Therefore, value is transferred from the bondholders to the shareholders by undertaking risky projects, even if the projects have negative NPVs. This incentive is even stronger when the probability and costs of bankruptcy are high. 4. Stockholders can undertake the following measures in order to minimize the costs of debt: 1) Use protective covenants. Firms can enter into agreements with the bondholders that are designed to decrease the cost of debt.
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.
The other reason was adjustable mortgage rates. Adjustable mortgages allowed banks to increase the monthly balance, when monthly payments were not large enough to cover principal and interest, which made loan takers to pay more payment that what they were not accepting. This caused owners to owe more on their loans than its market value with an inability to refinance. Lehman Brother’s was also in Commercial paper lending market and they were one of the largest commercial paper lending institutions in the world. Commercial paper lending market is short-term debt that big businesses and financial institutions sell primarily to money market fund managers and other institutional investors.
A powerful European banking agency could end the incestuous relationship between banks and regulators, while interfering much less with nations’ sovereignty than dictating their fiscal policies. Second, Europe needs eurobonds. The introduction of the euro was supposed to reinforce convergence; in fact it created divergences, with widely differing levels of indebtedness and competitiveness. If heavily indebted countries have to pay heavy risk premiums, their debt becomes unsustainable. That is now happening.
CCI would be taking a somewhat high risk by issuing additional stock due to the uncertainty about the offering price. Having a low P/E ratio with respect to the rest of the market, and the replacement cost of the firm being greater than its book value (argument 3), there is a good chance that the current stock price and the proposed offering Although long-term debt is a better financing choice a few of the drawbacks are pointed out. Debt holders claim profit before equity holders, so the chance that profits may be lower than expected, increases risk to equity may reduce or impede stock value. However, in extreme financial situations such as a recession period, CCI would still be able to increase its cash during a recession period with all debt capital structure. Also, there is a remaining 12.5 million that would have to be paid at the expiration of the bonds, but that could be paid off by issuing new bonds or additional equity at that time.
Question 1: The Northern Rock case demonstrates that financial regulators should not view modern banking separately from capital market developments. A) Describe the liquidity spiral at work in the Northern Rock case Liquidity spirals are loss spirals which start as a result of deprecation of asset value whereby the net value decreases faster than the gross value (because of their leverage). Assuming a constant leverage ratio, the drop in value of the asset will force the company to either raise more capital (not likely if the market is already tight) or to sell assets at a time when the prices have already dropped. The selling of the assets will push the prices down further which will inevitably result in more sales. The financial institutions’ capital erodes and, at the same time, lending standards and margins tighten.
Banks have a reserve requirement, which is set by the fed. A reserve requirement is the minimum percentage of a bank’s total reserves that they are required to keep, for security reasons. (Schiller) The fed can change the reserve requirement to allow a bank to loan more/less money, which is used to control the economy. Many critics use this to determine that annual deficit spending has a negative impact on the economic stability of our country. The fed has to set a lower reserve requirement, which allows banks to loan out more money, which generates more interest, which could lead to periods of inflation and could have worse consequences if the government does not react quickly enough.
Wal-Mart’s Strategic Initiative Stephanie Williams MGT521 February 22, 2012 Dr. Michael Lindquist Wal-Mart’s Strategic Initiatives The recent economic downturn in the U.S. has resulted in drastic behavioral changes in consumers. Consumers are spending and investing more conservatively. Wal-Mart’s success and survival depends on how they react to the recent changes in consumers’ shopping habits. So far, Wal-Mart’s strategy has proven successful in the midst of the recession, maintaining the title of the leading retailer world-wide. Adaptation Strategy Wal-Mart has recognized the shift in the spending habits of our consumers.
Such economies of scale will allow Berkshire to offset the very high costs of cold-forming equipment. Business StrategyA careful analysis is needed in order to determine Berkshire’s business strategy. At first one would think it was product differentiation because of the inelastic demand in the short run. But one thing that should also be noted is the fact that for most goods, demand is much more price elastic in the long run than in the short run. This combined with the fact that Berkshire is convinced that it could not individually raise prices without suffering substantial volume declines, and that all the products of the different manufacturers in the industry are very similar, prove that their business strategy is in fact cost leadership.
The precise definition is that TBTF companies are certain financial institutions that are so large and so interconnected that their failure will have a disastrous effect throughout the economy. So, if the cost of a bailout is less than the cost of the failure to the economy, a government will provide assistance to prevent its failure. An important point is that "too big to fail" doesn't mean that a financial institution can’t fail, but that it can’t be allowed to do so. Why TBTF institutions appear? The advantages are obvious.