UNIT III
Corporate Restructuring and Takeovers
Corporate restructuring is an action taken by a corporate entity in order to significantly alter its capital structure or operations. Corporate restructuring generally occurs when a corporate entity is experiencing major problems and is in financial danger.
To eliminate the entire financial crisis and improve the performance of the company, the corporate restructuring process is considered very important. A financial and legal expert is hired by the management of the corporate entity involved in the financial crunches for advice and assistance in the negotiation and transaction deals. The entity concerned can usually look at debt financing, reduction of operations, any part of the company to interested investors.
In addition, the need for corporate restructuring arises as a result of a change in a company's ownership structure. Such a change in the company's ownership structure may be due to takeover, merger, adverse economic circumstances, adverse business changes such as buyouts, bankruptcy, lack of divisional integration, overemployed personnel, etc.
3.1.1 Need:
Corporate restructuring can be motivated by the need to change a company's organizational structure or business model, or by the need to make financial adjustments to its assets and liabilities. It frequently includes both.
Restructuring companies for a variety of reason:
- To cut costs
- To focus on key products or accounts
- To integrate fresh technology
- Making better use of talent
- Enhancement of competitive advantage
- To spin off a subsidiary firm
- To merge with another business
- · To reduce or consolidate debt
Importance:
For the following reasons, companies may choose to restructure their finances and/or their organization:
- Profit improvement: If a company does not properly deploy its assets to maximize profit, it is possible to pursue restructuring to get the company on a more solid financial basis. The corporate strategy that best employs the available resources will determine the direction the company takes in its restructuring.
- Business strategy change: A business may decide to remove subsidiaries or divisions that do not align with its core strategy and long-term vision and raise capital to support the advancement of the core strategy. In addition, corporate strategy may be to maximize or enhance flexibility in tax opportunities.
- Reverse synergy: Just as businesses sometimes seek to create business synergies through mergers and acquisitions, the reverse is also true. The value of a merged or conglomerated unit is sometimes lower than the value of its individual components. As part of the larger corporate entity, some divisions or subsidiaries may have more value in a sale than they do.
- Cash flow requirements: The divestiture of underperforming or unprofitable divisions or subsidiaries may provide liquidity not otherwise accessible to the corporate entity. The sale of certain assets can provide both cash inflow and debt reduction, providing easier access to financing for the corporate entity and/or more favorable terms.
Forms of Restructuring:
(a) Portfolio Restructuring - It involves major changes, including liquidation, divestments, asset sales and spin-offs, in the mix of assets owned by a company or the lines of business in which a company operates. Company management may restructure its business to sharpen the focus by disposing of a unit that is peripheral to its core business and by selling off a division to raise capital or get rid of a languishing operation. In addition, in order to restructure its portfolio, a company may engage in an aggressive combination of acquisitions and divestments.
(b) Financial Restructuring - The financial structure refers to the allocation of the corporate flow of cash or credit funds and to the rules for strategic or contractual decision-making that direct the flow and determine the value added and its distribution among the different corporate constituencies. It involves major changes in a company's capital structure, such as leveraged buyouts, leveraged recapitalizations and equity swap debt, mergers, acquisitions, joint ventures, strategic alliances, etc.
The scale of the investment base, the mix between active investment and defensive reserves, the focus of the investment (choice of source of revenue), the rate at which earnings are reinvested, the mix of debt and equity contracts, the nature, degree and cost of corporate supervision (overhead), the allocation of expenditure between current and f Economic value is generated by financial restructuring.
(c) Organizational Restructuring -Organizational restructuring involves major changes in a company's organizational structure, including redrawing divisional boundaries, flattening hierarchical levels, spreading control spans, reducing product diversification, revising compensation, streamlining processes, reforming governance, and reducing employment. It is noted that the reform of layoffs unaccompanied by other organizational changes tends to have a negative effect on performance. Combined with organizational restructuring, downsizing announcements are likely to have a positive, though small, effect on performance.
