Leverage is a kind of tool to adjust the financial instrument and capital, which can measure the ratio of total debt divided the total assets, and increase the investment. Debt is used to finance operations for most companies. By doing so, the high leverage with a company could invest more without increasing the company’s equity. However, the high leverage will bring the benefits with the potential risk. For example, the company uses the leverage to make the profits in shareholder, when they failed, the company will default the shareholder value, get high credit fees and credit exposure.
The cost of borrowing gets impacted by the change in interest rates as mentioned before. When the rates increase, the banks charge a higher rate for the loans they give out. Starting a business or expanding the business at times of high interest rates hamper growth and result in lower revenues and delayed profits. Interest rates for personal loans also go up at the same time therefore the purchasing capacity of the consumer also reduces. They have to pay higher interests, which results in lower disposable income, which in turn results in lesser purchasing capacity.
Thus, it is expected that the smaller the company, the greater the probability of delisting (Boot, Gopalan & Thakor, 2008); (Michelsen & Klein, 2011). Boot, Gopalan & Thakor (2008) and Michelsen and Klein (2011) state that there is a negative relationship between firm size and underpricing. It is expected that the greater the company, the smaller the probability of delisting. This is due to the liquidity of the small companies will be reduced and the chances of going private will be increased because they draw less attention from the market and analysts. The amount of investment in the intellectual capital (IC) elements is affected by the firm size due to the availability of resources and because of the political costs, a higher disclosure is encouraged from the larger size of the
This can be achieved by exploiting a higher cost of capital in an investment decision or by setting a capital budget limit. Corporation would like to implement it in situations that the returns of past investments were lower than expected. The main advantage of capital rationing is the efficient use of the company’s corporate resources by enforcing strict budgeting of company’s corporate resources to focus on the higher return projects or investments. In addition, it prevents the wastage of corporate resources by investing on the unavailable or lower returns projects. Also, imposing capital budgets lead the company to focus on the less number of comparatively higher return projects and so number of active projects can be kept in minimal and projects or investments can be managed better.
The large companies managers decision are more likely than the actions of lower-level employees affect the stock price – thus stock ownership is more likely to be a better incentive for key executives than for operating level employees. In particularly in the case if the lower-level employees do not have part of decision making process. 2. In some cases there are issue which is called “free rider problem” among lower-level employees. The activity of all workers could increase performance and productivity, but only one of the employees makes a marginal contribution, thus the individual employee has limited incentive to participate more actively.
The companies involved in the price war can take steps to curtail their Selling, General and Administrative (S, G & A) expenses to improve their performance. If the company’s pricing strategy succeeds, the company will earn good operating profits. However, if it fails, the curtailed and well planned S, G & A expenses will help the company mitigate the competition risks. The lower S, G & A expenses as a percentage of revenue indicates a better performance. Sainsbury’s already had much lower S, G & A expenses as a percentage of its revenue than that of Morrisons.
Current ratio which measures amount of current assets to current liabilities in a firm and the formulae for this ratio is Current Assets/Current Liabilities = Current ratio. This is the formulae and it insinuates that the current ratio in the liquidity ratios should be between 1.5 to 2. This is because if the ratio is less than 1.5 then the business may be in a susceptible or vulnerable position and if the ratio is higher than 2 then it can show the business has too much capital in a loss-making form. This ratio can be improved, if the business sells its fixed assets and convert into cash or increase the business long-term rather than short-term debts. On the other hand, it can also improve current ratio by raising more share capital instead of
This is called securitisation and has constituted an alternative fund raising avenue for firms from the capital market. and renders traditional band services less attractive. Disintermediation also occurs due to high inflation rates but, bank interest rates remain stagnant which is often associated with government control. Therefore, where depositors are able to get better returns for their investment in mutual funds or securities, disintermediation
With regards to the private label, Freshgel, all that can be deduced from their pricing strategy is that the prices they set were not at a low enough level to entice consumers who would otherwise choose the two dominant brands in the industry. Their unit sales are considerably lower than that of their competitors and in order to achieve success their most likely strategy is to reduce prices even further. However, even if they witness an increase in unit sales, it is likely that their revenue will not increase substantially. In contrast, Store Two’s results are indicative of a slightly different relationship, as the correlation of the price and amount for sales is positive for Colgate. It is negative, but very close to zero in Prodent’s case.
A firm can choose a degree of capital structure in which debt is more than equity share capital. It will be helpful to increase the market value of firm and decrease the value of overall cost of capital. Debt is cheap source of finance because its interest is deductible from net profit before taxes. After deduction of interest company has to pay less tax and thus, it will decrease the weighted average cost of capital. For example if you have equity debt mix is 50:50 but if you increase it as 20: 80, it will increase the market value of firm and its positive effect on the value of per share.