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Chapter 10: Problem 71

Scan the recent financial press, such as Business Week, Forbes, or the Wall Street Journal, to identify a company that has recently changed its capital structure. Read one or two recent articles on this company and write a short summary of the restructuring, addressed as a memo to your instructor. In your memo, include the company's stated reasons for the restructuring as well as any other reasons that you might consider relevant and rational. To the extent possible, show how the company's capital structure appeared before and after the restructuring.

Short Answer

Expert verified
The solution involves a sequence of research, analysis, and summarization. It starts with finding a suitable company that has recently restructured its capital structure, going into the details of the change via multiple articles, identifying the reasons behind the change, recognizing any other rational motives, examining the company's capital structure before and after the change (to the extent possible), and finally writing a summary of all these findings in a memo addressed to the instructor.

Step by step solution

01

Sources Research

Browse relevant financial news outlets like Business Week, Forbes, or the Wall Street Journal to identify a company that recently changed its capital structure.
02

Detailed Reading

Once identified, read at least one or two recent articles about the company and the changes they've made. Take notes about the important aspects of the restructuring.
03

Identify Reasons for Restructuring

In the articles, look specifically for the company's stated reasons for the restructuring. Also consider any other reasons that you might find relevant and rational within the context.
04

Capital Structure Assessment

Based on the information obtained, outline how the company's capital structure looked before the change and after the restructuring. It may not be possible to get specific numbers, but a qualitative description can work too.
05

Writing the Memo

With all the researched information, write a memo to your instructor. Summarize the restructuring, including the company's stated motives and any other relevant reasons you have identified. Also include information about how the capital structure looked before and after the restructuring.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Financial News Research
To effectively execute financial news research, you need to start by identifying reliable financial news outlets. Sources like Business Week, Forbes, and the Wall Street Journal are excellent starting points, as they frequently cover topics related to capital structure and company restructuring.

Here鈥檚 how you can proceed with your research:
  • *Identify Keywords:* Look for keywords related to capital restructuring, such as "capital change," "debt issuance," "equity change," etc.
  • *Use Search Functions:* Utilize search boxes on these websites to narrow down articles that specifically address restructuring.
  • *Read Wide:* Cover a broad range of articles to get varying perspectives about the restructuring event.
  • *Take Notes:* Jot down key points about the company鈥檚 restructuring, focusing on facts like the date of change, reasons, and potential impacts.

The goal is to gather a well-rounded view of the restructuring, which will aid in understanding the complexities of the company's capital changes.
Company Restructuring
Company restructuring is a significant process aimed at altering the financial or operational aspects of a company. This usually involves changes in capital structure, such as modifying the ratio of debt to equity or issuing new bonds or shares.

Here's what typically happens during restructuring:
  • *Assessment of Current Structure:* The company checks its current financial health and sees if restructuring can add value.
  • *Decision Making:* This involves choosing whether to increase or decrease debt and equity. Balance is critical here to optimize financial stability.
  • *Implementation:* Restructure strategies are implemented, which can include selling off assets, merging with other firms, or altering debt agreements.
  • *Monitoring:* Once changes are made, continuous monitoring ensures the new structure supports the company鈥檚 strategic goals.

Restructuring aims to create a more agile and financially stable company, setting a path toward growth and profitability.
Memo Writing
Memo writing is the process of composing a concise document meant to communicate important information within an organization. When writing a memo about a company's restructuring, clarity and relevance are essential. Here's a simple guide to writing an effective memo:
  • *Start with a Clear Subject:* Clearly define what the memo is about鈥攗se a line such as "Subject: Company XYZ鈥檚 Capital Restructuring."
  • *Provide a Brief Introduction:* Introduce the topic with a quick summary of the issues or changes.
  • *State the Main Points:* Present the key information gathered from your news research, focusing on reasons for restructuring and its effects.
  • *Conclusion:* End with a succinct recap or call to action if needed.

By structuring your memo clearly, you ensure that readers, such as your instructor, can digest the information quickly and accurately.
Financial Press Analysis
Analyzing financial press articles requires a critical approach to understanding the information presented and assessing its reliability and relevance. Standing out among the many tools for this analysis is the skill to scrutinize how these reports discuss changes in capital structure, using them to deduct potential effects on a company.

Consider these steps:
  • *Capture Important Details:* Look for specific details like changes in debt-to-equity ratios or new financing activities.
  • *Evaluate Author's Perspective:* Note any biases or assumptions made by the article's authors, which can color interpretation of facts.
  • *Cross-Verify Information:* Compare details with other reports to ensure you have a balanced perspective.
  • *Predict Possible Outcomes:* Reflect on how the reported changes might influence the company's future stability and growth.

A thoughtful analysis can turn superficial articles into deep insights into a company's restructuring moves and its potential future trajectory.

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Most popular questions from this chapter

Distinguish between invested capital and retained earnings. What are the sources of each? Describe how each can be reduced.

Calculate EPS, given the following information: \(\bullet\) Common stock outstanding, 4,000,000 shares \(\bullet\) Net income, \(\$ 55,000,000\) \(\bullet\) Bonds payable, \(\$ 33,000,000\) \(\bullet\) Retained earnings (ending balance), \(\$ 44,000,400\) \(\bullet\) Preferred shares outstanding, \(1,000,000, \$ 10.00\) par value \(\bullet\) Preferred dividends, \(\$ 2,000,000\)

What are cumulative dividends as compared to noncumulative dividends?

The H. Houdini Company's capital structure includes \(\$ 10,000,000\) of long- term debt at an average rate of \(12 \% .\) The capital structure also includes \(\$ 3,000,000\) of (cumulative) preferred stock, with stated dividends of five percent and \(\$ 6,000,000\) of common stock. It has no retained earnings. a. How does the preferred stock affect the risk and potential returns of the long-term debt and the common stock? b. In what ways might preferred stock be considered debt? How might it be viewed as equity?

The Open Sesame Company has assets of \(\$ 300,000,000,\) long-term debts of \(\$ 100,000,000,\) common stock of \(\$ 100,000,000,\) and retained earnings of \(\$ 100,000,000 .\) Most of the long-term debt consists of convertible debt carrying fairly high interest rates that are about five points above the current prevailing market. Open Sesame wants to issue \(\$ 100,000,000\) of new debt at current market rates. It will then "call," or retire, the existing convertible debt, using the money from the new debt. Because its share prices have also increased \(40 \%\) over the past several years, Open Sesame is also considering raising additional funds by issuing new shares of common stock. Funds from the common stock issue would then be used to refinance the debt. a. If Open Sesame issued new debt, what would be the impact on its balance sheet? On its income statement? b. If Open Sesame issued new common stock, what would be the impact on its balance sheet? What assumption is crucial to answering this question? c. What other considerations might drive Open Sesame's decision about this possible refinancing of its long-term debt? d. How might the current creditors be affected if Open Sesame tries to "call," or retire, its convertible debt? How might they feel? What actions might they take immediately after hearing about the call?
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