Conflicts Of Interest Between Managers Owners And Creditors Finance Essay

Conflicts Of Interest mingled with Managers Owners And Creditors Finance EssayManagers, owners and creditors usu bothy excite the same fundamental clinical that is to see the business prosper in the companies. But when companies argon in financial distress, conflicts of recreate group between managers, owners and creditors arise. The reason to answer this problem is skilful beca employ managers have different goals from owners and creditors.As we sleep together, managers are usually hired to bring a business of companies on behalf of owners. Thus, some problems burn arise between managers and owners beca work interest of ownership is sepa castd from interest of control especially when companies render into financial distress. Managers whitethorn pursue some goals that bring benefits to them but may non be beneficial to the owners. Owners have their own shares and they think that their shares abide by go out be increased. They have right to indirectly control of the ope rating(a) decisions that influence the companies hard exchange guides and some other(prenominal)s. Besides, creditors are the party who provide crownwork to companies at judges based on the riskiness of companies assets and on companies nifty social system of debt and equity financing. Conflict of interest between owners and creditors is that owners want to borrow notes at the lowest lay out whereas creditors decide the tramp based on the risks of companies directment projects and companies themselves. The more risks companies have, the more required rate on the firms debt will be paid. When a comp either faces financial distress and may be going to bankruptcy, there are usually two tooth roots to settle. The starting signal stem is reorganization and continuation as a going concern. Managers usually alike this solution as they can exercise control over what goes on during the confederacy. The second solution is liquidation and selling off of the assets of the fri endship. Managers usually do not like this solution and may resist whereas creditors like this solution as they stand to get their specie from the liquidation cherish first. However, managers may not want this to happen and they may seek to bribe the creditors with a promise of getting more m iodiny than they should if the latter agree to the first solution. This is not in the interest of the owners.Conflicts of interest between managers, owners and creditors forever hold up even when the compevery is profitable. Therefore, the telephoner has a bills surplus. Managers would want this money as a financial bonus and the stockholders would want this money as a parenthood dividend whereas creditors get paid a fixed essence and they get paid earlier the owners get paid.II In a personal financial situation, give an example of fortune approach.In a personal financial situation, fortune terms of either investment is the extradite one could draw on the next crush alternative . A truthful way, we can understand that opportunity is the benefit you could have received by taking an alternative action.All investments of a attach to involve opportunity address. A sawhorse today is worth more than a dollar in one year because the dollar today can be invested and will increase more than a dollar in one year. The dollar you can get afterward one year railway carries an opportunities cost equal to the present on the forgone investment. Thus, opportunity cost is the forgoing cost and when there are a number of business alternatives. The decision liners always select the alternative which has the highest opportunity cost because if the decision maker selects any other alternative he or she has lost the opportunity. Companies usually use opportunity cost to evaluate a capital Investment project. The confederacy can compare between the projected return and the return it would earn on the highest yielding alternative investment involving similar risk. For exam ple, a company has a gratis(p) amount of money in the bank that earning interest 10% after 1 year. If this company uses this amount of money to invest a project, it will get 15% profit after 1 year. In this example, opportunity costs of this company are 5% (15%-10%). finis makers of a company always have to run into choosing the way which can give them the maximum benefit that can cover all costs. They use opportunity cost to analyze a project and the simplest way to thought the opportunity cost is to compare the feed choice with the next best alternative that could be made. However, it is not easy to make comparison because galore(postnominal) alternatives do not have a market monetary value or very(prenominal) difficult to calculate into money.Question III In America, Vietnam or any other arena, what is prehend question to ask when evaluating an investment opportunity? Explain why.When evaluating an investment opportunity in America, Vienam or any other country, the approp riate question that company usually concern is what is the discount rate?The discount rate is rate of return that recognizes the time value of money. It is careful based on cash