Essays on Financial Distress

WT Grant Company was known as the largest retail company in the urban areas of the United States. The main reason for the success of the company was its low-cost chain as compared to its competitors in the US market. The company liquidated due to its ineffective strategy to counter the competitive environment factors prevailing in the market. The major causes of the company’s failure in the market are mentioned below.

Financial Distress

It was the main reason for the failure of WT as it was unable to remain financially strong and increased credit risks to a high extent. The ...

1. Corporate Governance refers to the mechanism or system in which enterprises are directed and controlled, especially in which the interests of stakeholders are balanced. It is also known as the relationship between various stakeholders of business such as shareholders, management, the board of directors, etc. (Tricker & Tricker, 2012). Corporate governance system varies from country to country due to the differences in the economic and political system. It can be observed in a way that American corporate governance is entirely different from that is followed in Japan and Germany. In America, corporate governance system is controlled and directed by ...

Executive Summary

The report comprises of two main tasks that are financial ratio analysis and distress analysis to determine and evaluate the financial performance of HSBC. The case study is prepared to analyze the financial conditions of HSBC. HSBC Bank Plc. is one of the largest financial services providers in the world. HSBC operates in Finance and Insurance industry that is highly competitive in the global market. The decline in values of current ratio, quick ratio, and cash ratio reveals that the company did not succeed in maintaining stability in its financial position, but the decrease of 0.02 and 0.01 is ...

Introduction

The bank of Dhofar was started with only two branches, One in Salalah and another one in Muscat, and was first incorporated in January 1990 as a public joint stock company in Oman to conduct banking activities for the investment, retail and corporate sectors. At its inception, the bank had the name Bank Dhofar Al Omani al Fransi, which was changed to the current name in 2003 after the bank met all approval requirements. Before the name change, Bank Dhofar Al Omani al Fransi had merged with the Majan International Bank in 2002. Over the years, the bank has ...

Performance Measurement

Asset Utilization Revenue generation by each employee is perceived to be better for Boeing at $595,501.86, which may be due to a better employee retention policy. This was concurred by Boeing’s annual report where it revealed that the management has good relations with its employees since 38% are represented by unions (Boeing, 2016, p.20) with Lockheed at 18% (Lockheed, 2016, p.18). Due to the better employee retention, Boeing was able to generate a higher amount of sales based on its investor’s capital or equity at 15.02 but Lockheed was not lagging far behind at 14.90. The ...

Current Challenges

JC Penney is a mid-size departmental store operator that is struggling with a myriad of challenges, among them, a tough operating environment, reduced sales and financial challenges. The retail has seen increased competition with the rise of e-commerce and companies like Amazon and E-Bay. In the last ten years, for instance, JC Penney stock has lost 86% of its value, from a high of $83.43 in March 2007 to a low of $7.70 in May 2016. In May 2016, the company announced a drop in sales in the first quarter, 2016. However, the company cut down on losses, from ...

Abstract 2

Introduction . 3 Lessons from Capital Market History . 3 Return, Risk and the SML .. 5

Cost of Capital 7

Financial Leverage and Capital Structure Policy 9 Conclusion 11 Abstract This paper entails a critical analysis and discussion of the components of the corporate finance and its subsequent application in the contemporary business environment. The discussion and analyses contained in this paper are centered on the book by Ross, Westerfield and Jordan (2012) which is titled: “Fundamentals of Corporate Finance.” In this book, different aspects and components of this subject of corporate finance have been discussed in great depth and this paper essentially entails ...

Introduction 3

Comparative Financial Performance Analysis of Pepsi and Coca Cola for the Last Two Years (2014 and 2015) through Ratios and their Interpretations 3 Analysis of Profitability Ratios 4 Gross Profit MarginW 4 Net Profit margin 5 Return on Assets 6 Analysis of Solvency Ratios 7 Current Ratio 8 Quick Ratio 9 Analysis of Capital Structure Ratios 10 Debt-to-Equity Ratio 11 Interest Coverage Ratio 12 Examination of Efficiency Ratios 14 Days Sales are Outstanding 14 Days in Inventory 15 Payables Period 16 Findings and Recommendations 17

References 20

Comparative Financial Performance Analysis of Pepsi and Coca Cola Introduction Because of their global ...