(d) Technological Restructuring - Technological restructuring is described as an alliance with other companies to exploit technological expertise.
Key Takeaways:
- Corporate restructuring occurs when a corporate entity suffers from major problems and is in financial danger.
- Corporate restructuring can be motivated by a need for change in a company's organizational structure or business model, or by the need to make financial adjustments to its assets and liabilities.
- Organizational restructuring involves major changes in a company's organizational structure, including redrawing divisional boundaries, flattening hierarchical levels, spreading control spans, reducing product diversification, revising compensation, streamlining processes, reforming governance, and reducing employment.
- Financial structure refers to the allocation of cash or credit funds' corporate flow and the rules for strategic or contractual decision-making that direct the flow and determine the value added and its distribution between the different corporate constituencies.
Advantages and disadvantages
Advantages:
- To reduce expenses.
- To focus on key products or accounts.
- To incorporate new technologies.
- To make better use of talent.
- Enhancing competitive advantage.
- To spin a subsidiary business off.
- To merge with a different business.
- To reduce or consolidate debt
Disadvantages:
- The administrator approves legal actions of the debtor during the restructuring process (with the exception of common legal actions)
- The company is declared bankrupt when the restructuring plan is not approved (There is a possibility to replace a group disapproval with the restructuring plan with a court decree)
- The plan becomes legally unenforceable towards this creditor if the plan towards the creditor is not fulfilled (even after additional appeal).
When one business makes a successful bid to assume control of or acquire another, a takeover takes place. Takeovers can be completed by buying a majority stake in the target company. Takeovers are also commonly carried out through the process of merger and acquisition. The company making the bid is the acquirer in a takeover and the company it wants to take control of is called the target.
Takeovers are usually launched by a larger organization seeking to take over a smaller one. They can be voluntary, which means they are the outcome of a mutual decision between the two businesses. In other cases, they may be unwelcome, in which case, without their knowledge or sometimes without their full agreement, the acquirer goes after the target.
In corporate finance, a takeover can be structured in a variety of ways. An acquirer may choose to take over the controlling interest of the outstanding shares of the company, purchase the entire company directly, and merge the company acquired to create new synergies, or acquire the company as a subsidiary.
SEBI Guidelines:
The restructuring of companies by acquisition is governed by the SEBI Regulations (Substantial Acquisition of Shares and Acquisition) of 1997. These regulations have been developed in such a way that the acquisition and takeover process is carried out in a well-defined and orderly manner in accordance with fairness and transparency.
'Acquirer' is defined in the context of this regulation as an individual who acquires or agrees directly or indirectly to acquire shares or voting rights in the target company or acquires or agrees to acquire 'control' over the target company, either by himself or with any individual acting in conjunction with the acquirer.
The term 'control' includes the right to appoint a majority of directors or to control any person or person acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights, or shareholder agreements or voting agreements, or in any other manner, to exercise management or policy decisions.
This implies that where there are two or more persons in control of the target company, no management control should be considered to be the cessation of any of those persons from such control.
Certain categories of individuals are required to disclose to that business their shareholding and/or control in a listed company. In turn, such firms are required to disclose such details to the stock exchanges where the company's shares are listed.
In the event of an acquisition of 5% and more of a company's share or voting rights, an acquirer would have to disclose the aggregate of his shareholding or voting rights in that company to the company and to the stock exchange where the target company's shares are listed at every stage.
No acquirer should acquire additional shares or voting rights either by himself or through/with persons acting in concert with him, unless such acquirer makes a public notice to acquire shares in accordance with the regulations. The mandatory public offer is triggered on the basis of regulations:
i) A limit of 15% or more, but less than 55% of a company's shares or voting rights.
ii) The limit is 55% or more, but less than 75% of the shares. In the case where the target company obtained the listing of its shares by making an offer to the public of at least ten per cent of the size of the issue in accordance with the relevant clause referred to in the 1957 Securities Contracts (Regulations) Rules or with regard to any relief granted by strict enforcement of that rule.
