It cannot affect the amount of the firm's operating income that goes to taxes. c. It makes it more difficult for the firm to raise additional capital. d. It makes the firm's investors subject to greater potential personal liabilities. e. It makes it more difficult for the firm's investors to transfer their ownership interests. 2.
DFA roughly believed in efficient market theory. They believed that the high return of small stocks and value stocks come from high risk which matched the efficient market theory. Moreover, they would not do any fundamental analysis of the firm in question. (p6) At the same time, however, they did some adjustments based on other two principles, sound academic researches and skilled traders, to get rid of those not matching the theory. For example, they did not purchase those stocks with inside trade information.
This stands in sharp contrast to the early view of Miller and Modigliani (1958), who argued that in a well-functioning efficient market without taxes, informational asymmetries, and default costs no financial synergy can be found because the market value of company does not depend on its capital structure. However, a firm’s capital structure decision can matter if these assumptions are not true. The theory has two important caveats concerning its applicability; first, one of the merging firms must be experiencing financial distress. The theory is most directly applicable to marginally profitable start-up companies and existing companies that are financially distressed. Second, theory only applies when severe agency problems exist between the manager and the claim holders of the distressed firm.
They typically use this method because it requires fewer journal entries for closing an accounting period and creating financial statements. I feel this method only gives the owner or company a view on the cash coming in and out but does not give the company a long term view on the overhead cost and revenue for services in order to show the company where improvements can be made or where costs
On the other hand MI backed mainly by shareholders equity and performing assets and thus would be able to issue new debt increasing value for both shareholders and the corporation. Thus the shareholders would gain at the expense of bond holders and the equity value of the company would increase. b) Bondholders Bondholders had a lot to lose as according to Project Chariot almost all the debt would be assigned to HM. Given the problems in real estate and hotel markets there was a concern of HM’s ability to meet its debt payment and there was a high probability of default. This meant that the risk was issued at investment grade but now was not backed by valuable assets of the companies which were to be spun off to MI which was to be backed by equity.
From an accounting prospective, the major problem with the calculations mentioned in the article is determining the rate of return and length of the marketing investment. While the initial value of the “investment”, i.e. marketing expense, can be easily determined, determining the real value after the investment has been made has the potential to be biased without a commonly used measurement. The value of the investment could also fluctuate from year to year based on the companies’ profitability even though marketing had not direct
This is because according to Elliot (1986), it stated that historical cost assumes money holds a constant purchasing power. The specific price-level changes (shifts in customer preference and advances in technology), inflation, and fluctuation in exchange rates for currencies that happen in the modern economy cause this assumption less valid. Furthermore, historical cost does not consider the changes in price. In times of rising prices, the companies tend to overstate the profits and distribution of the profits to the shareholders will cause trouble to the company. This is because the historical cost does not
Answer: T 1-4 If a household invests in corporate securities and does not supervise how the funds are invested or used by the corporation, the risk of not earning the desired return or not having the funds returned increase. Answer: T 1-5 If not done by FIs, the process of monitoring the actions of borrowers would reduce the attractiveness and increase the risk of investing in corporate debt and equity by individuals. Answer: T 1-6 Failure to monitor the actions of firms in a timely and complete fashion after purchasing securities in that firm exposes the investor to agency costs. Answer: T 1-7 The risk that the sale price of an asset will be less than the purchase price of an asset is called liquidity risk. Answer: F 1-8 Because bank loans have a shorter maturity than most debt contracts, FIs typically exercise less monitoring power and control over the borrower.
The economy is not run by a single entity, which means that it is the individual or individuals that are driving our economy. The difference in motives and operation styles from company to company will mean that there are flaws within the economy. In a time of recession and high unemployment this has to be complemented in another way to counteract the recession and promote economic growth. The classical model is an accurate indication of the economy if businesses were operating as one entity, or under government control, which is not the case in our society. Supply does not match demand because the goal of the production entity is revenue and the goal of the consumer is spending.
Executives are hired to act as fiduciary agents of their stockholders for the purpose of increasing wealth (Smith, 2003). He argued that CSR amounted to spending the stakeholder’s money that clouded decision making by reducing the firm’s focus on maximizing profits, thereby placing the firm at a competitive disadvantage (Smith, 2003). Friedman’s approach is practical and takes into account the interests of both firms and society. However, it is not realistic to think that a firm can separate business and social responsibilities. According to Mintzberg "the strategic decisions of large organizations inevitably involve social as well as economic consequences, inextricably intertwined...there is no such thing as a purely economic strategic decision."