About the paper

Capital structure of the company represents the mix of debt and equity components used by an entity to finance its capital requirements. However, right from the beginning of the corporate era, the goal of the financial managers has always been the minimization of weighted average cost of capital and thereby maximizing the value of their entity. Ironically, the world of academicians is divided and postulates different opinion as under what conditions the WACC rate is minimized and how the additional funding affects the WACC rate of the company. While static trade-off theory stands as the most pragmatic theory relating ...

Question 1: What is Cineplex’s Altman Z-Score for 2013 and 2014?

Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5

Where:

X1 = Net Working Capital/Total Assets (it measures liquidity) X2 = Retained Earnings/Total Assets (it measures the cumulative profitability) X3 = Earnings before Interest and Tax/Total Assets (it measures the return on assets) X4 = Equity Market Value/Book Value of Liabilities (it measures the market leverage) X5 = Total Revenue/Assets (It measures the revenue generating potential of total assets) X1 = Net Working Capital/Total Assets = -184,021/1,609,416 = -0.11 X2 = Retained Earnings/Total Assets = -123,771 / 1,609,416 = -0.08 X3 = Earnings before Interest and Tax/Total Assets = (97,415 + 21,948) / 1,609,416 = 0.07 X4 = Equity ...

Question 1

In order to understand why people commit fraud, many companies use the fraud triangle to analyze the attributes, which make people commit fraud. The importance of the fraud triangle is to understand fraud and its significance demonstrated in the Darren Darren’s case. The explanation of why people commit fraud is examined by the use of fraud triangle. It evaluates the circumstances that make employees violate ethical standards and be involved in the fraud cases. Therefore, fraud triangle joins the perceived pressure, perceived opportunity and rationalization to facilitate fraud. The first required attribute is Incentive, motivation, or pressure ...

Question 1

Maintaining a fixed exchange rate is critical in stabilizing the value of a currency against an anchor currency as it makes trade and investment easier and more predictable. Nonetheless, central banks face a number of problems in their attempts to maintain fixed exchange rate, two of which include balance of payment problems when attempting to maintain a weak currency and reduced risk perception while borrowing in foreign currency when attempting to maintain a strong currency. When maintaining a strong currency, a false perception arises that the foreign exchange rate may not change thereby leading to reduced risks perceptions when borrowing in foreign currency such as the case of ...

What you think Roger Martin’s thesis is and what is the logic behind his argument?

Introduction Roger Martin in his book, “Fixing the Game” has presented some bitter realities on the American financial system. The first financial crisis that occurred in United States was in 1924 that was fueled by abundant hype and easy loans. As the crisis occurred, there was a blame game that who was responsible for this financial meltdown. As things settled down, heavy regulatory measures were imposed, so such kind of crisis does not occur in future. Then in the year 2000, the United States faced another financial crisis that became famous with the name, “Dotcom Bubble”. While many dotcom ...

Undoubtedly, the low cost of borrowing and the tax shield provided by the debt sources makes it a lucrative option for the company, and even the eminent finance professors, Modigliani and Miller has postulated that cost of capital is minimized at 100% debt level. In their study, MM Proposition II (With Taxes), the professors proposed that the tax shield provided by the debt funding causes Weighted Average Cost of Capital (WACC) to decline as the leverage increases. Therefore, the value of the firm is minimized at the point where WACC is minimized, which is 100% debt. The figure below shows ...

Abstract

Capital structure is a really important concept in the realm of financial management. Capital structure theory requires the management to search for the alternative sources of funds in an attempt to finance the various business operations and growth phenomenon. There are two main sources of capital around which the companies structure their capital financing, being debt and equity. This academic essay is an attempt on the part of the writer to discuss the phenomenon of capital structuring in detail. In lieu of this, the theory of capital structure is investigated in detail with an analysis of Modigliani and Miller model ...

