...Debt Financing Ayivi Koutodjo Business 530 Abiola Fapetu Liberty University Debt financing decision is not a process of couple hours of meeting. It required thorough scrutiny and an effective brainstorming. Managers are, most of time, facing huge challenges in meeting the company’s cash flow target. The task on hand is to find solutions of the possible organization’s incoming shortage of cash, more precisely how to raise and maintain cash in the company six months from now until the next two years, when the company will lunch his lucrative product. Many possibilities will be analyzed and the best one will be presented to the board of directors. Debt financing is an on-going process that company uses to achieve their objectives. It is one of the chief financial officer (CFO) duties. The CFO has multitude of choices to choose from when I comes down to raise cash. He could decide to retain earnings, to sell bonds, to sell stocks, or to obtain a loan. The CFO has to choose the one that add value to the shareholders wealth. To be successful in this task the CFO must consider the current economy condition and the current organization’s standing and objectives. Furthermore, the CFO must remain trustworthy and must not...
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...Restructuring Debt 1 Restructuring Restructuring Debt 2 The three common long term debt options are bonds, notes, and capital leases. These three financing options provide companies with needed resources when looking to finance business opportunities or restructure debt, the company must decide which options if not all are right for their business and restructuring of debt. Bonds, Notes, and Capital Leases Bonds are certificates issued to companies who promise to pay back borrowed money with a fixed interest rate at a certain time or maturity date. The borrower pays the interest or coupon on the bond either annually, semi- annually, or monthly. Bonds that mature in less than a year is called a boll, bonds that mature between one and Ten years are called notes, under writers provide the bond financing and then sell the bonds off to investors for profit on the open market. There are different types of bonds like callable bonds that allow the borrower to pay the bond off before maturity to limit interest paid on the bond. Putable bonds allow the bond holder to demand payment on the principle at an earlier date than specified avoiding coupon payments in the future. Convertible bonds are used by publically traded companies, this allows the principle to be “paid in shares of the company instead of cash” (Money, 2011). Corporate paper are short –term bonds issued to finance business operations. Bonds are used for financing activities for...
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...Part A Company A is in financial trouble. The company is reorganizing its processes and is looking to restructure its debt. Debt restructure is a mutual agreement between a financially troubled company and this company’s creditor, the bank. This process will reorganize the liabilities to prevent foreclosure or even asset liquidation (Business Dictionary, 2012). The liabilities under consideration for Company A are its capital lease obligations, notes outstanding liability, and mortgage outstanding. Company A’s capital lease obligations are currently $54,580. A capital lease is fixed-term lease similar to a loan agreement to the extent of purchasing capital assets with installment payment plans. The current capital lease obligation will not need restructuring but will require regular payments. The notes outstanding are for $3 million is of great concern to the company. The bank has offered to accept land with a book value of $1,950,000 and fair value of $2,400,000. By restructuring this debt, Company A will be able to concentrate on paying off its other current and long-term debts. The journal entries should this restructure occur are: Land (2,400,000 – 1,950,000) 450,000 Gain on disposition of assets (ordinary) 450,000 Note Payable 3,000,000 Land (fair value) 2,400,000 Gains on troubled debt restructure (extraordinary) 600,000 The mortgage outstanding is for $608,030 and will not require restructuring to settle this amount. A mortgage...
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...AGRICULTURAL DEBT WAIVER AND DEBT RELIEF SCHEME, 2008 A report submitted In partial fulfilment for requirements of the course Public Finance Instructor: Prof. Prem Pangotra Prof. R. H. Dholakia Academic Associate: Bangkim Kshetrimayum Submitted by Harish Mahale Kamala Kalavacharla Kashif Mohammad Mayank Kansal Rakesh Gehlot Rishabh Bhansali Tauseef Ahmad Khan 22ndAugust 2013 INDIAN INSTITUTE OF MANAGEMENT, AHMEDABAD AGRICULTURAL DEBT WAIVER AND DEBT RELIEF SCHEME, 2008 Introduction Poor farmers in India face highly volatile incomes. In such cases, the bank loans serve dual purpose of enabling productive investment and providing insurance against highly volatile income streams. But, the lack of access to any sophisticated instruments to manage income risks, leads to the poor farmers accumulating extreme levels of debt, eventually barring them from institutional credits in future. The Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS), 2008 was launched in May 2008 by the Government of India to address the problems and difficulties faced by the farming community in repayment of loans taken by them and in helping them qualify for fresh loans. Under the scheme, Marginal farmers (those cultivating agricultural land up to 1 hectare i.e. 2.5 acres) and ‘Small’ farmers (those cultivating agricultural land between 1 – 2 hectares (5 acres)) received complete waiver of the eligible amount (Direct agricultural loan, short term loan and investment load...