Then, instead of 75%, the limit would be 90 percent. In addition, if the acquisition (holding 55% but less than 75%) wishes to consolidate its holding while ensuring that the public interest in the target company does not fall below the minimum level permitted by the listing agreement, it may do so only by making a public announcement in accordance with those provisions.
No acquirer should acquire control over the target company, irrespective of whether or not there has been any acquisition of shares or voting rights in the company, unless such a person makes a public announcement to acquire shares and to acquire such shares in accordance with the regulations.
The regulations give sufficient scope for the consolidation of existing shareholders and also cover the scenario of indirect acquisition of control. The Takeover Panel constituted by the SEBI shall examine the requests for takeovers.
Key Takeaways:
- In corporate finance, a takeover can be structured in a variety of ways. An acquirer may choose to take over the controlling interest of the outstanding shares of the company, purchase the entire company directly, and merge the company acquired to create new synergies, or acquire the company as a subsidiary.
- Takeovers can be carried out by buying a majority stake in the target firm. Takeovers are also commonly carried out through the process of merger and acquisition. The company making the bid is the acquirer in a takeover and the company it wants to take control of is called the target.
- The restructuring of companies by acquisition is governed by the SEBI Regulations (Substantial Acquisition of Shares and Acquisition) of 1997.
- 'Acquirer' is defined in the context of this regulation as an individual who acquires or agrees directly or indirectly to acquire shares or voting rights in the target company or acquires or agrees to acquire 'control' over the target company, either by himself or with any individual acting in conjunction with the acquirer.
Anti-takeover defenses:
Hostile Takeovers
The acquirers normally use the following hostile takeover methods:
- Toehold acquisition – A purchase on an open market of target shares. They allow the acquirer to become a shareholder of the target and, if the takeover attempt proves unsuccessful, provide an opportunity to sue the target later on.
- Tender offer – An offer by an acquirer to the shareholders of the target to purchase their shares at a premium above the market price. Typically, a partial, two-tier, front-end loaded tender offer includes a back-end merger. Generally, the takeover literature treats tender offer as a technique of hostile takeover. However, if it favours the interests of the majority of shareholders, it should not be treated as hostile. To approve the relevant merger or acquisition, such a majority should be adequate. It would render virtually any merger or acquisition hostile to claim that any tender offer is hostile.
- Proxy fight – A request to vote for insurgent directors by shareholder proxies. Together with "board packing," proxy fights can run, where the number of board members increases and the acquirer plans to fill this increase with his slate of directors.
Targets normally devise the following defenses in response to these hostile takeover techniques:
The repurchase of stock (also known as a self-tender offer) is a purchase from its shareholders of its own-issued shares by the target. This is an effective defense that such prominent anti-takeover defense cases as Unitrin and Unocal v. Mesa Petroleum Co. have been successfully passed.
Poison pill (aka shareholder rights plan) is a distribution of rights to purchase shares of the target or the merging acquirer at a substantially reduced price to the target's shareholders.
A purchase by an acquirer of a certain percentage of the target's shareholding is what triggers the execution of these rights.
These rights can significantly dilute the acquirer's shareholding in the target if exercised and can thus deter a takeover.
One of the most powerful defenses against hostile takeovers is the poison pill.
Flip-in, flip-over, dead hand, and slow/no hand may be the pills.
- Flip-in poison pill can be “chewable,” This implies that if the tender offer is an all-cash offer for all the target shares, the shareholders can force a pill redemption by a vote within a certain timeframe. The poison pill can also provide a redemption window. That is a period within which the pill may be redeemed by the management. Therefore, this window determines the moment when the right of management to redemption ends.
