you must provide an educated responses for number 1 and 2.
1)This week we address solvency of companies, a longer-term view than liquidity. Solvency can have many components.
One example of focusing on liquidity and solvency involves buyouts of company which change capital structures trading significant debt for equity. Elon Musk’s current effort to buy Twitter is an example. There are mixed views on whether or not the deal will be completed. Recently Twitter shares closed at a 10% discount to the buyout price (21% annualized) indicating the risk premium of holding shares until the deal goes through (Bary, 2022). Some of the liquidity risks are specific to Musk. He has margined $12.5 million using Tesla stock to help finance the deal and a drop in Tesla stock could pressure him (Bary). Estimates are that annual interest expenses will increase from $51 million to $600 million based on an estimate of net debt of $10 billion (Bary). Based on the leverage, Twitter’s debt rating could fall from high-junk level ratings of Ba2 to single-B (Bary). Musk’s ability to raise revenues and to cut costs will be important to long-term success.
2) Solvency is difficult to assess due to the relation of not being able to determine the L-T Debt capital of a company within a better means that doesnt allow the leading risk towards defaulting on company obligations. When dealing with solvency, the risk associated with this default on long-term debt capital repayment creates difficulties when being analyzed due to there being various types of risk continuously arising with an ever-changing market condition. Thus, a market can never be predicted in advance.
An example of this is the risk associated with downside of the economy and recession in the economy cannot be predicted. When there will be higher amount of debt capital, the company will be able to maximize upon its total rate of return on equity at the time of economic expansion, but the total risk will be increasing at the time of economic recession and hence there will be increase in risk which is not properly determined by investors.
There is importance of capital structure in predicting future solvency issues because the debt equity ratio or debt to capital ratio should always be looked upon from the perspective of the overall industry in order to analyze the risk associated with default. If the company is taking too much of debt capital, then it should be analyzed in advance, and it will help in analyzing the risk associated with default on debt capital. Solvency refers to a company’s capacity to meet long-term financial obligations. When analysts want to learn more about a company’s solvency, they compare the entire worth of its assets to the total obligations it owes. When an organization’s current assets surpass its current liabilities, it is said to be solvent.
