DEBT AND FOREIGN EXCHANGE

Debt and Foreign Exchange



Debt and Foreign Exchange

Evaluate the view, within the context of current theories and evidence that the distinctions between debt and equity are disappearing

As during the past decade the capital structure of the organizations have changed a lot, financial security characteristics have also changed. Warrants, yield enhancements, variants of preferred stock, and junk bonds have become very much common in private loan contracts and in the credit markets and the traditional legal and financial distinctions between the equity and debt have been challenged by these innovations (Kopcke and Rosengren, n.d, pp).

The long-term survival of a company depends on its profitability and liquidity. Profitability and company's survival are closely interrelated and are of great importance in determining the effectiveness of the production. Profit is an absolute indicator for return. It is a relative index, which measures the efficiency of use of resources of the enterprise, innovation and investment in the production, sustainable production of a particular type of goods, services and works.

Profitability is the relationship between the utility and the investment needed to achieve it. Profitability measures the effectiveness of a company's management, as evidenced by the profits earned from the sales and use of investments, their category and regularity is the tendency of profits. It is said that a company is profitable when it generates enough profit or benefit, that is, when your income is greater than its costs, and the difference between them is considered acceptable. But right when evaluating the profitability of a company is to evaluate the relationship between profits or revenues, and investment or resources used to get (Bradley M., Jarrell G., Kim H., 2009).

As far as Liquidity is concern, companies need immediate cash to run their daily operation and payments. The company's liquidity is a measure of whether company is able to pays its debt or not in order to continue their activities. It is a sort of the engine for business survival. Measuring the liquidity of the company is also the evaluation of their resources in relation to its expenses. If company has standard liquidity comparing with the industry, the firm can put an end to short-term bonds in order to sustain business relationships. It can also adjust its various charges from financial institutions, social security contributions, wage payments and payables. The liquidity of a company is assessed through a table as cash flow analysis and cash compared to working capital needs. The company can also opt for a cash flow to better determine its operating cash flows and its resources (Reilly, Frank K. & Brown, Keith C., 2003). 

The theory of corporate finance as a field of study is closer to the microeconomics since it studies the optimal decisions of economic agents assumed rational that can help the Organization in fixing its capital situation. Its main purpose is to define an optimal ratio between the expectation of financial return and its uncertainty, that is to say, its risk. The fundamental intuition linking risk and profitability an investor in an organization will require ...