Answer To: Dec PART A. Read the article: “Silicon Valley Adjusts to New Reality as $100 Billion Evaporates” and...
Himanshu answered on Dec 15 2021
Part A
1. As the IPO value reduces main players, agents and partners will be affected as they have spent a substantial amount in the venture. But now the project value has decreased, which will not encourage potential investors, that will contribute to a poor picture of the IPO that decreases the share price more once the stock issue in the exchange.
2. Valuation can be change which is discussed below:
a. Addition or loss of significant customer (changes in taste and preferences)
b. Introduction of new product and services
c. Change in debt of management
d. Expansion of new service in new locations
e. External Risks: Economy, industry change, graphical events
f. and Internal risks: Financial, operating risks
Valuations of stocks can be change by various problem i.e., company growth decline, dividend growth decline, continuous losses, negative losses, economic downturn, specific business risk. For example, Uber in pandemic situation people is avoiding using services of uber which declining the business growth as well as stock value that will at the end lead to decline in the valuation of the company.
3. The downside of debt finance is that companies are obliged to repay the principal repaid along with interest. Businesses facing cash flow issues may have a tough time paying back their money. Fines are levied on businesses who refuse to settle their obligations on time. Even if the company measure the subsidised interest rate from the tax deductions, company will always be confronted with a high interest rate because it may vary with the market environment, bank background, the company credit rating, and personal payment record. A high ratio also indicates that a company can risk default on its debts if interest rates escalate suddenly, which is not ideal for shareholders, since growing risk may potentially lead to major losses. Shareholders typically dislike businesses that are extremely debt-reliable.
4. By this argument, the article seemed to imply that every company is distinct from each other. One sector may be impacted by the present scenario, which may be beneficial for another industry. Business who meets consumers' desires and wishes will surely resist because if the consumer is pleased with the goods and services of the company, he/she will use the product for a longer period of time, which will improve customer retention percentage, that will improve the company's performance, and create high profits , that will increase the stock values that will provide successful returns to shareholders.
Part B
1. According to the article share repurchase falls into two categories, some believe buy-backs, on a par with all the convoluted financial instruments that helped cause the economic crisis, to be a kind of monetary magic. Others accept that buy-backs are a reasonable way for investors to return money, but they are worried with their size. Theory states that When a company sells its shares or issues a dividend, it returns cash to its shareholders. In no case does this change the underlying worth of the company, which is calculated by its projected cash flows and its risky existence. Rather, all that remains is that the investment products that say such cash flows are reshaped: the worth of the company's shares decreases, its cash falls (or liability increases) and holders' cash reserves increase by the same level. In all situations, the assets of the owners are still unchanged: those who sell stocks in a buy-back end up with additional funds and less shares; those who do not end up with a greater portion of a limited cake. The physical world is far from what the books claim. Since interest paid on loans is tax-deductible, while interest received on cash is taxable, the corporation lowers the tax bill by raising its total debt to fund buy-backs or dividends. And of course, rising the debt of the company makes it more dangerous.
2. Reallocating the retained profits in the company is simply the best method of financing. If the business makes money, it can reallocate them to continuing increase revenue, competitiveness or quality and enhance balance sheet performance. Advantages;
a. Increase stock value
b. Assure corporate stability
c. Provide support for innovation and advancement without rising corporate liabilities. For example, businesses like Amazon are starting to allocate their revenues back to business so that they can create more innovation without raising their debts. This technique allows them to have a strategic edge and build strong returns to the shareholder. Reinvesting revenues would draw more investors as a business-like Amazon has generated significant returns over the years. Reason being an organization has succeeded tremendously over the years and defeated the competition in every division of the industry. The cost of capital of a business is the rate of return that the business would have gained if it had invested its capital in a company of equal risk.
3. Corrupt manager can take the advantage of the share buyback, they will generate unintended pressures to pay too much cash, destroy the balance sheets of companies and their willingness...