Capital Structure Theory Essay Essay Example

Capital Structure Theory Essay Paper When a firms debt-to- equity ratio maximizes its value and minimizes the firms weighted average cost of UAPITA (WAC), it is said to be at the target or optimal capital structure. Debt usually offers a lower cost of capital because of the ability to deduct tax from Interest, but the companys risk Increases as debt Increases. Part b. (Business Risk) Business risk refers to the risk brought upon the firm by its operations. This can be influenced by many factors such as, cost of production, sales volume, unit price, competition, demand, government regulations, etc. A company with higher business risk should operate with a capital structure that has a lower debt ration to safeguard TTS shareholders by guaranteeing that it can meet all of its financial obligations. A high business risk means a low debt ratio while a low business risk means that a firm might be able to operate with a high debt ratio. Part c. (Operation Leverage) A firm that makes few sales with sales providing a high gross margin is said to have high operation leverage. Operating leverage is dependent on a firms fixed and variable costs. If a firm has a high proportion of fixed costs it has high operation leverage as opposed to a firm with low fixed costs and high variable casts which are unconsidered to have a low operation leverage. A high-end car dealership has high operating leverage while a grocery store has low operating leverage. In a high operating leverage firm or Industry, forecasting Is Incredibly Important. A small error in forecasting could greatly damage the firms BIT. The opposite can be said for a firm with a low operating leverage. We will write a custom essay sample on Capital Structure Theory Essay specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on Capital Structure Theory Essay specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on Capital Structure Theory Essay specifically for you FOR ONLY $16.38 $13.9/page Hire Writer A small error in forecasting is accepted and expected. The error will have little effect on the firms BIT. A Company with high operation leverage should finance its operations with a low amount of debt to insure, n the case of a misconception, to protect Its Investors. Business risk and operation leverage often go hand In hand and are used to calculate the firms total risk on ROE. Part d. (Trade-Off Theory) The trade-off theory states that there are benefits to debt within a capital structure up until the optimal, or target, capital structure. The theory takes into effect the tax shield created by interest payments. Interest payments on debt are tax deductible creating a tax benefit for debt financing. A firm reaches optimal capital structure when the marginal tax shield equals the marginal bankruptcy costs. Bankruptcy costs are ten Increased costs AT Talking Witt EOT Instead AT Witt equally which result in a higher probability of bankruptcy. Thus, there is a point where the marginal tax benefits equal the cost of financing with more debt. At this point, we see the firms optimal capital structure. Part e. Asymmetric Information and Signaling) Asymmetric information refers to the realization that managers have more and better information that outside investors do. Signaling is based upon a firms actions and how it is preserved by its investors. Optimist asymmetric information could lead oh firm suddenly taking on more debt or increasing their dividend policy. This would signal that the company is about to experience growth or is at a mature and stable state. Pessimist asymmetric information could lead a firm to issue more stock because they recognize an upcoming loss. By issuing more stock, the loss could be spread over a larger number of stockholders resulting in a smaller loss per share. Investors know this however and are wary when a firm issues more stock. Because of signaling, when a firm tries to adjust their capital structure their investors behave in way directed by the signal given, whether that signal is accurate or not. Part f. (WAC) WAC or weighted average cost of capital is the firms cost of capital with each category of capital weighted proportionately. The more debt that company uses, the higher the WAC. The higher the WAC, the higher the companys risk. When using debt, the WAC begins to fall, but eventually, the costs of debt and equity will cause WAC to increase which will in turn cause the value of the company to drop. This brings us back to the optimal or target capital structure, where the debt to equity Asia maximizes the firms value. Part g. (Reserve Borrowing Capacity) Firms should however, use a lower debt to equity ratio than optimal capital structure suggests. The reason being, that an opportunity may arise where more funds are needed. As previously discussed, the issue of more stock sends a negative signal whether the signal is accurate or not, but to issue more debt past the optimal capital structure ratio would decrease the firms value which would also send a negative signal. Therefore, a firm should have a reserve borrowing capacity in the case of such an opportunity. Part h. (Windows of Opportunity) A window of opportunity is a time period where a normally unreachable opening exists. An example is todays interest rates. The windows of opportunity theory suggest that because interest rates are so abnormally low, now is a good time for businesses to issue debt. On the contrary, when stock market prices are exceptionally high, firms should issue more equity. Part I. (Personal Application) It is of the utmost importance that managers know and understand their firms risk and how it breaks down into operation leverage and business risk. This might be eased solely off their particular firm or off their industry as a whole. Managers should also consider the benefit of deducting interest on debt to use as a tax shield. Managers should take the asymmetric information theory and signaling into consideration. They should be aware of what certain actions signal and how they can avoid sending the wrong signal and use signaling to their advantage. The WAC should also be considered when determining the corporations debt to equity ratio. They should know that at a certain point, WAC will begin to increase as at this point ten Tall Is Klan on too much EOT IT a corporation wants to take advantage AT an opportunity but does not have the funds necessary, they should issue more debt to take benefit. For this reason managers should have a reserve borrowing capacity and have a lower initial debt to equity ratio than the optimal capital structure suggests. Managers should also be watchful and aware of windows of opportunities in which they can maximize the corporations growth. As one can see, there are many aspects one needs to consider when determining a firms capital structure and this essay only slightly begins to scratch the surface of capital structure theory.

