involves combining numerous modest loans into one straightforward one. Usually, this has the effect of lowering interest rates, lowering monthly payments, and simplifying the payment schedule (Henry, 2019). Consolidating debt frees people from the weight of debt and simplifies payment planning so they can pay attention to just one big bill.

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4 Question 4 a. According to the pecking order hypothesis, a business should favor internal financing from retained earnings. If this source of funding is unavailable, the business will have to borrow money. Last but not least, the business must raise money by issuing new shares. According to the pecking order theory's criteria, the focus should be on the idea that managers have asymmetric information and are more knowledgeable about the company's potential, and that their asymmetric information would affect the decision between insiders and outsiders. Financing Other regulations include choosing internal financing, which allows businesses to customize their goal dividend payout ratio to investments that follow a particular dividend policy. The most trustworthy kind of collateral will be used by outside financial institutions— debt capital. b. The $10 million initiative was to be launched by The Angelina Corporation. It states that the money is earned through business dealings for the internal financing option. Since the business has $6 million available and pays $90k in interest annually, $3.91 million is still required to meet planned objectives in cases where internal financing is not feasible. If your budget cannot reach your $10 million goal, you should think about debt financing. However, the only way to take this into account is with equity financing, which can give you enough money to finish the project. c. This hierarchy is significant since it informs the public about the performance of the business. The hierarchy idea has the following three ramifications. A strong firm is one that is organically funded. When a business funds itself through debt, it shows that management is confidence in the ability of the business to make its regular payments. When a business finances itself by issuing additional shares, it typically sends out a negative signal since the business likely thinks its shares are overvalued and wants to make money before the price of its shares drops. The best capital structure can generally be chosen among cash from sales,

5 the selling of shares to investors, and the sale of debt to bondholders. An effective capital structure analysis can assist a business in lowering its cost of capital and increasing profitability. Question 5 A company's dividend policy determines how dividend payments are made to shareholders. The majority of businesses view their dividend policy as being fundamental to their corporate strategy. The amount, timing, and several other aspects affecting the payout of dividends must be decided by management (Jessi, 2019). The stable dividend policy, constant dividend policy, and residual dividend policy are the three types of dividend policies that the board of directors takes into consideration. The most prevalent and basic dividend policy is one that is stable. The strategy seeks to deliver consistent and predictable dividends each year, which is what the majority of investors desire (Jessi, 2019). A corporation that follows a consistent dividend policy distributes a certain portion of its annual profits as dividends. Although the residual dividend policy is extremely erratic, some investors find it to be acceptable. A corporation that has a residual dividend policy pays the dividends that are still due after paying for working capital and capital expenditures. Question 6 For the reasons listed below, Angelina Corporation chose to repurchase its shares in order to distribute greater dividends. The quantity of outstanding shares drops when a corporation buys back its shares at market price. The buyback has increased the share price while leaving the company's value unchanged. Other advantages include a more financially sound outlook on the entire economy, higher shareholder value, and firm consolidation. Question 7

6 Due to the following negative tax treatment, Angelina Corporation may exercise the following four alternatives for distributing dividends to its board of directors. 1. Acquiring financial assets will aid in debt reduction. 2. By repurchasing outstanding shares, the market will be informed that the share price must rise and the number of outstanding shares will be reduced. 3. With capital budgeting, funding is allocated to projects that have profitable net present values. 4. Buying strategically advantageous enterprises with cash can raise their value and cut the cost of financing. Question 8 i. The customer effect explains how a company's share price changes in response to the demands and objectives of its investors. These claims result from corporate activities or changes in tax, dividend, or other policy that have an impact on a company's shares. Depending on each customer's unique payout preferences, a change in a company's dividend policy may result in gains for new customers and losses for existing ones. On the other side, if a company's new dividend policy aligns with the group's playout preferences, it may draw in a fresh set of clients. Examples of the consumer effect include these shifts in demographics related to stock ownership brought on by changes in dividend policy. ii. The client effect states that investors in lower tax levels want bigger dividend payouts, while those in higher tax brackets prefer lower dividend payouts. Free businesses only offer average payouts. As a result, certain groups favor various dividend levels. The wealthy investor James Robertson decides not to take dividends, lowering his tax exposure. Because she elects to pay dividends and is in a lower tax rate, Alicia Walters is not

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7 subject to dividend taxes. Institutional investors that are exempt from taxes would prefer dividends that boost their income.

8 References Henry, K. (2019). An overview of techniques for cost reduction. Techniques for Surviving the Mobile Data Explosion , 45–53. https://doi.org/10.1002/9781118834404.ch4 Jessi, A. (2019). Traditional methods of reducing warranty cost. Warranty Claims Reduction , 34–39. https://doi.org/10.1201/b17122-8