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...5.5%. In 2007 Tom made a $200 payment to Jamie. Later in 2007 Jamie granted Tom a second $10,000 loan under the same conditions as the first. On December 1, 2008 Tom agreed to sign two promissory notes for the loans. In 2010 the IRS disallowed Jamie’s nonbusiness bad debt deduction disputing that the entire sum of $40,000 was a gift from Jamie to Tom and a bona fide loan never existed. Facts: • The first loan of $30,000 occurred in 2006 while Tom was an unemployed salesman. • The second loan of $10,000 occurred in 2007 after Tom failed to maintain steady employment. • The debtor made one interest payment of $200 early in 2007 as a show of good faith. • Both promissory notes were signed on December 1st 2008. • The stated rate of interest was 3% which was below the market rate of 5.5% at the time. • Jamie filed for the nonbusiness bad debt deduction in 2010. • The loan had no due date. Issues: Jamie Douglas is seeking a nonbusiness bad debt deduction from her taxable income under IRC sec. 166.1. In order to claim this deduction she must have proof that the transaction was indeed debt and not a gift. To do this Jamie must show that she and Tom had a true debtor creditor relationship and that the debt has become worthless in the year she is claiming the loss. In court the IRS contended that a bona fide loan never existed because the nature of the transaction is more appropriately classified as a gift and that repayment was contingent upon Tom getting a job. Therefore...
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...Student debt is a serious issue in the United States, especially due to the fact that high unemployment has caused many students in higher education to question whether the debt they are piling on in pursuit of their degrees is worth it if they are still unable to get a job. Alan Collinge, Neal McCluskey, and Andrew Ross have all weighed in on the topic, but none of them has offered real, practical solutions that can assuage the burden that many students and families face. Tackling student debt will require multiple policy interventions, but it is imperative that action is taken. According to Collinge, the primary reason for exorbitant student debt is the removal of bankruptcy protections on student loans, which are no longer dischargeable since changes in bankruptcy law in 1998 and 2005 (federal student loans first underwent the change and private loans followed suit). Likewise, many unethical lenders have profited from defaults even as the nation as a whole has approximately $1 trillion in student debt. Collinge suggests the solution is to reinstitute dischargeable student loans so that students can be “freed” from their education debt if they become bankrupt. The problem with his suggestion is that does not actually solve the student debt problem but provides a way out once the situation is completely out of control and cannot be resolved in any other way. He also fails to mention that bankruptcy can significantly...
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...Nicolas Farrant ACC/543 Debt Financing Week 4 10/15/2012 Negotiable instruments are basically promises to pay, you are basically saying you need the funds right now and will promise to pay the money back in a determined period of time. Business and banks use this type of payment all the time because they may not have the funds on hand at the given time. This is exactly what is going on in the case of our company. We need the funds up front and will promise to pay the loan back when we have set up our other locations and have the funds to do so. The bank in which we have chosen for our line of credit have some simulations to our proposed idea, so we must break them down to understand exactly what we are getting ourselves into. In this case we will be getting a line of credit or a loan from the bank to be paid back over the course of the next few years. During which time we will be externally audited by the bank and must adhere to their policies while going through the loaning process and payback period. The company will be named as the policy holder and will be liable for the full amount loaned. The elements involved in negotiable instruments are certificates of deposits, notes, checks and drafts. The Uniform Commercial Code governors over negotiable instruments and defines who is liable, both primary and secondary. The primary holder of the loan is liable for the loan, it is...
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...A restructuring of debt constitutes a Troubled Debt Restructuring if the creditor for economic or legal reasons, related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider (FASB ASC 470-60-15-5). That concession either stems from an agreement between the creditor and the debtor or is imposed by law or court (FASB ASC 470-60-15-6). In a Troubled Debt Restructuring, the creditor’s objective is to maximize recovery of its investment by granting relief to the debtor. The creditor expects to obtain more cash or other value from the debtor, or to increase the probability of receipt by granting the concession, rather than by not granting it. Modifications and exchanges that are not considered Troubled Debt Restructurings are accounted for as either (1) an extinguishment (if the terms are substantially different, greater than 10 percent) or (2) a modification. A Troubled Debt Restructuring involves one of two basic types of transactions: 1. Continuation of debt with a modification of terms. 2. Settlement of debt at less than its carrying amount. In the first type of transaction, the creditor agrees to restructure the original terms of the loan in order to help the debtor meet its short-term cash requirement. The purpose of this modification of terms and reduction or deferral in payment is to help the debtor improve its financial condition and eventually be able to pay the creditor. The second type of transaction...
