Be explicit and explain to the CFO how financial markets differ from markets for physical assets and why that difference matters to Jagdambay Exports. 2. Explain the relevance of money markets and capital markets for Jagdambay Exports. 3. Analyze Jagdambay exports and advise how the CFO should consider the primary market and secondary market in the expected transaction.
Why is such a question relevant to a company like ICI, which is considering a specific acquisition? Explain your answers. Answer: From the stand point of society, synergy is the only benefit to the same. Tax considerations, diversification, control, purchase of assets below replacement cost are not relevant from the standpoint of society. From the standpoint of ICI, All the above points would be relevant.
Second, it is argued that cost-benefit analysis contain a unadventurous bias because its Valuation principle, motivation to pay, depends upon ability to pay (i.e. wealth and income), Which is unequally disseminated? Again, the criticism is valid in theory but need not be so in put into practice. Weights may be assign to benefits which accrue to specific groups, if there is a clear and explicit policy good reason for doing so. Also merely display the incidence of (un weighted) costs and benefits will often provide useful indicators of the equity implications, in income distributional terms, of projects and programmes.
Basically firm records all of its assets in the financial statements at their original cost (cost which is initially incurred to acquire these assets), but this is not an established rule for recording inventory, and hence at the time of recognizing and valuing inventory in the financial statements, cost principle , which businesses follow for entirely all of their asset is not recognized for inventory. Lower of Cost or Market value states that inventory must always be valued/ recorded at lower of cost
Also, Pablo Fernandez (2010) states that it is not a cost nor a required return, but a average cost of required return. This means that for the company WACC is not just a cost or required return they need to have in order to be break-even or profitable, it represents average of those two, because it can be higher and it can be lower in the real life. Pratt and Grabowski (2008) argue that WACC is used for project selection in capital budgeting. It is very important part of the capital budgeting process. Pratt and Grabowski (2008) also state that WACC has two sides: pretax and after tax.
This mean that even though the normative analysis assume that the bond-warrant is more advantageous as compared to convertible bond but this theory is unable to be practice in the real world if the bond-warrant is not demanded by investor. Which mean, even though the firm has a good product but if there is no one to buy it, then what is the point of selling it. For a firm to get a financing, it has to follow the preference of the investor. If not, then the firm unable to pool high amount of money to expand its business. However, it cannot be denied that normative analysis mention of how much does the bond-warrant gives benefit as compared to the convertible bond and this is true but there is one thing that the author and the normative analysis didn’t mention in this paper, which is about the disadvantages of both bond-warrant and convertible.
2. THEORETICAL FRAMEWORK Two traditional capital structure theories guide most academic literature concerning financing decisions; the pecking order theory and the (static) tradeoff theory. This section will elaborate on the implications of these theories in order to clarify that the market timing theory cannot be explained by one of these theories. The existing academic literature concerning market timing will also be discussed in this section. Tradeoff theory In a perfect market without taxes, costs of financial distress, agency costs and any other imperfections, the capital structure of a firm is irrelevant in terms of costs.
Measurement of the fair value of asset and liability only can refer to the active market. When the market is illiquid, the assets will be recognized at the forced sale values instead of their true values. So, the estimation introduced by the fair value valuation models, and lack of definite measurement indicator causes concerns about the reliability of the fair value measurements has been raised. According to Stephen G. Ryan (2008), when level-2 inputs are driven by forced sales in illiquid markets, the company is allowed to use level-3 model based fair values. However, the use of level-3 model might be difficult to be used by the company because it requires the company to provide to evidence to prove that the market prices are driven by the illiquid markets fire sales.
Cash flows provide more information about cash assets listed on a balance sheet and are related to net income on the income statement but not exactly the same, And so on. No one financial statement tells the complete story. The three financial statements together can provide a very powerful information for investors or
1) Sources of capital to be included when estimating Harry Davis’s WACC: The WACC is primarily used for making long-term investment decisions that is capital budgeting. The WACC should include the types of capital used to pay for long-term assets like as long-term debt, preferred stock and common stock. Short-term capital consists of account payable, accruals, short-term debts and note payable. WACC should include short-term debt component if the firm is using short-term debt to acquire fixed assets rather than just to finance working capital needs. Non-interest bearing debt is not included in cost of capital estimate as theses funds are netted out when determining investment needs which is net rather than gross working capital is included