Analysing the application of commercial law towards Ship Operations The WritePass Journal

Analysing the application of commercial law towards Ship Operations Introduction Analysing the application of commercial law towards Ship Operations IntroductionReferences:Related Introduction This assignment refers to a case sceanario in terms of Analysing the application of commercial law towards ship operations and the role of Master in its application wherein as a Master of a General cargo ship of 30,000T on a voyage charter sailing from U.K port after loading high grade steel pipes bound for Korea.   Master was forced to sign a Clean Bill of Lading instead of claused entry, inspite of identified   some steel rusty on visual inspection (that too in hasty n hurried situation) for which no shipper surveyor was appointed to have recorded witness (perhaps deliberately),   rather a Letter of Indemnity was issued by the shipper/seller.   Own vessel sailed with an inoperational Radar with the owners knowledge but not to the Classification society and the Insurer. In the ocean passage own vessel colledes with another Container ship which also infact had been in a situation of short of 2nd Mate who was airlifted a day before for medical emergency due to unexpected injur y onboard. Both vessel had suffered damage with own vessel in severe damage whereas   the Container ship minor hull damage but had to jettison some of the container to save the ship apart from some were lost due to incident. Own vessel was towed to ports of refuge for emergency repair with own ship under Lloyds Open Form and the Other ship under daily hire agreement. Since own ships sails from the UK portThe Hague Rules amended by Protocol in Brussels in 1968 called Hague-Visby Rules enacted by U.K in the form of Carriage of Goods by Sea Act, (COGSA 71 Act) amended n brought in force in 1977 shall apply. The act applies to : Any contract for the carriage of goods by sea in ships from a U.K port requiring issue of a bill of lading or similar document of title   If contract in or evidenced by it expressly provides that the amended Hague Rules shall govern the contract. The Article III mentions under the contract of carriage of goods by sea, that the carrier is subject to responsibilities and liabilities and entitled to the rights and immunities contained In analysing the case considering the Contractual obligations and mitigate any losses might be incurred by the ship owner, the following are the points to consider for any Master to safeguard his owner’s are: 1)   Article III bounds the carrier to exercise â€Å"due digilence† to make the ship seaworthy before and at the beginning of the voyage, properly man, equip and supply the ship, make cargo spaces fit and safe to receive and carriage and preservation until delivery. 2)   Ã‚  After receiving the goods the master or his agent is to issue the shipper with a bill of lading. A B/L must give an accurate description of the goods and must be endorsed to show the true condition. The bill of lading is a prima facie evidence of the receipt by the carrier of the goods mentioned on it.   A letter of Indemnity is not legally binding and cannot be sued upon. A Master should not sign any bill if it is misleading as to quantity of condition.   Without specific instructions from owner, the Master should refuse the letter of Indemnity, make out his own bills duly signed and present to the shipper. If shipper objects or refuses to accept then the Master should lodge the bill with British Consul and note protest accordingly. 3)   Ã‚  Article IV also directs that Neither the carrier nor the ship is liable for the loss or damage resulting from unseawothiness, unless caused by want of due diligence. The burden of proof as defence towards exercised due diligence shall remains with the carrier. Also neither the carrier nor the ship is responsible for any loss or damage caused due to the Act, neglect of default of the master, pilot or carrier’s servants in the navigation of the ship. Considering the the both articles of COGSA / Hague visby Rules Act here Master has not prevented the Owners efficiently from the losses which normally exempts from any liabilities arising later due to the reasons beyond his control. 4)   Ã‚  Here the Master has neither exercised due diligence in making ship seaworthy prior departure from load port   which, he could have reduced by informing the Classification society / Administration and the Insurers, leading to obtaining the permission for such voyage with additional measures required to overcome such deficiency authorised and thereby, keeping the Insurance contract Intact based upon â€Å"Utmost Good Faith† complying with Implied warranty terms and, would have better prevented him or his owner in mitigating the financial losses arising due to situations beyond his control,   nor by signing clean B/L he prevented the Carrier’s liability arising later from cargo claims and thereby increasing the financial burden of the cargo loss if any.   