Reference no: EM13896880 , Length:

Question I. Read the article Below. Answer the following in light of the facts that corporate investment spending has been flat and corporate dividend payments were at record levels.

a. What do you think the primary motive of issuing debt rather than equity?
b. Why would they issue debt while the cash balances are at record levels?
c. In what waus do you suppose there could be agency costs?
d. In what ways do you suppose there could be financial signaling?

Article - Debt Issuance Poised for Record Year: Fitch

Question II. Read the article Below. Answer the following in light of the facts that BHP is one of the world's largest iron ore mining companies. Assume in your answer that iron ore prices have fallen from $150/ton to $40/ton in the last 2 years

a. In light of the Residual Theory, and with their financial troubles, why might they continue paying dividends?
b. How would financial signaling play a role?
c. C. what clientele effects By Andrew Peaple

When shareholders in BHP Billiton Ltd. BHP 0.78 % gather in Perth, Western Australia, for its annual general meeting this week, a faraway iron-ore mine in rural Brazil will be on their minds.

The breaches at two tailings dams near BHP's jointly owned Samarco operation in the Minas Gerais state on Nov. 5 unleashed a flood of mud across the surrounding area, leaving nine people confirmed dead and 19 missing. The clean-up bill could reach at least $1 billion, according to Deutsche Bank estimates.

BHP's Australian-listed shares have fallen to their lowest level since the financial crisis and close to 10-year lows in the dam bursts' aftermath, as investors fret about the cost to the business-both reputational and financial-and whether the world's largest miner by market value can continue to pay its current dividend. BHP's London-listed shares have also suffered.

Against such a backdrop, Thursday's shareholder meeting is likely to be one of the trickiest in years for BHP's long-time chairman, Jac Nasser, and its chief executive, Andrew Mackenzie.

"I hope they cut the dividend," said one Australian-based fund manager, who holds shares in BHP and expects it to be a key topic at the meeting next week. "The [dividend] policy is creating havoc with the management of the company."

For Mr. Mackenzie, holding to BHP's dividend is a reputational issue. The company's policy is to maintain or lift investor payouts every half-year, even in the face of the downturn in world commodity markets in the last few years. For cash-hungry investors like big pension funds, that sort of commitment is one of the key attractions of resources stocks like BHP.

The miner's boss has strengthened his rhetoric to soothe such investors, even though earnings for its June-ended fiscal year slumped nearly 90%. "Over my dead body sounds a little strong, but it is almost right," Mr. Mackenzie said in discussing the annual results in August, referring to the possibility of a dividend cut.

Analysts are less sure he can hold the line. BHP aims to generate enough cash flow each year not only to cover its costs, but also to fund new investment and its shareholder payout, without going too much further into debt.

Meeting those different objectives is becoming harder. Even before the Samarco disaster, Standard & Poor's Ratings Services cautioned that the miner's payout pledge could weaken its financial position given a broader downturn in commodity prices. The price of iron ore, which contributed 80% of BHP's earnings last year, has fallen below $50 a ton this year, down by a third from a year ago.

In response to a request for comment, BHP pointed to a recent speech by Mr. Nasser in which he said the company's balance-sheet strength had provided it with the confidence to increase its dividend this year.

BHP's dividend already looks out of line with its long-term performance. The company on average paid out around 20% of its earnings before interest, tax, depreciation and amortization in the years from 1970 to 2012, Goldman Sachs GS -1.23 % has calculated. BHP would have to halve its current payout to achieve that sort of "sustainable" level now, the bank reckons.

It remains unclear how much harder the catastrophic dam bursts will make Mr. Mackenzie's task. While offering some support on the ground, BHP has been careful to state that responsibility for the accident lies with Samarco, a limited liability company it owns in equal parts with Vale SA, VALE 1.02 % the Brazilian mining giant.

But some local lawyers have suggested the co-owners will be targeted if their joint venture can't cover the legal and clean-up costs. BHP should make a provision of around $400 million to cover potential charges over the next two years, Credit Suisse analysts say.

To date, BHP has provided no explanation of what caused the Samarco disaster, amid growing criticism of the company in Brazil. The company's investors will be looking for a clearer accounting come Thursday.

Question III. Read the articles Below.

a. Why would you suppose the stocks of Square and Match rose so much on the first day of trading?
b. Why would Loan Depot postphone their IPO in light of the success of the previous two IPO's?

Art by Mike Lucas

The venture capital sector was shown a sign the door may be open to tech IPOs. Widely watched Jack Dorsey-founded payments startup SquareSQ -1.00% finished trading higher while Match Group also advanced in its trading debut, report The Wall Street Journal's Telis Demos and CorrieDriebusch. The market reception, which comes after pricing below or at the low end of expectations, is a bright point in an otherwise lackluster year for public offerings. The IPOs come as email security startup Mimecast also staged a positive first day, on the NasdaqNDAQ -0.07%, and ended the day edging slightly higher than its price, reports Deborah Gage for The Wall Street Journal.

