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Impact Of Financial Crisis On The Capital Structure Decision Making Of The Firm - Essay Example

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Impact Of Financial Crisis On The Capital Structure Decision Making Of The Firm

The underlying discussion has developed the reference from the literature related to the capital structure theories and the brief about the financial crisis of late 2000s. The discussion also addresses the firms’ response to the financial crisis by adjusting mix of the capital structure. Therefore, for clear assessment along with overall global assessment, capital structure adjustments of Tesco and Dell have been discussed in the report. The report also has presented alignment of the responses of the capital structures with theories. FINANCIAL CRISIS Financial crisis have always been the dominant factor for determining trends and practices in the economic scenario. A financial crisis traces the reasoning from the excessive loans such as sub-prime mortgages as well as financial instrument of debt derived from such loans (Mizen 2008). Crisis originated from US in late 2000s spread across Europe and then to world owing to the benefit of diversification that businesses attempted to gain from spreading risk across local and international markets (Fosberg, 2010). First strong hit from financial crisis and its intensity was revealed in late 2007 upon the Bear Stearns’ declaration about evaporation of the value of major assets held by Bear Stearns’s hedge funds. ...
ct of financial crisis then resulted in continuity as Fannie Mae and Freddie Mac declared bankruptcy in third quarter beginning of 2008 followed by government takeover. Similar month also witnessed another major shock from financial crisis as Lehman Brothers declared bankrupt and immediately next day another giant AIG ended up receiving $85 billion credit facility from NY Fed to sustain. Efforts to sustain the steep fall of the financial stability of bank and institutions Troubled Asset Relief Program (TARP) was launched (Fosberg, 2010). TARP performance has also been bringing losses to treasury as TARP invested US $25 million in the bank while managed to fetch only US $13.5 million on sale of preferred stock of invested in financial institutions. TARP is also actively making efforts in closing down its program for banks though it still held the share for 199 banks (Sparshott, 2013). Being international firms, all these apart from impact on local financial market had detrimental impact on the international financial markets and hence international firms locally. Estimation of the reasons of the financial crisis, other than the core reason of subprime loans backed by subprime mortgages, has been found many. Such as among various factors discussed for fact has been the claim to the performance of respective roles of asymmetric information etc (Miglo, 2010). Further, another core factor along with dominant role of agency problem mounted the issue. Agency problems’ role was initially ignored to be addressed for the level of attention required (Miglo, 2010). In addition to these, role of already stressed factors such as taxes and bankruptcy cost in capital structure theories were receiving less attention in operational practices and hence contributed to the financial ...Show more


IMPACT OF FINANCIAL CRISIS ON THE CAPITAL STRUCTURE DECISION MAKING OF THE FIRM INTRODUCTION Capital structure of the firm is a dynamic decision and this decision faces impact from large number of factors (Miglo, 2010). Accounting for the wide variety of factors both internally and externally, firms’ capital structure responds to changing dynamics…
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Impact Of Financial Crisis On The Capital Structure Decision Making Of The Firm essay example
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