Using the American Recovery and Reeinvestment Act of 2009, need more clarity on:
How the Tax Shield could help a business who is about to close their doors gain control over their debt financing and how to evaluate the financial stress of a business who was struck by a natural disaster after they received ARRA gains. Is bankruptcy the only option?
How can a business who is just going to market use WACC to optimize their use of funds?© BrainMass Inc. brainmass.com December 24, 2021, 11:03 pm ad1c9bdddf
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Tax shield is a reduction in income for a person or a business by claiming allowable deductions. This is a reduction in income taxes that a person or a business gets from taking allowable deduction. Now in the American Recovery and Reinvestment Act of 2009, companies get several tax incentives. One of these is that companies are allowed to use current losses to offset profits made in the previous five years, instead of two, making them eligible for tax refunds. If a company is about to close their doors, it means that it has made large losses in its current year. If the business offsets these losses against profits made during the past five year then it is likely that the company will get a tax refund under the American Recovery and Reinvestment Act of 2009. This refund money will help the business get control over its debt financing and avoid closing its doors. The law is made to enable businesses to survive.
The financial stress of a business that has been struck by natural disaster after they received ARRA gains is to carry out an internal stress testing. It must test its own ability to meet capital and liquidity requirements in stressed condition. After the internal stress test has been carried out an external stress test should be carried out by an outside firm. Firms carry out such tests for specific firms that have been impacted by circumstances. These firms will test the ability of your firm to meet minimum specified capital levels throughout the stress period. These firms give a stress score.
Bankruptcy is not the only option. If the firm has been hit by a disaster, the government usually passes relief aid. For example, the Congress passed a storm relief air for victims of Sandy. In addition, there may be additional tax shield for a firm hit by a natural disaster. Finally based on the stress score the business may be able to get finance from banks or other financial institutions. The purpose is to avoid bankruptcy and liquidation.
When a businessman is going to the market he will be making investments. For evaluating the alternative investments, he will use WACC. When the returns are in the form of future cash flows, the businessman will use WACC as the discount rate. The businessman can use WACC as a hurdle rate against with he may assess return on invested capital performance. The businessman should use WACC as a tool to decide whether he should invest or not. The WACC is the minimum rate of return at which the company produces value for its investors. WACC will help the business man make prudent investments.
Fundamentals of Financial Management, , Eugene Foster Brigham, Joel F. Houston, E12, Cengage Learning, 2009