- “Dead hand” pill creates continuing directors. These are the directors of the current target who are the only ones that can redeem the pill once the target is threatened by an acquirer. While the earlier court decisions restricted the use of dead hands and no hand pills, such pills are upheld by the more recent decisions.
- “No hand” (aka “slow hand”) pill It prohibits the pill from being redeemed within a certain period of time, such as six months, for example.
The Staggered Board is a board in which only a certain number of directors are re-elected annually, usually one third. It is a powerful defense against taking over, which may be stronger than is generally recognized. The latter resisted this type of defense for the reason that it was too strong and reduced returns to the target's shareholders.
Shark repellants are certain provisions in the charter or bylaws of the target that deter the desirability of a hostile takeover by an acquirer. Typically, this defense involves a requirement for a supermajority vote regarding a merger of the target with its majority shareholder. In the target's certificate of incorporation or bylaws, this defense also includes other takeover deterrent provisions.
Golden parachutes are additional compensation to the top management of the target in the event that its employment is terminated after a successful hostile acquisition. Since these compensations reduce the assets of the target, this defense lowers the amount that the acquirer is willing to pay for the shares of the target. Thus, this defense may damage shareholders. It, however, deters hostile takeovers effectively.
Greenmail is a buyout with a premium on the market price of its own shares from the hostile acquirer, which results in the acquirer's agreement not to pursue control of the target in the near future. The taxation of greenmail was used to present a significant barrier to this defense. In addition, the statute may require the approval of the shareholder to repurchase a certain amount of shares at a premium.
The Standstill Agreement is an undertaking by the acquirer not to acquire, within a certain period of time, any further shares of the target. An additional defense that usually accompanies the above-described greenmail is a standstill agreement.
Leveraged recapitalization (also known as corporate restructuring) is a series of transactions intended to affect a corporation's equity and debt structure. Usually, recapitalization includes such transactions as
(i) Sale of property
(ii) Issue of debt
(iii) Dividend distribution.
The leveraged buyout is a management purchase of the target with the use of debt financing. The target is burdened with debt by this defense. The management becomes a bidder in such a case and competes for control over the target with a hostile acquirer.
Crown jewels are options that allow a favored party to purchase a key component of the target at a price that may be lower than its market value.
A self-tender offer by the target that burdens the target with debt is Scorched Earth.
In friendly mergers and acquisitions designed to deter hostile bids, lockups are defensive mechanisms. Included in the lockups are
(i) no-shop covenant
(ii) cessation/bust
(iii) Option for the purchase of a subsidiary
(iv) Reimbursement of expenses etc.
Pacman is a tender offer target for the acquirer's shares.
White Knight is a strategic merger that does not involve a change in control and relieves the responsibility of the target management to look for the best available price. The case of Paramount Communications, Inc. v. Time Inc. is an example.
White squire is giving a certain ownership in the goal to a friendly party by the target. This defense is effective against the acquisition of full control over the target by the hostile party by "freezing out" of minority shareholders.
16. Change of control provisions
The change of control provisions is the objective contractual arrangements with third parties which, in the event of a change in its control, burden the target.
Above all, the "just say no" approach is the development and implementation of a long-term corporate strategy by a board that allows the board to simply reject any potential acquirer's proposal that would not prove that his acquisition strategy matches that of the goal.
Key Takeaways:
- The takeover literature generally treats the tender offer as a method of hostile takeover. However, if it favours the interests of the majority of shareholders, it should not be treated as hostile.
- An offer by an acquirer to the shareholders of the target to purchase their shares at a premium over the market price. Typically, a partial, two-tier, front-end loaded tender offer includes a back-end merger.
- Golden parachutes are additional compensation to the top management of the target in the event that its employment is terminated after a successful hostile acquisition.
- Leveraged buyout is a management purchase of the target with the use of debt funding.
Asset Restructuring:
Asset restructuring is the process of buying or selling the assets of a company that are much more important than half of the consolidated assets of the target company. It is usually a one-time expense that, when the restructuring takes place, needs to be funded by any company.
