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Impact of a Large Amount of Debt on Corporations Essay

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Updated: Sep 1st, 2021

The significance of debt with respect to corporation acquisition is that it can be utilized as a source of finance. Corporation can in turn use the fund sourced through debt to finance the corporation’s acquisition of other entities. Moreover, corporation can as well use the debt feature to fight take over attacks from its competitors (Louis S, 2004, pp.314). In this case the corporation incurs large debt by deferring interest. Huge debt will in effect make the corporation unattractive to buyers.

Corporations employ the deferred interest feature with the intent of increasing the amount of debt (Louis S, 2004, pp.317-318).This is whereby the corporation delays to pay the interest on loans or bonds, and pay later together with the principal loan amount. This implies that the accrued interest is added to the principal loan amount. This in essence enables the corporation to fight takeover attacks as well as achieving enough funds for acquiring other corporations. On the other hand interest rates resets allow the corporation to increase interest on loan bearing assets such as bonds and loans. The corporation debt increases when interest rates resets are positive (Louis S, 2004, p.319).

Interco in acquiring a large amount of debt made her look unattractive to buyers. Typically, very few firms would like to acquire with a large debt. This can effectively assist corporation in fight takeover.

Bonus plan and the approach of giving employees option to buy company stocks are techniques employed by firms to maintain talented workers as well as attracting new ones, in effort to improve corporation’s productivity (Anne B & James S, 1998, p.862).

Bonus plan allows the company to reward her workers for excellent performance. This motivates the employees to work harder, which consequently translates to high company’s productivity (Anne B & James S, 1998, p.869).

Another significant element of bonus plan is that is independent of the time span on which the employee as been with the company. This is to mean that both old and new employees are treated in similar way. This in turn can result to a vibrant workforce, which can improve the company’s production. Bonus plan therefore can impact positively on Buzzyears’ net income when implemented appropriately.

On the other hand the option of allowing employees to purchase company stock creates the feelings of ownership in his/her mind (Anne B & James S, 1998 p.856). This spirit encourages the employee to work more diligently. The knowledge that he/she will share the company’s profit can boost his/her morale. These in turn can results to overall increase in productivity in the company. Moreover, the worker in effect takes the leadership roles which ca result to better management of company’s resources.

Considering the both options, would advice Buzzyear Company to adopt bonus plan. This is due to the fact that bonus plan prospects’ of establishing continuous improvement in company’s productivity.

For subsidiary 1, that is MEOiL Oil Company, International Inc should adopt equity accounting method even it owns 75% of the Oil Company. This is because the government as issued a threat of nationalizing the subsidiary. This can be illustrated by the government’s removal of non-native employees from the operation of the company. Equity method considers the element of voting rights. International Inc can utilize this technique to reduce the voting rights of the Government (Shannon P et al, 2000, pp.39-50). This in effect will minimize the government’s influence on financial and operational policies of the Oil Company

For subsidiary 2 that is Ecological Inc, International Inc. should adopt cost accounting method. This is because Ecological Inc. is widely owned and also International Inc. owns only 15% of this subsidiary.

For subsidiary 3, that is Harmon national bank, International Inc should adopt consolidation method. This is because International Inc owns 100% of the Banks’ outstanding stock.

Works cited

Adrew Oswald (1997). Happiness and Company Performance.Economic journal Vol. 7 pp. 1815-1831

Anne Bruce and James S. Pepitone (1998). Motivating Employees. Oxford University Press. pp. 851-870

Baumol William, L, and Edward P. (2007) Economic Theory. The Quarterly journal of Economics 115(1) pp.99-146

Louis S. Freeman (2004). Tax Strategies for Corporate Acquisition, Dispositions, Spin-offs, Joint ventures, Financing, Reorganizations and Restructuring. Practicing Law Institute. pp. 311-320

Shannon P. Prat, Robert Reily and Robert P. (2000) Accounting Methods.McGraw-hill Professional. pp. 39-50

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