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...Sale of Debt Should We Trade in Debt? Term Paper for the Islamic Financial Contracts Course Dr. Monzer Kahf Student: Ihab Abdelrashid Galal Date : 13th May 2013 Content: 1- Introduction a. Definition of debts b. Is debt a real asset c. Does debt create value 2- Study d. Definition and process e. Advantages and disadvantages f. Trading debts and financial crisis g. Trading debts in the world h. Cases and applications: i. Sukuk ii. Options iii. Rescheduling of debt iv. Account receivable factoring 3- Conclusion 4- References Introduction: The recent financial crisis has proven that most of the economists and financial experts need to reconsider their views in relation to the proper financial system and also to the financial transactions. One of the major factors behind this crisis was the lack of realism in the capital market and financial transactions. However there were voices during and after the crisis claim such financial crisis would have been avoided, if asset-backed Islamic finance were adopted. It is well known that sale of debts is one of the area that have been criticized by many Islamic financial supporter...
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...____________________________________________________________ _______ Case Study corporate finance Case 28 – An Introduction to Debt Policy and Value Case 30 – MCI Communications, Corp.: Capital Structure Theory ____________________________________________________________ _______ Table of Contents Case 28 - An Introduction to Debt Policy and Value 3 Effects of Debt on the Value of the Firm 3 Split of Value between Creditors and Shareholders 4 Source of Value Creation 4 Effects on Value per Share 5 The Benefits of Leveraging for the Shareholders 6 The Macroeconomic Benefit of Debts 7 Koppers Company, Inc. 7 Case 30 – MCI Communications, Corp.: Capital Structure Theory 9 Introduction 9 Cost of Capital 9 Costs of Equity 9 Cost of Debt 10 WACC 10 Scenario Analysis 11 Leverage and Risk – Coverage Ratio 11 Leverage and Earnings – Earnings per Share 12 The Creditor’s Reaction 14 Impact on Financial Flexibility 15 Summary and Concluding Remarks 16 Literature 17 Case 28 - An Introduction to Debt Policy and Value The following case is about the management of the corporate capital structure. In this context, we deal particularly with the questions on debt policy and value. Effects of Debt on the Value of the Firm Borrowing for itself does not create any value. However, borrowing might influence the capital structure of a firm in a way that changes the weighted average costs of capital (WACC) which consequently has effects to the value of the firm...
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...Restructuring Debt To: Finance Accounting Manager, XYZ Company Re: Restructuring Debt XYZ Company is experiencing some financial trouble and management is asking that a memo be prepared to entail important disclosures when dealing with long term debt. According to Kiesco, long-term debt consists of probable future sacrifices of economic benefits arising from present obligations that are not payable within a year or the operating cycle of the company, whichever is longer (2007, p.672). There are three types of long term debt and different requirements for reporting each debt. Per corporation’s bylaws, the company must get approval from the board of directors as well as stockholders before a note or bond can be issued. Long-term debts have covenants that are meant to protect lenders and borrowers. Long term debts have indentures or agreements that have all information about the debt. Companies disclose the features of the indenture within the body of its financial statements so that end users can have a precise understanding of the company’s financial positioning and its operations results. Bonds and Notes Payable According to Kiesco, the main purpose of bonds is to borrow for the long term when the amount of capital needed is too large for one lender to supply (2007, p. 673). Bonds allow more than one lender to partake in a company’s debt. When reporting bonds the issuing companies have to follow certain procedures that could take months to have a bond published...