Daktronics' Capital Structure Policy

Worksheet 5: Current Debt-Equity Policy of the company: Referring to the financial statements of the company, we came to know that since the company has not acquired any debt financing in its capital structure, the debt equity ratio has been zero(0) since 2010. Thus, although the company is trading without any financial risk, but since it is not using the available debt resources, it is letting go the advantages offered by debt financing in the form of tax shield. Thus, the treasurer should consider including debt financing as it will only add value to the company ...

Question 1 - Effectiveness of Altman or Modified Altman Algorithm

Today, the pressures from globalization and global competitiveness have been increasing consistently in a dramatic manner. In their true essence, business activities are undertaken to work towards generation of profits and achievement of growth objectives by serving targeted consumers in an effective manner. With increased volatility in the global business environment, it has become imperative to assess if a business or any organization is performing well or not. Analysts predict whether the business will go bankrupt has become one of the greatest concerns of various financial analysis theories and researches. Additionally, it has been widely believed among financial research analysts ...

Abstract:

The elongated report is a proposal to invest either in 401k or the Indexed Universal Life (IUL). Important to note that it was very important to discuss the issue as many Americans are just investing their annual contributions to the traditional 401k, juts because others are doing it. But is this the best option to consider always? The report begins with statistical evidence comparing the performance of 401k and the IUL which gives a clear interpretation that the structure of IUL is itself investor-friendly and is association with features as S&P 500 Index, caps, floors and many others, make it a ...

Optimal leverage analysis

The Toll Holdings Limited is an Australian company whose operations are majorly in transport on roads, sea, rail and air. The company, in its operations, requires to be financing at all times. Sometimes the profits the company makes are not enough to finance all its projects. It, therefore, calls upon the company to think of a better way to finance its projects. One of the ways of financing the projects is through taking of debts. These debts are supposed to be scrutinized by both the company and the lender. Some debts might have some negative implications on the company and, ...

T.C Boyle’s The Tortilla Curtain has been described variously as the most controversial yet timely novel of the current times, at least in the context of the American situation. The novel, which revolves around cultural, financial and social differences of two families, is a manifestation of the themes of poverty, illegal immigration, class conflict, xenophobia and social strife. Boyle wrote this book before 1996, and got it published by Vikings press at a time when California had voted on and the rejection of what was referred to as Preposition 187 – a bill that would restrict illegal immigrants’ access to some public ...

8th December , 2013

He initiates the discussion with the first theory on capital structure i.e Static Trade Off theory, where he used a diagram to explain as how the finance managers are often viewed as trading off the tax savings from debt financing against cost of financial distress, specifically the agency costs generated by issuing risky debt and the deadweight cost of possible liquidation and re-organization. In other words, the tax deductibility of interest payment induces the firm to borrow to the margin where the present value of interest tax shields is just offset by the value loss due to agency costs of ...

Introduction

Situated between the North Atlantic and Arctic Ocean, Iceland is one of the Nordic countries falling into the European continent. The population of the country is 321,000 and the total area of the country is 40,000 sq. mile. Iceland is the least densely populated country in Europe. The capital city of Iceland is Reykjavik which is also the north most capital city in the world. In 2008 when a global financial meltdown started in US after the bankruptcy of Lehman Brothers, Icelandic economy was hurt badly by the crisis. This resulted in the whole banking sector of Iceland ...

The Pitfalls in Borrowing Money

A. The dangers or risks of borrowing money B. Background of borrowing/ responsibilities of borrower C. Thesis Statement: Borrowing money creates a profile of financially-at-risk individuals that shall be dependent on the characteristic of the borrower, who may the tendency to mismanage and misuse their credit cards. II. Counter-Arguments - There are advantages and disadvantages in borrowing money through loans and credit cards. - The financial problems of the borrower are easily resolved by seeking financial assistance from loans and credit cards for payment of mortgage, car loans, student loans and other emergency needs. ...

Apple vs. Samsung: A Financial Perspective. Apple vs. Samsung: A Financial Analysis.

Introduction

Apple Computer was established by Steve Jobs and Steve Wozniak in 1976 in Cupertino, California. In its early days it was primarily a personal computer manufacturer, producing and selling Macintosh and Power Mach’s. During late 90s it went through a huge financial stress as a company and under the leadership of Steve Jobs rebounded as an innovative company. It returned to the market in a grand way with the launch of its iPhone, IPad, iPod and iTunes portfolio. Apple has market revenue of $156 billion (2012) and market capitalization ...

