ON FINANCIAL ARCHITECTURE: LEVERAGE‚ MATURITY‚ AND PRIORITY by Michael J. Barclay and Clifford W. Smith‚ Jr.‚ University of Rochester n an article published in this journal a year ago‚ we reported the findings of our study of corporate financing and payout policies covering some 6‚700 industrial companies over the past 30 years.1 Our analysis suggests that the most important systematic determinant of a company’s leverage ratio and dividend yield is the nature of its investment opportunities
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of capital come in two forms: debt and equity. Obtaining permanent capital through equity is the capital supplied by the entity’s owners. It is the owner’s share in the financing of all the assets. Richard Scott‚ United States accounting professor wrote‚ “one of the most deep-seated‚ and incontrovertible concepts embraced by accounting theory today is that of owner’s equity.” Through analysis of the case‚ we found this to be true. There are different financing costs both a company and its investors
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small business borrowers. What is a personal guarantee and provide two reasons why a personal guarantee is taken. [ 3 marks ] A personal guarantee represents a promise by a person‚ typically the owner of the business‚ to pay the company’s debts should the firm have inability to pay its loans. Banks require a personal guarantee for several reasons: (1) as a measure of the owner’s commitment to the success of the business‚ (2) to increase the
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business sector‚ organizations use debt financing to accomplish their monetary goals. This can be defined as raising working resources by borrowing. The Scott Equipment Organization is researching a variety of combinations of instant and continuing debt financing in financing all of their assets. When referencing short-term financing the company is looking to mature in one year or less‚ as for long-term they consider this to be more than a year. Short-term debt is primarily used to amplify the
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capital‚ i.e.‚ the growth in Accounts Payable is not sufficient to fund the growth in Accounts Receivable and Inventory. In this case‚ the business needs some source of financing to pay the operating creditors in a timely fashion. Banks represent a common source of seasonal working capital financing. One type of such financing is a revolving line of credit‚ which expands with seasonal buildup of Accounts Receivable and Inventory and then contracts when‚ as the selling season passes‚ Inventory
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considering a capital restructuring. The low-debt plan calls for a debt issue of $200‚000 with the proceeds used to buy back stock. The high debt plan would exchange $400‚000 of debt for equity. The debt will pay an interest rate of 10%. The firm pays no taxes. a. What will be the debt-to-equity ratio after each possible restructuring? b. If earnings before interest and tax (EBIT) will be either $90‚000 or $130‚000‚ what will earnings per share be for each financing mix for both possible values of EBIT
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Date: 11 Oct‚ 2010 Financing Small and Medium Enterprises Introduction: Cash is like the blood in human body for all companies. So‚ the problem of financing is one of the most important issues in company operations. Appropriate and healthy sources of capital is the primary issue for an enterprise‚ especially for the SMEs. As policy‚ the reasons for their ideas‚ and SMEs’ own flaw‚ so that the financing channels for SMEs is relatively narrow‚ a shortage of
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Financing the Toyota Recall. INTRODUCTION In May of 2006‚ The Toyota Motor Corporation initiated a recall of nearly one million vehicles around the world to replace faulty parts that could cause drivers to lose control of the steering wheel. The recall affected vehicles across 10 models‚ including the popular Prius. The intermediate shafts and sliding yokes in the recalled cars lacked the necessary strength and could distort or crack under strong pressure‚ causing drivers to lose control
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agreement is affecting the cash flow of the company since the interest expenses raises by around $12‚000.00 more per year‚ this together the financial interest of the Metropolitan’s Bank loan makes that the company needs a larger amount to finance its debts‚ that by the way regarding the agreement with Verden should not being paid by the company but by Jones personal income since this agreement was not reached between the company and Verden but between Verden and Jones. Furthermore‚ we are assuming that
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outside financing? Based on our findings in Part A‚ the company will definitely need outside financing. There is a cash deficit in three months out of the year that was examined. The months that are deficits are March‚ April‚ and June 2004. If there is no outside financing brought into the company‚ the cash that is needed in order to cover the expenses that are incurred the month following each deficit will not be available. Without the cash being fed into the company through financing‚ there would
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