Dunham Cosmetics - Financial Evaluation

1. Briefly explain why many corporations prefer to issue callable long-term corporate bonds rather than noncallable long-term bonds.

Long-term financing means a financing provided to an organization for a period longer than a year. This is done typically for companies who do not have enough capital or for potential home owners. Mortgages are considered long-term loans.

d) What is the difference between long-term debt and notes payable? A notes payable is normally a short term debt whereas a long-term debt is typically over a time frame of more than one accounting period or longer.

Dillard 's, Inc. has established retail department stores located mostly in the Southern and Midwestern regions of the United States. The Organization offers name brand and private-label merchandise, including fashion apparel and home furnishings. SIC Code 5311(Dillard’s)- This category includes retail stores carrying a general line of apparel, from men’s suits, outer ware, women’s clothing, casual ware and home furnishings, such as furniture, home decor, towels or linens, and major household appliances; and housewares, such as home appliances, dishes, and utensils all of must be sold to classify for proper coding. NAICS Code- 452110 (Dillard’s) - These products and other merchandise has specific departments with the accounting on a departmentalized basis. A single management team oversees the work functions of these departments and has an average above 51 staff members. The stores have their own charge accounts, deliver merchandise, and maintain open stocks. Since the recession, Dillard’s has decreased the amount of storefronts within the market and has moved into the discount store market to attempt to capitalize on the lower range of income households. Because of this change in strategy and decrease in profit margins economist have stated the life-cycle stage is close to the end and the competitive outlook for Dillard’s is very vulnerable.

short- or long-term borrowing” are a cash inflow from financing activities. Similarly, ASC 23010-45-15 states that “repayments of amounts borrowed” are a cash outflow for financing

Neil Kokemuller (2014). The Advantages and Disadvantages of Debt and Equity Financing. Retrieved from http://smallbusiness.chron.com/advantages-disadvantages-debt-equity-financing-55504.html

Many businesses use debt financing to achieve their financial goals. Debt financing is raising operating capital by borrowing. Scott Equipment Organization is investigating various combinations of short-term and long-term debt financing in financing their assets. Short-term debt financing has a maturity of one year or less; whereas, long-term debt financing has a maturity of more than one year. Short-term debt is usually used to increase the amount of available working capital that can assist the company with its day-to-day operations, such as purchasing a required piece of equipment or to pay suppliers.

Debt is cheaper than equity finance, so as gearing increases, the WACC should fall. If a company borrows through debt, the shareholders' return should also increase due to the immense risk the company is undertaking. However, there is an optimal level, if reached, debt financing essentially becomes expensive for the company (Brealey, Myers, Allen & Mohanty, 2012).

The advantages of debt financing are that: bond investors are generally willing to accept a lower rate of return as compared to equity investors, the debt interest is tax deductible, and bond investors do not have voting rights on company issues. (Anthony 243) General Motors’ times interest earned ratio has generally stayed on course except for 1998. This shows that GM needs strong sales volumes to pay its on its liabilities due to the low profit margin. If a long-term decline in worldwide auto sales occurs, GM may have difficulty paying on its debt.

Mason Financial LLC is a large company that is built on handling of personal data. As the company performs its operations on a network and over the Internet, it is exposed to a plethora of information security risks. Insurance and financial records are a prime target of hackers the world over. As the company stocks volumes and volumes of such personal information, it paves way for hackers and other fraudsters to commit insurance scams. Digital information makes it easier to monetize operations and it is always hard to track. There is the need for all stakeholders handling such sensitive personal information assets to be aware of security implications, monitor their personal credit cards and banking information besides consumers remaining

Using debt is also advantageous to existing owners because of the effect of financial leverage. When companies use debt to provide addition capital for their business operations, equity owners get to keep any extra profits generated by the debt capital, after any interest payments. Given the same amount of equity investments, equity investors have a higher return on equity because of the additional profits provided by the debt capital. As long as using debt doesn’t threaten the financial soundness of a company in times of difficulties, equity owners welcome certain debt uses to help enhance their investment

Short-term debt is easy to rise and faster to get as the requirements of this loan is significantly less. It requires for less verification and less processing time which is a great advantage of this loan (Finance-blog.eu, 2012). The main drawback of short-term loan is higher interest rate and the repayment tenure. Since the loan tenure is short, it will increase the liquidity problem for the company and it becomes difficult to be repaid within the due date (Www.wahm.com, n.d.).

Advantages to debt financing is that the debt gets paid off and the risk that you invest in will end up helping pay off the debt. Disadvantages is that if there is no high risk then the amount of return is not as high. Also the company’s stock may fall and put the person more into debt.

The advantage of debt financing is that interests paid on such debt are tax deductible. If a company has the intention of maintaining a permanent debt, the present value of the tax shield can be obtained by discounting them by the expected rate of return demanded by the investors who hold the debt (this is a perpetuity, where in reality would be the maximum possible present value for the tax shield). This tax shield value reduces the tax bill and increases the cash payment to investors, increasing the value of their investments.

In the business world companies are always trying to maximize their earning potential by strategically investing in short-term financing. In terms of finance short-term may mean months or even a couple of years. The type of finance method that is used is contingent on the specific needs of the corporation. These methods include trade credit, bank credit, financing through commercial paper, foreign borrowing, and the use of collateral, accounts receivable financing, inventory financing and hedging to reduce borrowing risk.