Can i get a feedback for this particular discussion post below. Thank you 4~ In
ID: 2820790 • Letter: C
Question
Can i get a feedback for this particular discussion post below. Thank you
4~ In this situation, I would do my own financial analysis for the company to determine whether or not the data supports this investment. If my conclusions differed from the opinion of the CEO, I would consult with him or her to see why the investment is so appealing to this individual, and why they believe that it is a good decision for the company. As the company controller, it would be unethical for me to support an investment that was not in the best interest of the company. The main goal of a corporation is to generate income, so I would need to make the recommendation that I would believe is in the best interests of the company. I would be forthcoming with the CEO in explaining my decision and showing how the data does not support this investment.
6~Debt is the least expensive cost of capital. With debt, companies enter into a contract with a lender to obtain a set financed amount with regular payments and a set interest rate. Once a company has repaid their debt and the interest, they no longer owe payments or interest to other parties for the borrowed amount. Additionally, the company may receive tax benefits as a result of the debt and interest. On the other hand, preferred stock is the most expensive form of capital for a company to raise. There are floatation costs involved with setting up the preferred stock, and the company must continually pay out dividends to the shareholders. For a company that is expected to perform well, it would be cheaper for them to issue debt vs. stock or preferred stock and be required to part with a portion of their ownership.
7~Smaller companies typically finance with equity for several reasons. First of all, it can be difficult for smaller or companies that have not been in business for very long to secure financing. Additionally, in the first few years, when profits are still relatively small, it can be cheaper for companies to share their profits over paying back larger amount of debt. Once companies are larger with steady and dependable growth, then debt becomes less expensive option.
https://www.investopedia.com/ask/answers/05/debtcheaperthanequity.asp
Explanation / Answer
4~ In this situation, I would do my own financial analysis for the company to determine whether or not the data supports this investment. If my conclusions differed from the opinion of the CEO, I would consult with him or her to see why the investment is so appealing to this individual, and why they believe that it is a good decision for the company. As the company controller, it would be unethical for me to support an investment that was not in the best interest of the company. The main goal of a corporation is to maximize share price, and main goal of management is to act in the best interests of the shareholders so I would need to make the recommendation that I would believe is in the best interests of the company. I would be forthcoming with the CEO in explaining my decision and showing how the data does not support this investment.
6~Debt is the least expensive cost of capital. With debt, companies enter into a contract with a lender to obtain a set financed amount with regular payments and a set interest rate. As it guarantees fixed payments to the investors, they consider it less risky and they are fine with a lower return hence this means a lower cost for the company. Interest payments is tax deductible. Also, bondholders do not have any voting rights. Common stock is the most expensive form of capital for a company to raise. Fotation costs may be applicable for all the three but flotation costs are the highest for common stock. Addiitonally, as common stock does not guarantee any fixed payments to the investor, they consider it riky and demand higher return compared to debt/bonds and preferred stock (preferred stock also guarantees fixed dividend payments to the investors and are hybrid between common stock and debt). For a company that is expected to perform well, it would be cheaper for them to issue debt vs. stock or preferred stock and be required to part with a portion of their ownership.
7~Smaller companies typically finance with equity for several reasons. First of all, it can be difficult for smaller or companies that have not been in business for very long to secure financing. Additionally, in the first few years, when profits are still relatively small or are loss making, firstly it can be cheaper for companies to share their profits over paying back larger amount of debt and it might be dififcult to generate cash flows to service debt in the initial few years and secondly they wont be able to take advantage of tax deductibility ofinterest payments initially because of losses. Once companies are larger with steady and dependable growth, then debt becomes less expensive option because then benefits of tax shield outweighs bankruptcy or financial distress costs..