Restructuring of assets is a cost that can occur during the entire process of strategically writing off its assets or sometimes moving the entire production facility to any new location, shutting down the production facilities, and laying off all non-strategic employees uniquely.
Typically, individuals take a loan from banks while buying any immobile property. Without proper background verification of the customers whether they would repay the loan amount with interest within the specified period or their creditworthiness, several banks lend them cash. Therefore, by increasing their fiscal debts, the chances of the loan going bad are rising significantly and could therefore harm these financial institutions.
The concept of asset restructuring has therefore been developed for the purpose of checking such frauds and providing an adequate remedy if sudden fiscal losses occur. Through such actions, several frauds were successfully prevented and a significant decrease in fraudulent and criminal activities was noticed in a unique way. Also, a robust asset restructuring mechanism could even prevent multiple lending frauds. The key project is operational in several businesses, and the same concept has been successfully implemented across several countries.
Due to a variety of reasons, asset restructuring could be implemented, including aiming the organization to become more competitive, survive successfully and emerge stronger from the existing hostile economic environment, or positioning the company to move to a completely new direction.
The management could consider strategic asset restructuring of the company during a key transition, a bankruptcy or a buyout. Asset restructuring could include several measures, such as streamlining and reorganizing core operations and management, consolidating new owners or buyer management teams, to eliminate diseconomies of scale.
Asset restructuring could involve new capital, new management, and any new opportunity for the business plan and organization to be rethought. Fruitful asset restructuring would usually lead to the valuation of a higher company.
For some clarity on asset restructuring, let's take some examples.:
Example 1: Assume that a bank has some old furniture and a traditional locker with it, as it could be treated as non-performing assets or NPA, which is of no use to the bank. Now, at some predetermined price, the top management of the bank decides to sell it off. It would make it possible for the bank to get rid of such NPAs while making some money from them, which was no use to the bank already.
However, a few points about accounting entries to be made when selling any fixed assets, including fixed assets, must be kept in mind,
- The recording of the asset's depreciation expense until the date of its sale;
- Removing the accumulated asset depreciation and cost;
- The total amount received shall be recorded;
- Any distinction must be recorded as a loss or gain.
Example 2: Consider originally buying a calculator for $100 while simultaneously depreciating by applying the straight-line depreciation method and having a salvage value of $0. For just 5 years in a row. After 2 years, the ledger entries will appear like this:
- Product – Calculator
Accumulated Depreciation
- $100 $20 (yr 1)
$20 (yr 2)
- The decision is, at present, to sell the calculator for $80. In addition, the entries must be made in such a way that the accumulated and equipment depreciation accounts are nullified as they would cease to exist after the transaction. Also, accounts receivable or money that is currently available due to the sale must also be considered. The corresponding journal entries appear as follows:
- Dr. Cash $80
- Dr. Accumulated Depreciation $40
- Cr. Product – Calculator
$100 $120 $100
- But they don't match those credits and debits. By entering another account referred to as Gain (Loss) on the Disposition of Assets or similar, it can be corrected. A credit entry is considered a gain (such as income) and a debit entry is considered a loss (such as Expense). In this case, a $20 credit entry is shown below:
- Dr. Cash $80
- Dr. Accumulated Depreciation $40
- Cr. Product – Calculator $100
- Cr. Gain or Loss on Deposit $20
- $120 $120
- Hence, credits and debits match!
- Let's see the effect on the Cash Flow Statement now. We note that the net value of the entire fixed assets would decrease across the balance sheet of the company (being a source of cash), and we have increased the total cash account. This highlights the transaction's cash flows.