prevail expected in prospective(a) from the investment. Management of a company always compares the discount rate of some(prenominal) projects to choose which projects with maximum return or wealth for the companys have a bun in the ovenholders. The discount rate is also associate to a risk fixings that recognizes the uncertainty associated with achieving future profit forecasts. The risky projects can bring high discount rate to investors. However, it is not easy to determine the appropriate discount rate because it is work out by using discounted cash light techniques. Besides, the appropriate discount rate is influenced by some main factors. The first factor is related to macrostinting conditions such as inflation, interest rates and country risksVietnam has higher country risks than America be cause Vietnamese policies can be changed very fast. The second factor is matter of the industry such as average of profit symmetry in the industry The third factor is the company policy which related to capital structure. Otherwise, there are some factors related to projects themselves. Evaluating the factors helps investors adjust discount rate and therefore they have an overview of the investment opportunity. Besides, management have to expect the estimated future benefits are long enough to justify the current using up as well as the proposed investment based on capital budgeting. It is the most cost-effective way to achieve their goals.The discount rate to be applied can be based on the facts and circumstances of a particular case as well as the analysis of the likelihood of achieving forecasted lost profits. Companies have to assess the relevant factors in determining an appropriate discount rate that help them build a stronger case in support of their damage position.Ques tion IV Discuss the admittedly economic cost to Daimler-Benz (Mercedes) when it purchased Chrysler in 1998. How did that workout?In May, 1998, Daimler-Benz and Chrysler Corporation, two of the worlds leading car manufacturers, agreed to combine their businesses. Daimler-Benz purchased the Chrysler Corporation at $37.3 billion. The former Chrysler Corporation was wedded autonomy to manufacture mass-market cars and trucks while the Germans firm continued to build extravagance cars. Thus, purposes of this business for Daimler-Benz is to access to the North American market for automobiles without diluting the image of its Mercedes-Benz brand. Otherwise, with getting Chrysler they can get production capacity outside Germany and opportunity to determine from Chryslers envied process of making decisions quickly and bringing new vehicles to market promptly. However, the avowedly cost to purchase the Chrysler is not $37.3 billion because the Chrysler has $15.5 billion in interest- pay offing debt that makes the total expense to purchase is $52.8 billion ($37.2 trillion + $15.5 cardinal). Thus, Chryslers assets need to make future cash flow worth at least $52.8 billion.Therefore, the true economic cost to Daimler-Benz when it purchased Chrysler is over $52.8 billion. After purchasing Chrysler, Daimler-Benz firm had to bear many extra expenses related to changes in many factors such as leaderships, business strategy, culture clash and management titles. The Daimler is different from the Chrysler different in businesses. The Daimlers core competency is high-valued, technically advanced cars and focuses on development of luxury cars whereas Chrysler focused on mass market and considered as a very cost effective company. Moreover, European culture is far different from American style and there may seem conflict of management style in a short time. Thus, it is difficult to the business and cash flow for DaimlerChrysler in the future. Therefore, DaimlerChrysler f aced failures in operating. Despite significant short and culture medium term expected synergies, DaimlerChrysler has been negative profits after the deal. In 2001, DaimlerChrysler got disadvantage of $5.8 billion which was the biggest loss in German business history. In 2007, The Chrysler was bought of 80.1% (about $7.4 billion) by Cerberus Capital Management LP. This price is much cheaper than the price ($37.3 billon) when Daimler purchased Chrysler in 1998. After 9 years, this deal marked the divorce of Daimler and Chrysler.Question V A sporting good manufacturer has decided to expand into a related business. Management estimates that to build and module a facility of the want size and to attain capacity operations would cost $275 million in present value terms. Alternatively, the company could acquire an lively firm or division with the desired capacity. One such opportunity is the division of another company. The book value of the divisions asset is $140 million and its e arnings before interest and tax are presently $30 million. Publicly traded same companies are selling a narrow range around 12 times current earnings. The companies have debt-to-asset ratios averaging 40 percent with an average interest rate of 10 percent.Using a tax rate of 34 percent, estimate the minimum price the owner of the division should consider for its sale. four-fold = trade Value / EBIT (1-tax)Therefore, Market value = Multiple x EBIT (1-tax)Market value = 30 (1-0.34) x 12 = $237.6 millionMarket value = D + ED = 40% x $140 million = $ 56 million.E = Market value D = $237.6 million $ 56 million = $181.6 million.With calculation preceding(prenominal), the minimum price the owner of the division should consider for its sale is the value of its equity (E). The minimum price is $181.6 million.b. What is the maximum price the merchant bank should be willing to pay?The maximum price the acquirer should be willing to pay is the market value. In this case, it is $237.6 milli onc. Does it appear that that an acquisition is feasible? wherefore or why not?Because the companies have debt-to-asst ratios averaging 40 percent with an average interest rate of 10 percent, the price will be$237.6 million + ($237.6 million x 40%) x 10% = $247.104 millionThe price above is less than $275 million. If the managements build and staff a facility, they have to pay $275 million. Thus, this acquisition is feasible. Otherwise, the company can hire staff and facility.d. Would a 25 percent increase in stock prices to an industry average price-to-earnings ratio of 15 change your answer to (C)? Why or why not?In this situation, Market Value = $237.6 million x 1.25 = $297 million.The price in this situation is more than $275 million. If the managements build and staff a facility, they have to pay $275 million. Thus, with 25% increase in stock prices to an industry average price-to-earnings ratio of 15%, my answer to (c) will be changed.e. Referring to the $275 million price tag on the substitution value of the division, what would you telephone would happen to acquisition activity when market values of companies and divisions rise above their stand-in values?When market values of companies and divisions rise above their replacement value and related to the $275 million price tag on the replacement value of the division, I predict that the company will acquire existing firm or division with the desired capacity instead of twist and staffing new facility.Question VIWhat does it mean when a companys broad cash flow is negative in one or more years? cede cash flow always measures how much money a company generates after deducting maintenance capital expenditure, but before capital expenditure on expansion. Free cash flow is classical for any company because it a company can pursue opportunities that increase shareholder value with free cash flow. It is difficult for a company to lance new products, make any acquisition, pay dividends and reduce debt without enough cash.In theory, Free Cash Flow = Net Income + Amortization/Depreciation- Changes in on the job(p) Capital Capital Expenditures. Thus, if the free cash flow is negative in one or more years, company may have oversize investments. If these investments get a high return, profits that a company attains are more than costs to be paid. Otherwise, a profitable business or in some particular industries may have negative cash flow especially in the beginning of investments. In these cases, negative free cash flow of a company can be recognized in a short time but not in a long time.b. Do negative values of free cash flow in way alter or invalidate the notion that a companys fair market value equals the present value of its free cash flows discounted at the companys weighted average cost of capital?Free cash flow is the amount of cash a company has after expenses, debt service, capital expenditures, and dividends. The higher the free cash flow of a company, the stronger t he companys counterbalance Sheet. Free cash flow can affect the value of a firm. Negative free cash flow can not define the value and it has no sense. However, negative values of free cash flow invalidate the notion that a companys fair market value equals the present value of its free cash flows discounted at the companys weighted average cost of capital. Some divisions of a company may accept loss in order to increase free cash flow of a company in the future.c. Suppose a companys free cash flows were expected to be negative in all future periods. Can you conceive of any reasons for geting the companys stock?Free cash flow is the most important number to be needed to know about a company before buying its stock. Big companies usually throw off plumping sums of free cash flow whereas young or growing companies may have a negative free cash flow. We can buy the companys stock if the companys free cash flow in the short time. However, if a companys cash flow were expected to be ne gative in all future periods, we should not buy their stock because the companys finance situation is not good. The company may get troubles in sales, heavy debt, ineffective investments or other causes in operation that result to a cash flow with higher expenditures than income. With negative cash flow in all periods, the company may have to bankruptcy. Therefore, there is no reason for buying its stock.However, if we know that the company has some big projects and will get high return in the long time, we can consider buying the companys stock because large investments can make the company having negative cash.