Understanding Managerial Flexibility And Capital Structure

Managerial Flexibility and Investment Decision

The overall managerial flexibility could be identified as the ability of the management to make adequate investment decision according to the changes required in current market conduction. The managerial flexibility mainly ensures the relevant decision regarding the investment decision could be conducted by the management, which might help in generating higher revenue and reduce the overall risk from investment. With the implementation of managerial flexibility the company also needs to different investment appraisal techniques, such as Net present value, payback period, Internal rate of return and profitability index to determine viability of the investment (Cole 2013). This relevant increment managerial flexibility could eventually allow the company to identify the projects, which could provide higher return and generate profitability for the company.

In real world actions the overall action of share buyback issue is not recommended for the company. This relevant share buyback could mainly result in blockage of the company cash flow in its shares, which could not be used in investing in new projects.

The statement is mainly correct, as the investors mainly aim to increasing their wealth from the overall cash payout priced by the company, without the cash payment the interest of shareholders are reduced, which in turn effects share valuation of the company.

The main advantages of the company for using debt in capital structure could directly reduce tax payment. This could eventually allow the organisation to retain the required level of retained income, which could help in supporting future expansion and activities of the company. The major limitation is the overall reduction in profit and increment in insolvency changes of the company. This could eventually increase problems for the company to sustain the required level of activity due to cash shortage (Hannafey and Vitulano 2013).

The overall statement is relevantly true as the future prices and spot prices of the a share are never same. This mainly allows the investor to identify the relevant arbitrage opportunity, which could help in maximising the profits. The overall arbitrage opportunity in the market is not constant, as the extensive selling the buying pressure decreases the arbitrage value, which reduces and in turn nullifies the arbitrage opportunity. This mainly indicates that the future prices and spot price aims in getting the same value. However, the intensive selling and buying pressure the overall sport and future value are no same at the end of contract tenure (Harrison 2013). 

Investment Appraisal Techniques

The maximum possible subscription price could be less than actual market share price of the company. This could eventually help in attracting more customers. 

This minimum subscription price could be greater than zero, until the actual market share price of the company.

From the overall perspective of company the share issue mainly allow the organisation to gather the relevant capital that could help in supporting their future endeavours. However, the major limitation for the company is after share issue is the decline in its share value. This is mainly due the increase volume and supply of shares, which could in turn reduce its value amount potential investors (Kennickell, Kwast and Pogach 2016).

The overall increment in total debt value could eventually increase risk level of company, as the solvency conduction of the company is drastically reduced. This relevant increment in debt value could also increase the interest payments of the company, which might drastically reduce the risk control of organisation.

The relevant difference in short term and long term debt securities could be identified, as the interest rate and tenure provided by the debt securities. The long term, debt is mainly considered to be for long tenure, with a lower interest rate. However, short term debt mainly contains low tenure for a maximum year is 5 years, while the interest rate is higher than long term debt securities. In addition, the long term debt mainly consists of loan tenure more than 5 years ranging from 20 to 25 years. However, the short term loan mainly consists of overdraft, and credit balance, which could be used by the company for supporting its short term needs. Nevertheless, the overall long term debt is mainly used for expansion and investing projects by the company (Kraemer-Eis, Lang and Gvetadze 2013).

References and Bibliographies:

Cole, R.A., 2013. What do we know about the capital structure of privately held US firms? Evidence from the surveys of small business finance. Financial Management, 42(4), pp.777-813.

Gielens, K., Geyskens, I., Deleersnyder, B. and Nohe, M., 2017. The New Regulator in Town: The Effect of Walmart’s Sustainability Mandate on Supplier Shareholder Value. Journal of Marketing.

Hannafey, F.T. and Vitulano, L.A., 2013. Ethics and executive coaching: An agency theory approach. Journal of business ethics, 115(3), pp.599-603.

Harrison, R., 2013. Crowdfunding and the revitalisation of the early stage risk capital market: catalyst or chimera?.

Jarmolowicz, D.P., Cherry, J.B.C., Reed, D.D., Bruce, J.M., Crespi, J.M., Lusk, J.L. and Bruce, A.S., 2014. Robust relation between temporal discounting rates and body mass. Appetite, 78, pp.63-67.

Kennickell, A.B., Kwast, M.L. and Pogach, J., 2016. Small businesses and small business finance during the financial crisis and the great recession: New evidence from the survey of consumer finances. In Measuring Entrepreneurial Businesses: Current Knowledge and Challenges (pp. 291-349). University of Chicago Press.

Kraemer-Eis, H., Lang, F. and Gvetadze, S., 2013. European Small Business Finance Outlook June 2013 (Vol. 18). EIF Working Paper 2012.

Peirson, G., Brown, R., Easton, S. and Howard, P., 2014. Business finance. McGraw-Hill Education Australia.

Pradhan, R.S., Shrestha, R., Bhandari, S., Limbu, P., Acharya, R. and Maharjan, S., 2016. Impact of firm capital structure decisions on debt agency problem: Evidence for Nepal. Nepalese Journal of Finance, 3(1), pp.1-12.

Rezende, M.L. and Richardson, J.W., 2015. Economic feasibility of sugar and ethanol production in Brazil under alternative future prices outlook. Agricultural Systems, 138, pp.77-87.

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