- Another effect includes the Net Gain (Loss) on the disposition of the asset, which is again a non-cash activity that appears on the combined income statement of the company, while reducing or increasing taxable income. Depreciation Expenditure is also a non-cash activity that lowers or expands beyond limits on Net Income Before Taxes (NBIT). Finally, it appears as follows in the consolidated income statement:
- Revenue $100
- Minus Expense $20
- Net Profit from Operations $80
- Other Proceeds/Outlays
- Gain or Loss on disposing of the product $20
- Net Income before Taxes $82
- Taxes $5
- Net Income $77
- In the above example, a non-cash activity of $20 has overestimated the company's net income (whereas depreciation expenditure is believed to lower the net income as it is a non-cash expenditure). Therefore, this non-cash activity, as shown in the cash flow statements, must be deducted to compensate for the overstatement of net income. As associated with depreciation expenditure, it falls under operating cash flows.
- After the company's major non-core and non-profitable assets have been restructured, its business will become attractively integrated and highly profitable. The organization mainly hires legal and financial advisors to negotiate and develop restructuring plans strategically.
- Asset restructuring, as the sale of non-strategic assets, must lead to much smoother and highly economical business operations. In turn, it is believed that the purchase of several other important assets crucial to expanding business operations will continue to deliver sustainable long-term business growth while offering attractive returns to shareholders
Key Takeaways:
- Asset restructuring is the process of buying or selling the assets of a company that are far more important than half of the consolidated assets of the target company.
- Usually, it's a one-time expense that any company needs to fund when the restructuring takes place.
- Due to a variety of reasons, asset restructuring could be implemented, including aiming the organization to become more competitive, survive successfully and emerge stronger from the existing hostile economic environment, or positioning the company to move to a completely new direction.
- Asset restructuring may involve new capital, new management and any new opportunities for the business plan and organization to be rethought.
Liability Restructuring:
Debt restructuring is a process used by businesses to avoid the risk of default or lower available interest rates on existing debt. Individuals on the verge of insolvency are also restructuring their debt, as are countries heading for sovereign debt defaults.
When they are facing bankruptcy, some businesses seek to restructure their debt. Many loans could be restructured by a company so that some are subordinate to other loans in priority. If the firm files for bankruptcy, senior debt holders are paid before the lenders of subordinated debts. To avoid potential bankruptcy or default, creditors are sometimes willing to change debt terms.
Typically, the debt restructuring process involves decreasing the interest rates on loans, extending the dates when the liabilities of the company are due to be paid, or both. These steps enhance the chances of the company paying back its obligations. Creditors understand that, should the company be forced into bankruptcy or liquidation, they would receive even less.
For both entities, debt restructuring can be a win-win because the company prevents bankruptcy, and lenders typically receive more than they would through a bankruptcy procedure.
A debt-for-equity swap could also be part of a debt restructuring. This occurs when, in return for equity, creditors agree to cancel a portion or all of their outstanding debts. When the debt and assets are significant, the swap is usually a preferred option and forcing it into bankruptcy would not be ideal. The creditors would rather take control as a continuing concern of the distressed company.
A business seeking to restructure its debt could also renegotiate "take a haircut," with its bondholders in which a portion of the outstanding interest payments would be deducted or a portion of the principal would not be repaid.
To protect itself from a situation in which interest payments cannot be made, a business will often issue callable bonds. In times of decreasing interest rates, a bond with a callable feature can be redeemed early on by the issuer. This enables the issuer to restructure the debt in the future because, at a lower interest rate, the existing debt can be replaced with new debt.
Practical Problems:
With creditors and tax authorities, individuals facing insolvency can renegotiate terms. An individual who is unable to continue making payments on a $250,000 subprime mortgage, for example, could agree with the lending institution to reduce the mortgage to 75% or $187,500 (75% x $250,000 = $187,500). In return, when it is sold by the mortgage, the lender could receive 40 percent of the house sale revenue.
Countries may face sovereign debt defaults, and this has been the case throughout history. Some countries choose, in modern times, to restructure their debt with bondholders. This can mean moving debt from the private sector to institutions in the public sector that may be better able to deal with the impact of a default in a country.