Determinants of Capital Structure

Abstract Decision on capital composition is a crucial decision for firms as it has major financial and profitability implications. The objective of this paper is to identify the determinants of capital structure and discuss the key theories on capital structure. The paper discusses they key theories of capital structure, providing evidence of the theory and listing its limitations. The MM theory is the foundation for the other modern theories of capital structure. The trade-off theory is an extension to MM theory relaxing the assumption of bankruptcy. Pecking order theory highlights the firm’s preference of internal cash flows as ...

Answer ot question #1: Not provided as we agreed to check it by yourself.

Answer to question #2: B Explanation: Expected return and mean return are completely two different concepts. Expected return is the weighted average of the possible returns, where the weights correspond to probabilities. In contrast, mean return is the average of all of the historical returns over a particular time period. So the statement B is not correct.

Answer to question #3: A

Answer to question #4: B Explanation: Dividend yield is the return on investment in the form of dividend. It measures the dividend income earned for each dollar invested. Here General Electric Company stock was purchased at the price of S14.64 on ...

Financial risk management is important for any firm’s success and survival in today’s corporate world. There are several strategies employed by firms to mitigate risk. Hedging is a strategy used in risk management aimed at minimizing or eliminating the probability of making losses due to translation exposure, transaction exposure and economic exposure. There are several techniques used by firms to hedge against risk, they include; money market and commodity market hedge options forward contracts, swaps and currency futures. This paper aims to critically appraise the theoretical and empirical literature for and against the use of the various hedging ...

Abstract

Financial risk hedging and corporate management are important tools for non-financial corporations. Following the theories of Modigliani and Miller corporate risk management is an irrelevant activity. However, the presence of market imperfections can explain the corporate use of derivatives. Hedging can contribute to the firm value, when firms face a progressive tax rate and when in the presence of the expected costs from financial distress. Moreover, hedging can lower agency costs of debt. The use of derivatives can be also explained by the managers’ behaviour towards risk. The aim of the paper is to evaluate the theoretical and empirical literature ...

Long-Term Financing

Question 1 Suppose that a firm is operating with neutral corporate and personal taxes in an otherwise perfect capital market and Equation (I6.7) currently holds. In such a world, a firm would never take on any risky debt. Why not? (Hint: Consider what would happen in financial distress). When a firm is operates in an environment with neutral corporate and personal taxes imply that the source of financing has no impact on the tax liability of the firm. Normally, companies usually borrow debt to reduce their tax liability by deducting interest expense. Interest expense is an allowable expense for tax purposes, ...

Task

Compare the corporate form of organization with the sole proprietorship and the partnership.

Describe the principles dealing with ways of creating value and economic efficiency

The major principles include comparative advantage and absolute advantage. Comparative advantage is the ability of a country to produce a particular commodity in a more efficient way than other countries. Countries that have modern machinery are likely to produce machine intensive products than other countries. Absolute advantage is the ability of a county to be able to produce a particular commodity that other countries do not produce. For instance, a country that is endowed with a unique mineral that is not produced by other countries can be said to have absolute advantage ...

Special Topics

Question 1 Change in corporate control refers to transfer of the decision making authority of a company from one group of persons to another group. This power entitles individuals to make decisions concerning operations and strategic planning of the company, allocation of capital, acquisitions, marketing decisions and production decisions. Publicly traded companies are prone to corporate control changes when large investors, especially institutional investors and other companies, strive to seize control from existing shareholders and managers. Change of corporate control can be effected through; tender offers, negotiated offers and proxy fights . Negotiated offers are the process by which ...

Abstract The trade off theory advocates that the management consider the trade off between the benefits resulting from tax shields verses costs, such as bankruptcy costs, interest costs and agency costs among others. The ability of management to obtain external financing is determined by size of company, profitability, opportunities for growth among other factors. The trade off theory indicates that the management gears at obtaining all the benefits associated with external financing. The M and M theory (1963) has the argument that changing the capital structure may not make the share holder any better off. The contradiction of ...