Ã¢â‚¬Å"A contract of marine insurance is a contract whereby the insurer undertakes to indemnify the assured, in manner and to the extent thereby agreed, against marine losses and losses incident to marine adventures. It is understood that each will act honestly with the other and assured must disclose every material circumstance known to him. If the assured fails to make disclosures, the insurer may void the contract†(college handout notes).   Therefore the owner here might be denied for even Hull Machinery, cargo losses and the General/Particular averages arising due to the Salvage of the vessel, by the Insurers for even 1/4th collision damage n third party liabilities due to Master not complying with want of due diligence and in Utmost Good Faith and, the Insurer can choose to waive this breach.   However, the burden of proving a breach of the implied warranty of seaworthiness lies on the insurer who alleges it. Therefore by not exercising his contractual obligatory duties according to the COGSA/Hague visby Rules Act and the Marine Insurance Act and the PNI warranties and thereby is in breach of both contractual obligations which   might end up the owners with a denied benefits of Assured indemnities and the heavy financial loss from both Hull and Machinery(3/4th RDC, Salvage and General Average) and, PNI (together with 1/4th collision liabilities) as well as all the insurable interests and will have to bear all these losses. However, since it was found that the other vessel also, was in a situation of unseaworthy at the time of collision, it can be argued and sued for the liabilities and claims becoming due on her part under Both to Blame Collision   cross liabilities clause under   Ã¢â‚¬Å"Marine Insurance Act† as a â€Å"peril of the sea† is an excepted peril, allowing the carrier to avoid cargo loss or HM damage claims arising out of a collision with another ship and which will benefit the Owner in mitigating some losses. General Average: As set out in â€Å"York-Antwerp Rules 2004 A† that any extraordinary sacrifice or expenditure is intentionally and reasonably made or incurred for the common and reasonably made or incurred for the common safety for the purpose of preserving from peril the property involved in a common maritime adventure. (college handout notes).   Where the common maritime adventure / benefits identifies usually three interests – ship, cargo freight.   Since it is proven that own vessel did not depart in seaworthy condition it will be difficult to produce defence against compliance of want of due diligence under Hague Visby Rules / COGSA Act and therefore resulting in owner bearing all expenses under General Average as well as towards cargo claims and salvage expenses. With regard to the other vessels if she proves that she exercised due diligence then the cargo damage because of collision will be covered under the particular average and not the gen Avg under equal loss betwn the cargo of the chtrs and the jettisoned containers will be covered or will come under the Gen Avg because the action which was taken to prevent the ingress was intentional. Salvage:   The services provided to any maritime property in dangerous or hazardous situations in such a way that it results in saving it fully or partially or even saving the marine environment and thus promoting the culture or entitling the such service provider with sufficient reward in size, to the total property saved and thus not exceeding the saved value. The operation will require to be successful to provide the value from which the reward shall be obtained. The law of salvage to be considered in three particular prospects: a)  Ã‚  Common Law: requires voluntary services where the person has no prior interest in the property endangered or under any pre-existing contractual agreement falling within the definition of maritime property. The size of reward depend upon various factors with particular regard to the level of danger ship is in, the skill and expertise of the salvors utilised with degree of risk were exposed to them and, it shall be payable the parties benefited from such services. b)  Ã‚  Statutory Law : The International convention on salvage 1989 enacted by UK by S224 of Merchant Shipping Act 1995 as statute law and will therefore override the common