Reference no: EM131794440

Part -1:

Shelf registration allows a firm to register inventory of securities for a period of two years. During that two year period of time, the firm is allowed to take the securities "off the shelf" and sell them as needed. The costs associated with selling the securities are reduced because only a single registration statement is required and shelf registration statement can cover multiple securities. Corporations gain flexibility, and they are able to sell small amounts of the securities it shelves. Greater flexibility in bringing securities to market in that securities can be taken off the shelf and sold within minutes. Shelf registration allows firms to periodically sell small amounts of securities, raising money as it is actually needed, rather than banking a large amount of money from a single security sale and spending it over time.

Parrino, R., Kidwell, D. S, & Bates, T. W. (2012). Fundamentals of Corporate Finance (2nd ed.). Hoboken, NJ: Wiley.

Part -2:

Modigliani and Miller's (MM) Proposition I under corporate taxes shows that the weighted average cost of capital will decrease as leverage increases, as long as the company is paying taxes. A company avoids a certain amount of taxes when leveraged because the interest on loans is tax deductable. Therefore, the cost of capital decreases when the money is borrowed to pay for the capital versus a company paying outright for the same capital. However, there is an agency cost of financial debt and distress that offsets the tax advantage. These agency costs typically occur because stockholders are trying to maximize their benefit if the firm is in financial distress. Unfortunately, the tactics they utilize can hurt bondholders, such as undertaking risky projects, a propensity towards underinvestment (why spend money and decrease value when the company is in dire straits), and issuing more dividends. The above theories can be applied to AT&T.

Parrino, R., Kidwell, D. S, & Bates, T. W. (2012). Fundamentals of Corporate Finance (2nd ed.). Hoboken, NJ: Wiley.

Part -3:

A dividend is something of value that is distributed to a firm's stockholders on a pro-rata basis-that is, in proportion to the percentage of the firm's shares that they own. A dividend can involve the distribution of cash, assets, or something else, such as discounts on the firm's products that are available only to stockholders. When a firm distributes value through a dividend, it reduces the value of the stockholders' claims against the firm. A dividend reduces the stockholders' investment in a firm by returning some of that investment to them. The most common form of dividend is the regular cash dividend, which is a cash dividend paid on a regular basis. These dividends are generally paid quarterly and are a common means by which firms return some of their profits to stockholders. The size of a firm's regular cash dividend is typically set at a level that management expects the company to be able to maintain in the long run, barring some major change in the fortunes of the company. Management does not want to have to reduce the dividend. Management can afford to err on the side of setting the regular cash dividend too low because it always has the option of paying an extra dividend if earnings are higher than expected. Extra dividends are often paid at the same time as regular cash dividends and are used by some companies to ensure that a minimum portion of earnings is distributed to stockholders each year. A special dividend, like an extra dividend, is a one-time payment to stockholders.

Special dividends tend to be considerably larger than extra dividends and to occur less frequently. They are used to distribute unusually large amounts of cash. A liquidating dividend is a dividend that is paid to stockholders when a firm is liquidated. Distributions of value to stockholders can also take the form of discounts on the company's products, free samples, and the like. These noncash distributions are not thought of as dividends, in part because the value received by stockholders is not in the form of cash and in part because the value received by individual stockholders does not often reflect their proportional ownership in the firm.

Parrino, R., Kidwell, D. S, & Bates, T. W. (2012). Fundamentals of Corporate Finance (2nd ed.). Hoboken, NJ: Wiley.

Part -4:

What is financial planning? What four types of plans are involved in financial planning

A financial plan is a set of actionable goals derived from the firm's strategic plan. The financial plan focuses on selecting the best investment opportunities and determining how to finance those investments at the lowest possible cost. The overall goal of the financial plan is to create as much value for the firm as possible. The major outputs from a financial plan are the pro forma financial statements. A financial plan provides a blueprint for the firm's future, aligns all operating units with the firm's strategic plan, and provides a common set of goals. An important benefit from financial planning is that it forces management to think through a number of alternative scenarios, which provides insights into dealing with unexpected problems as they arise. Finally, financial planning helps firms prepare contingency plans for events that are unlikely to occur but that would cause substantial financial injury if they did occur. Financial models are the analytical part of the financial planning process. A planning model is simply a series of equations that model a firm's financial statements, such as the income statement and balance sheet. Once the model is constructed, management can generate projected (pro forma) financial statements to determine the financial impact of proposed strategic initiatives on the firm.

For most financial planning models, a forecast of the firm's sales is the most important input variable. The sales forecast is the key driver in financial planning models because many items on the income statement and balance sheet vary directly with sales. Thus, once sales are forecast, it is easy to generate projected financial statements using the historical relationship between a particular account and sales.