The paper "Initiatives Taken by Thomas McGill and Improving Financial Position of Star Bay Company " is an outstanding example of a finance and accounting assignment. Executive vice presidents, finance and managers at every level must make some technical financial decisions at a given part of their profession. One thing though that remains poignant is that the decision might have a disastrous impact on the company. To underscore the above statement, a thorough evaluation of Thomas McGill’ s financial decisions needs to be related. Executive Vice President’ s financing decisions taken from 1990 to 2007 has much to query and admire at the same instance. Case of 1990 In 1990, Thomas McGill made to the critical decision in the name of issuing stock and obtaining of $10 million in form of long term bonds.
To begin with is an assessment of the decision to issue stock. There are some pressing circumstances when such decision as issuing of the company’ s stock may be acceptable. If there is a belief in the future that stock prices will inflate thus generating some extra income then managers may make such decision(s).
The second option is when the company is in dire need of external finance and cannot raise from within. The third option is that a company can do this if it wants to make a change in its debt-to-equity ratio which it can thereafter use to assess its bonding rating. It is from the above premise that I am going to refute or take in the decision made by Thomas McGill. Assessing circumstances at hand in 1990, there were two pressing issues and a decision by McGill to issue shares was the best decision any manager working at such circumstances would have been advised to do.
Star Bay Company was supposed to increase net assets by 30% which translated that the asset is moved from $80 million to $104. Out of $24 needed, McGill could only obtain $4 through retained earnings with no idea where to get $20. Again, though financial analysts may have argued that there was a 5% increase rate in sales between 1986 and 1989, there were other dragging expenditures such as the new plant facilities required to produce the products developed by the running R& D programmes.
This and other expenditures made the company require a substantial amount of external funds. Any auditor expecting books of account would have concurred that the decision made was proper. With regard to the decision to obtain $10 million in the form of long term bonds, the bottom line of the idea is that any company who tries to sell their long time bonds before maturity may have a problem with their finances as these bonds will be affected with heavily discounted markets.
However, as the case with their shares, there was a compelling circumstance which was the need to realise a capital gain. This is so because as the case stands, the prevailing rates have declined while the value of the bond has gone up. It, therefore, remains that the decision made by McGill was not against the policy. Case of 1992 The Star Bay Company Cash Budget For the Year Ended December 31, 1991 QUARTERS Q491 Q192 Q292 Q392 Q492 Cash balance, beginning 5,000 5,000 5,000 5,000 5,000 Add sales 21,000 29,000 44,000 51,000 54,000 Total cash available 26,000 34,000 49,000 56,000 59,000 Fewer purchases 22,500 37,500 37,500 45,000 22,500 Fewer expenditures 4,500 3,600 4,500 4,500 5,200 Cash balance ending -1000 -7100 7000 6500 31300 Cash balance ending $36,700 As the balance stands, the company indeed needed a minimum cash balance of $25 million.
Therefore borrowing must be sufficient to cover cash deficiencies of the $25 million.
Efraim, Benmelech and Eyal, Dvir. “Does Short-Term Debt Increase Vulnerability to Crisis?” Evidence from the East Asian Financial Crisis, 2011. Print.
Diamond, D.W., and Rajan, R.G. Liquidity risk, liquidity creation and financial fragility: a
theory of banking. Journal of Political Economy 109, 287–327, 2001. Print.