![]() However, the previous PM of Australia, Tony Abbott, had also been nearly put in a similar situation with the New Zealand flag. This is evident since PM John Key has been seen being photographed in a newspaper with the Australian Flag during international visits. According to Prime Minister John Key, he feels that the Australian and New Zealand flag are too similar and that other countries leaders get confused between the two (Moir, 2015). With these reasons I believe that the flag should not be change. New Zealand is still a dominion of the British Empire. There are other pressing issues facing New Zealand and the flag change is not one. It also has been heavily publicized that the flag should not change with many citizens voicing their opinions to not change the flag. The premises for this are that Prime Minister John Key’s reason for a flag change is not a strong enough reason to justify a flag change. In this paper, I will argue that in New Zealand’s current predicament, the nations flag should not change but be open to it in the future. The leverage ratio measures the firm’s liquidity to repay its liabilities, the inclusion of intangible asset would not be efficient as it is difficult to sell thus would be a poor representation of liquidity. Also, the inclusion of intangible assets may allow the firm to take on more liabilities, and not be in breach of their debt covenants. Intangible assets are also very difficult to measure as it has no physical form and the value of the asset is very volatile, as it is very sensitive to changes (especially if the firm is facing financial distress). Intangible asset is not included in the denominator for calculating the debt/leverage ratio because the inclusion is considered inefficient in calculating the leverage ratio as it is not a good source of security or support against debt. Hence why firms have an incentive to align its interest with debt holders. So, by negotiating debt contracts with restrictive covenants, this will satisfy both parties. This leads to firms unable to maximize value for their shareholders whilst debt holders have their investment still protected. Example of these costs would be a penalty fee to the firm, renegotiation costs which may include higher interests and more restrictive covenants or a force repayment. Debt holders are price protected because if firms breach the covenants then the costs associated with the breach lies solely on the firm. Firms can further align their interest with debtholders by hiring auditors, a third party, to show that they are complying with the covenants. These covenants provide some assurance to debt holders that firms will not be opportunistic and also able to repay its debt and interest. Maintain the leverage ratio (Total Liability/Total Tangible Assets) > 0.6). Such restrictive covenants are: dividend payout restrictions whilst there is interest unpaid (stops excess dividends), sale of major assets requires approval from debt holder, limit to taking on additional debt with higher or same priority (helps prevent claim dilution) and accounting-based restrictions (e.g. This is because debt holders are not naïve and are able to price protect themselves, fully if in a perfect world, by negotiating restrictive covenants in their debt contracts that prevent/discourage the firm from being opportunistic. In a debt contract, the cost of being opportunistic falls entirely on the firm. A key assumption from the agency theory is that individuals are rational self-interested wealth maximisers which in turn leads to the agency problem (people being opportunistic). ![]() Specifically, it is a derivative financial instrument as its value is derived from an underlying asset (the underlying asset the put option is selling), it is settled on a specific future date and it can require no initial net investment.įirms have an incentive to align their interest with debtholders. ![]() A put option fulfils the requirements of a financial instrument. The holder (an entity) has a financial asset as it has the option to execute the options contractual right to exchange financial assets or liabilities with another entity(writer) under conditions that are potentially favorable. The writer would then have a contractual obligation to deliver cash or another financial asset to the holder (another entity). In this case a put option gives rise to a financial liability to the writer (an entity) when the option is exercised. Where by the underlying asset can be anything.įrom NZ IAS 32 a financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. A put option is a financial instrument that gives its holder the right to sell some underlying asset on or before a specified date at an agreed price.
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