Financial Managment Coursework Example | Topics and Well Written Essays - 3000 words

Financial Managment - Coursework Example igh stock of debentures is usually considered unattractive to invest in for the reason that it has a higher risk especially in the times of financial volatility since only holders of debenture have priority over the company assets in such circumstances. Prudent financial management stipulates that, a business should not depend much on loan capital and debentures compared to equity capital unless it is only being employed for a very short period of time. However, these kinds of ascertaions are highly challenged by Modigliani and Miller (MM). In fact their basic hypotheses states that, in an efficient market, the nonexistence of bankruptcy costs, asymmetric information, taxes and agency costs, the business’s value is not affected by the manner in which that business is financed. According to MM, it doesn’t matter whether the capital of the firm is raised through selling debt or issuing stock. They further state that, the dividend policy of the firm also does not affect it s value. Actually, the argument of MM is straightforward; the cash flows that a corporation can make for all investors are all the same despite the capital gearing. According to them, changing the capital gearing does not in any way alter the firm’s general cash flows (Modigliani & Miller, 1958). b) Factors to consider when raising capital through preference and Debentures i. The Board Operation Although preference shares do not have much effect on the company’s management, debentures do have. This is based on the fact that, a business with external investors needs to be run in a manner that goes in line with the aspirations of debenture holders. With this in mind, it may be quite impossible to manage a company where the lifestyle of directors is the only central part behind the business... This paper approves that the company’s declared objective is to maximize shareholder wealth. In principle, a variety of dividend policies is consistent with this aim depending on factors such as the tax position of the clientele and whether dividend policy has been used to convey information to the market. Pavlon has followed a remarkably consistent dividend policy, adhering to a constant payout ratio. At the time of listing, it would presumably have stated its dividend policy in its prospectus and unless specified otherwise, shareholders would have been justified in expecting continuation of this policy. A switch in dividend policy so soon after listing is certain to offend at least some portion of its clientele. This essay makes a conclusion that The stand point of Director C is based on the argument that all shareholder amounts and returns on investments should always be ploughed back to create more wealth. Besides, his argument to maintain dividend is aimed at boosting more capital for the company and evade on paying taxes on some taxable dividends. For instance, the Director seem to have considered the rate of taxes on both capital gains which at times is not taxed and dividends which are usually taxed at the incomes marginal rate. However, with this process shareholders stand too loose more than if they were given the dividends. First, continuously retaining shares in the company without a close follow up on the performance of the company may create a scenario where the company managers will be having easy cash at their disposal to squander.