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...Brazil, Argentina and Mexico. Reminiscence of few decades before, these progressive nations took out significant figures of loan packages to stimulate their economy expansion (examples). Unfortunately, this manner accompanies with a significant drawback; the ‘Debt Crisis’ that followed due to unpredictable economy fluctuation all around the world. A debt crisis deals with countries and their ability to repay borrowed funds; which include international lending, national economies and budgeting. The “Debt Crisis" definition have varied over time, the most common one – “when a national government cannot pay the debt it owes and seeks, as a result, some form of assistance” (eHow.com, 2012). An international debt crisis erupted in the early 1980s was “one of the most traumatic international financial disturbances” of the twentieth century (Cline, 1995). Nineteenth century’s debt crises plus far-flung nonpayment loans specifically in 1930s sternly interrupted capital flows to Latin America and Southern and Eastern Europe. Yet, offhanded 1980s debt crisis undoubtedly threatened the international banking system and many less developed countries. AIMS This paper will discuss the factors which lead to the notable 1980s debt crisis. At first, we will describe the economics background concerning 1970s and 1980s. Then, it follows by the factors; both from the debt’s demand and supply perspectives. On the demand side, the factors are non-productive investments, the oil prices, the interest...
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...Debt and the Generations Summary As the UK faces a difficult economic period, many families and households are suffering financially. 65% of all debt belongs to households aged between 35 and 54, and within this age bracket 35-44 year olds hold a staggering 37% of this debt. This demonstrates the rise in debt hitting its peak between people’s mid-30s and mid-40s, however research has shown this is changing; younger consumers are now more likely to be less financially aware. This has resulted in around 75% of people aged 18-39 having unsecured debts, and becoming increasingly reliant on credit in order to meet financial commitments - 19% of 18-24 year olds are “very or fairly likely to borrow in the next 3 months”. Not only do younger generations have difficulty in getting onto the housing ladder, with 84% of first time buyers under 30 having to turn to financial assistance in order to buy, but many of the younger generation (almost 3.2 million) also have student loans that must be repaid. Both of these are factors resulting in a reduction in available income, meaning younger and future generations will have less money to save and invest, potentially reducing their quality of life during retirement. Older generations are more likely to own property and savings by the time they reach retirement age – nearly half of all assets in the UK are owned by the 60+ age group. There are, however, a minority of the older generation who owe a large amount of debt. Around 7% of...
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...Preparation Notes Article: “Student Debt: Is the College-loan System Fair?” By Marcia Clemmitt 1. Evaluate the credibility. Please be specific. I felt like this article was fairly credible, because of its structure & length, publisher, and depth of research that went into writing it. Furthermore, the article looks at and discusses both sides of the argument, even featuring an entire yes/no column written by two outside sources discussing the topic of student loan debt. For the most part, articles which examine both sides of the equation are going to be more fair and fact checked, simply because both parties will be represented and won’t want to be misinterpreted or misunderstood. 2. Briefly summarize. For the most part, the article discusses what you think it would – the current state of the college-loan system in the country, as well as arguments from proponents/detractors of said system. Many people are attending college in the hopes of landing higher paying jobs, and ending up in debt with a career they could have attained without a college degree. 3. List problems & solutions for student debt. (You may wish to match them.) One of the biggest problems I thought they discussed in the article was the issue I just mentioned – People are coming out of college weighed down in overwhelming debt and entering into jobs with little to no college prerequisite, essentially making the debt they accrued worthless. A possible solution (which was brought...
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...A life in debt Imagine this, a fresh graduate, still quite warm from wearing that thick convocation robe and a suit in the middle of the tropical sun heat, entering the “real world” with a debt of at least RM20k to 40k, that is if he is from a government university. Chances are if he is a graduate from a private college or a private university (MMU, UTP, UNITEN) it would probably be above RM50k, usually in the form of the infamous acronym PTPTN (Perbadanan Tabung Pendidikan Tinggi Nasional). While some lucky ones may get a scholarship from either the government, private insititutions or from MBF (Mak Bapak Finance), the majority would take a loan to fund their degree in the hope that they may secure a good job in the future, get a decent wage, pay off the debt and, God willing, maybe settle down after a few years. Spending and lifestyle A graduate would want a car, or at least at some point would like to own one. Of course, he could always resort to owning a motorcycle or simply use public transportation but judging by the death rate of motorcyclists and the weather here, eventually one would dream of owning a car. Let’s face it, we’re not Japan yet, we are still an automobile nation. So how does owning a car get into the equation? Consider this, a graduate buys a standard, fuel-saving, comfortable Malaysian car, say a MyVi. A MyVi in the peninsula costs around 38k to 40k, so our graduate would then take a car loan, say a nine-year plan to buy his/her first car. Now, our...
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