By agreeing to accept a reduced percentage of the debt, perhaps 25 percent of the full value of the bond, sovereign bondholders might also have to "take a haircut" It is also possible to extend the maturity dates on bonds, giving the government issuer more time to secure the funds required to repay its bondholders.
Unfortunately, even when restructuring efforts cross borders, this type of debt restructuring doesn't have much international oversight. Debt restructuring, when a company, individual, or country is in financial turmoil, provides a less costly alternative to bankruptcy. It is a process through which debt forgiveness and debt rescheduling can be obtained by an entity to prevent foreclosure or liquidation of assets.
- Consider a calculator originally purchased for $100 while simultaneously depreciated by applying the straight-line depreciation method and having a salvage value of $0. for just 5 years in a row. The ledger entries would seem like this after 2 year:
- Product – Calculator
Accumulated Depreciation
- $100 $20 (yr 1)
$20 (yr 2)
- The decision is, at present, to sell the calculator for $80. In addition, the entries must be made in such a way that the accumulated and equipment depreciation accounts are nullified as they would cease to exist after the transaction. Also, accounts receivable or money that is currently available due to the sale must also be considered. The journal entries appear as follows for the same:
- Dr. Cash $80
- Dr. Accumulated Depreciation $40
- Cr. Product – Calculator
$100 $120 $100
- But they don't match those credits and debits. By entering another account referred to as Gain (Loss) on the Disposition of Assets or similar, it can be corrected. A credit entry is considered a gain (such as income) and a debit entry is considered a loss (such as Expense). In this case, a $20 credit entry is shown below:
- Dr. Cash $80
- Dr. Accumulated Depreciation $40
- Cr. Product – Calculator $100
- Cr. Gain or Loss on Disposition $20
- $120 $120
- Hence, credits and debits match!
- Let's see the effect on the Cash Flow Statement now. We note that the net value of the entire fixed assets would decrease across the balance sheet of the company (being a source of cash), and we have increased the total cash account. This shows the transaction's cash flows.
- Another effect includes the Net Gain (Loss) on the disposition of the asset, which is again a non-cash activity that appears on the combined income statement of the company, while reducing or increasing taxable income. Depreciation Expenditure is also a non-cash activity that lowers or expands beyond limits on Net Income before Taxes (NBIT). Finally, it appears as follows in the consolidated income statement:
- Revenue $100
- Minus Expense $20
- Net Profit from Operations $80
- Other Proceeds/Outlays
- Gain or Loss on disposing of the product $20
- Net Income before Taxes $82
- Taxes $5
- Net Income $77
In the above example, a non-cash activity of $20 has overestimated the company's net income (whereas depreciation expenditure is believed to lower the net income as it is a non-cash expenditure). Therefore, this non-cash activity, as shown in the cash flow statements, must be deducted to compensate for the overstatement of net income. As associated with depreciation expenditure, operating cash flows are included.
Key Takeaways:
- Debt restructuring is a process used by businesses to avoid the risk of default or lower available interest rates on existing debt. Individuals on the verge of insolvency are also restructuring their debt, as are countries heading for sovereign debt defaults.
- A debt restructuring could include a debt-for-equity swap as well. This occurs when, in return for equity, creditors agree to cancel a portion or all of their outstanding debts.
- To protect itself from a situation in which interest payments cannot be made, a business will often issue callable bonds. In times of decreasing interest rates, a bond with a callable feature can be redeemed early on by the issuer.
Reference Books:
1) Fundamentals of Financial Management by D. Chandra Bose, PHI Learning Pvt. Ltd., New Delhi
2) Fundamentals of Financial Management by Bhabotosh Banerjee, PHI Learning Pvt. Ltd., New Delhi
3) Fundamentals of Financial Management by Vyuptakesh Sharma, Pearson Education, New Delhi
