Limited Liability Entities - Essay Example

Owners of equity are not the managers of their organizations. Instead, they delegate this function to other people who they believe are capable of perfectly handling these duties. This way, the owners of equity reduce the likelihood of a risk of loss happening. Some investors start a business in an industry that they have little knowledge of. However, by making use of experts in that industry, they significantly reduce their risk of loss. Hired managers undertake their duties with a lot of caution, avoiding causing losses to the organization.

Separation of ownership and control is a virtual necessity for the successful financing of large corporations since it leads to high performance which subsequently attracts more investors and increases confidence among creditors. If an organization is managed by separate persons other than the owners, due care and diligence are accorded to the organization by the management. They exhibit high levels of accountability in delivering their duties and services to the organization. With the knowledge that they are held accountable for any in eventualities that may arise from misrepresentation, they show care in their activities. This leads to high-performance standards, which attract more investors and shareholders to the organization.

2. The tendency of debt ratios varies tremendously across individual firms. However, debt ratios tend to stabilize within individual firms over a long period supporting the pecking order model. Pecking order states that as the cost of financing increases, so does asymmetric information. Every organization gets its financing from three sources, which include internal funds, debt, and equity financing. Companies, therefore, have to prioritize their sources of financing. Initially, organizations put into consideration their internal sources of funds. If internal funds cannot adequately meet the organization’s obligations the management considers the use of debt (Baker & Martin, 2011). However, in case this too does not help, the company might consider raising equity as a measure of ‘last resort.’ Therefore, internal financing is used first, when it fails the company considers the debt, and when this does not work out, the company raises equity. This theory holds that businesses will conform to a hierarchy of financing resources and prefer the use of internal financing when it is available. Debt on the other hand is preferred over raising equity in the case of debt financing.
The extent to which a company goes to finance its operations and the type of fund chosen, the management is sure that the company will in future be in a position to repay. Mostly, internal financing is inadequate. In deciding the most appropriate form of funding between equity and debt, the organization opts for debt financing. There are two types of debt financing available, that is short-term and long-term financing. It is due to the use of debt financing that debt ratios tremendously vary across firms but tend to be stable within individual firms over long periods as companies repay their debts.

3. To improve a company’s profitability or popularity, many companies are either involved in hostile takeovers, mergers, acquisitions, and buyouts. Many organizations across the globe seek to either acquire their smaller competitors in the industry to improve their efficiency or increase their capacity, while mergers are the coming together of two firms that are at a similar level to create a stronger brand. In most cases, the resultant firms are stronger and perform better (Sherman, 2004).
NationsBank & Bank America merger is considered one of the largest acquisitions in history. The move saw a $64 billion acquisition of Bank America Corp by the Nations Bank. The move led to the creation of Bank of America. The acquisition was focused on creating a solid investment bank in America. The motive behind this merger was the creation of a stronger investment bank. Huge sums of money were involved, with the bank having to pay. Financially, the merger led to an increase in the revenues of the two banks.
Campbell Soup Co. recently acquired organic baby food maker Plum Organics to increase its exposure and drive its sales high. This offered the company an opportunity to increase its brands’ visibility in the lucrative organic foods businesses to improve its growth. The company, whose products in the recent past saw an increase in demand was looking for an opportunity to increase its brand awareness and acquire a larger market share. This was the best way the company could have achieved this. As a result of this acquisition, the company increased its revenues as well as better performance in the market.

Recently, Rinaldi Bay Cookie Co of Australia bought out the Baryon Bay Cookie Company. In the buyout, Rinaldi Bay Cookie Co acquires full ownership of the company including trademarks as well as properties outside Baryon Bay. The company was bought as a going concern by Rinaldi Bay Cookie Co, in hopes of securing its future in the Australian food market. This presents Rinoldi Co with an opportunity to increase its revenues, while it has significantly saved Baryon from financial constraints