law. c)  Ã‚  Ã‚  Contract Law: The Master of the salvaged vessel will have the right to conclude the salvage contracts on behalf of the owner of saved vessel. As per Article 7 of   the convention   any contract or contract terms may be considered invalid if the contract was agreed under undue influence of danger and its terms are inequitable or payment agreed is in an excessive degree or too large for the services actually rendered. There are mainly two types of salvage agreements: i)   Ã‚  Services offered on the basis of ordinary tariff or fixed lump sum or daily rate ii)  Ã‚  Services offered on the basis of remunerations to be settled later, whether by agreement or by court judgement or by arbitration under Lloyds Open Form. Depending on the particular case of severity of the dangerous situations and availability of the time the each one has its own advantages and disadvantages for the Master ship which requires assistance.   The Salvage arranged under ordinary tariff   is obviously shall be cheaper and should be obtained if time permits.   However if the time available is crucial in saving the ship or property in imminent danger or imminent danger to the marine environment the the 2nd option of â€Å"Services on the basis of remunerations to be settled later† shall be opted for normally called as salvage agreement under LOF (Lloyds Open Form). The LOF also includes the SCOPIC clause (introduced in LOF 95) as an optional term. The advantages of using LOF 200 salvage agreement are summarised as : The agreement can be transmitted via radio or other electronic means, although an independent witness to the event should be sought and, there is no need to sign the agreement until the salvage services have been completed. The agreement is not likely to be disputed. It is basically â€Å"no cure, no-pay† principle agreement. Any claim applies under English Law. The salvor has maritime lien on the property saved, even after sale of the property to another party. The property saved can be quickly released to the owner on security payment. The salvor will get an interim reward. Any disputes will be referred to an arbitration. Underwriter’s liability can not be increased beyond that for total loss The excessive claims by salvors are avoided. (college handout notes). Analysing the situation for the said case of assignment the own vessel was towed under Lloyds Open Form due to the vessel suffering severe collision damage in the forward it was the best decision to opt for towage under LOF since it was the necessity of the situation to not loose much time in bargaining for contract towage under daily hire agreement because there was a danger of sinking of the vessel quickly as server forward damage and could had resulted in the total loss otherwise of the property. However in case of the other vessel, since she suffered a minor hull damage forward, there was no serious danger to the vessel immediately and had time to bargain and organise for the daily hire agreement resulting in a cheaper option safely. So it was a wise decision to opt for the daily hire agreement for the other vessel. The Master will need to follow the customary procedure when proceeding for of Port of Refuge, arrival and reporting procedure of port of calls and, by following the inward clearance requirement and procedure for unscheduled arrival to POR by appointing   / informing the agent thru owner including intimating the destination agent and the charterers, following the procedures and completing the documentation formalities on arrival in regard to Pilotage/Port arrivals, Port Health, Customs and Immigration etc., Lodging the Note of Protest in front of Notary via agent with records and evidences, informing HM and PNI, Classification society for various surveys towards repairs / dry docking formalities etc. In no way the master should allow the cargo to start till either bonds or guarantees are used to secure payment from contributors, all the formalities have taken place and, all the settlements are finalised between the shipper, owner and the charterer (An Adjuster will calculate payments based on benefit) . Also Before departure Master is to obtain the interim certificate of Class / issuance of certificate of seaworthiness. The action of the master in compliance with appropriate codes and regulations will assist in reducing the carriers liability and mitigating losses against extra ordinary perils of the sea or the situations beyond his control. References: i)   College Hand outs    ii) The shipmasters business companion – Malcolm Maclachlan – 2004   iii)  Business and law for the shipmasters – F.N. Hopkins – 7th edition 1989