ALSO IN TODAY'S VENTUREWIRE (subscription required):

Nigel Morris, a co-founder of Capital One and the financial tech investment firm QED Investors, has backed high-flying startups in the financial sector. Most recently, his firm invested in CircleUp Network Inc., an equity fundraising platform for consumer goods and retail businesses. He discussed alternative lending and equity crowdfunding in a recent interview with Lora Kolodny for Dow Jones VentureWire.
Travo, based in Los Angeles, has raised $2.4 million in a seed round to grow its travel reservations platform tailored for professionals who book their own business trips. Investors in the round included Great Oaks Ventures, Baroda Ventures, Valence Ventures, TYLT Lab and individual angels.

(VentureWire is a daily newsletter with comprehensive analysis of all the investments, deals and personnel moves involving startups and their venture backers. For a two-week trial, visit https://on.wsj.com/DJPEVCNews, scroll to the bottom and click "try for free.")

ELSEWHERE AROUND THE WEB:

Massachusetts Moves to Restrict Daily Fantasy Games to Players 21 and Older. The Massachusetts' attorney general wants to ban anyone younger than 21 from playing daily fantasy sports and impose a host of regulations on the industry. The announcement, made by state Attorney General Maura Healey, stopped short of declaring the games illegal. Massachusetts will not follow the lead of New York Attorney general Eric Schneiderman, who this week declared daily fantasy "plainly illegal" and filed suit to shut providers down in the state, reports The Wall Street Journal's Sharon Terlep.

Square Pays $93 Million Penalty to Some Investors in IPO. Square Inc. will have to give some investors additional shares valued at $93 million after its initial public offering priced well below a promised threshold, report The Wall Street Journal's Scott Austin and Rolfe Winkler.
LoanDepot Defends Plan to Withdraw IPO, Citing Square

AP

LoanDepot Inc. is standing by its decision last week to put off an expected public offering in the wake of SquareInc.SQ -1.00% having to offer new investors a discount to buy its shares in its IPO.

The mortgage lender cited "market conditions" last Thursday when it withdrew plans to sell shares that the company had originally hoped would give it a market value of up to $2.6 billion. Anthony Hsieh, loanDepot's chief executive, wrote in a blog post on the company's website this week that the company is moving forward with its growth plans and that while it may consider an IPO in the future, "it's not a necessity."

Mr. Hsieh also called attention, as many observers have, to payments startup Square's situation of pricing its public offering at a valuation that was lower than it achieved in its most recent round of private fundraising:

"Time will tell if the highly anticipated Square IPO made the right decision to price at $9 a share, 25 percent down and well below the anticipated range of $11- $13 dollars. Their decision to move forward gave their brand a market cap of approximately $2.9 billion. The last private round for Square was reported to be at a value of over $6 billion."

Square's shares rose 45% to $13.07 in its first day of trading, giving it a market capitalization of around $4.3 billion. They've eased back a bit Friday to $12.82 in afternoon trading.

Mr. Hsieh also had a little fun with the in-state rivalry his Southern California company has with peers in the San Francisco Bay area. "The surfer crowd from SoCal can compete with the Silicon Valley hoodie crowd thanks to our 5,000+ dedicated team members throughout the country," he wrote.Public markets have assigned little value to financial technology, or "fintech," companies that are focused on lending. Mr. Hsieh also pointed out in his blog post that LendingClub Corp.LC +3.11% and OnDeck CapitalInc.ONDK +0.21% are trading below their IPO prices.

Square's $3 billion value at its IPO price gave little credit for its growing Square Capital business, which had made $300 million in cash advances since 2014, analysts said. Analysts at Wedbush Securities said that their view of Square's fair value at $3 billion to $4 billion was based on the potential earnings from its core payments business.

Investors may get another chance at valuing a lending startup in the not-so-distant future: Elevate Credit, Inc., which provides unsecured loans to subprime consumers in the United States and United Kingdom over the internet, filed offering documents on Nov. 9.

Question IV.

Read the article below.

a. How do you suppose the move to more capital leasing will affect measures such as return on Assets and Return on equity?

b. How do you suppose it will affect EBIT and Net Income Measures?

c. How do you suppose it will affect financial flexibility?

d. Why do you think many CFOs are against rules on Capital leasing

Article - The Morning Ledger: Lease-Accounting Overhaul Moves Forward

A new accounting rule is expected to have the biggest impact on companies that use lease financing as a key part of their business, like airlines that lease the planes they use. Above, United Airlines jets are parked at their gates at George Bush Intercontinental Airport, in Houston.

Question V. Read the below article.. In your answer, assume JC Penney was troubled financially in 2013

a. What advantages did the Convertible issue offer JC Penney?

b. What Advantage di the Convertible issue offer Potential Investors?

c. What do you suppose the overall effect that the convertible issue had on JC Penney's Cost of Capital? Why?

Article- Penney Can Raise Billions Under Revised Credit Line Miles Weiss

Question VI. Read the Below Article

a. In what ways would this dividend announcement be positive for NIKE stock price?

b. In what ways would this dividend announcement be negative for NIKE stock price?

c. Why do you suppose they announced both a stock buyback and a dividend increase instead of just one or the other?

Article - Nike Unveils Stock Split, Boosts Dividend

The world's top sneaker seller also said it approved an additional share buyback