Increasing debt commits managers to paying out to debt holders, hence reducing the free cash flow problem. There are always empire building appear in the management as the manager allowed to hire staff based on the relationship rather than employ based on ability. Therefore, the manager can build up his or her kingdom in the company... displayed 300 characters
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Therefore, the manager can build up his or her kingdom in the company. Moreover, managers tend to evaluate projects based on the short-term profits that typically determine their own remuneration (Sternberg 2004). The issue is that managers may make decisions, not for long-term financial growth, but to increase their own wealth... displayed next 300 characters
So having more debt on the capital structure increases cash flows to the
shareholders and debtholders in the current period, but increasing debt could be a
suboptimal strategy for a firm in the long run because of higher expected distress
costs associated with more debt...
Without careful monitoring of the cash flow, the business may not have the profit realization as they scheduled it. Appropriate actions must be done to prevent such incidents or it may run the business into bankruptcy...
Furthermore, the projections are speculative, and the selection of the discount rate is somewhat subjective. Nevertheless, it is important to mention this method, as it is one of the most popular methods for analyzing large companies...
Assume that Nadia can earn 15 percent on her investments.
a. Find the future value at the end of year 6, FVA6, for both annuities.
b. Use your findings in part a to indicate which annuity is more attractive...
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