Strategic Financial Management

Strategic Financial Management
Strategic Financial Management

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Strategic Financial Management

Learning Outcomes

  1. Assess and evaluate the theoretical basis of financial strategic decision making

2. Analyse and interpret data, and by the integration of theory and practice, investigate and apply relevant tools to the assessment of a variety of business problems

3. Evaluate and synthesise the problem solving mechanisms from strategic financial decision making and assess the value to enhanced decision making of the application of relevant tools & techniques.

Assessment Task

Company A has the following budgeted income and expenditure for two potential  projects : Alpha and Beta

Year 1Year 2Year 3Year 4
Project Alpha
Income2,250,0002,500,0003,000,0003,250,000
Expenditure – plant and equipment (purchase)1,500,000   
Other expenses1,000,0001,100,0001,250,0001,500,000
     
Year 1Year 2Year 3Year 4
Project Beta
Income2,200,0002,200,0002,200,0002,200,000
Expenditure – plant and equipment hire375,000375,000375,000375,000
Other expenses900,000990,0001,000,0001,100,000

Strategic Financial Management

Additional information:

If the additional information does not indicate that it is project specific you are to assume that it is relevant to both potential projects;

  • Taxation is charged at 20% a year in arrears;
  • Extracts from the company financial statements are as follows: – Benchmarked gearing of 0.40:1; – Cash position:  cash at bank of £1 million;
  • The company are wishing to reduce their carbon footprint in line with their core strategic values of sustainable production.  They have determined that renting the equipment for Project Beta  would reduce their carbon emissions by 70% but Project Alpha’s would have a nil effect on their carbon footprint.
  • Project Alpha would require other projects to be put back by one year due to the initial capital investment required in Year 1.  It would not prevent these other projects from going ahead, but would delay their completion by one year – there is no quantitative financial data available for these other projects.
  • Usual margin that the company achieves on its products is between 15-25% on a cost plus basis.
  • The product that they are looking to introduce in both cases (A or B) is a product that already has an established market with both well established brand competitors and some substitutes.
  • The market is reasonable mature having been in existence for about 5 years, there are no patents or other protection rights for the existing competitors but competition is fierce.
  • This is a new product for Company A and would be entry into a new market of which they have no experience or established reputation.  However, they do sell a complementary product for which they are the brand leader both on cost and perceived quality.
  • They usually price on a cost plus basis but this is based upon the appropriateness of the method for the product being priced.
  • PROJECT ALPHA ONLY– the plant and equipment has no scrap value.

Requirements:  

(a) Calculate the CASH net present value of the two projects (including the taxation charge)  The discount factor is 10% and you should round your answer to the nearest full pound (not pence) . (10 marks)

(b) Critically evaluate the usefulness of net present value and two other methods as  project appraisal tools using academic references to support your answer. ( 15 marks – 600 WORDS)

(c) Having decided to use a traditional absorption costing method, the directors now need to decide on a pricing methodology.  You are required to evaluate the different ways in which a company can determine an appropriate price for its product and advise the directors, based upon the information within this assignment what pricing method would seem most appropriate for the company. (15 MARKS – 600 WORDS)            

TOTAL MARKS AVAILABLE: 40 MARKS

Strategic Financial Management

Key Resources/Reading

  • Arnold, G. Corporate Financial Management (2012)  5th edition chaps 14/15
  • Collier, P.M. Accounting for Managers 4th edition (2012) Wiley chaps 1/2/3/4/6/7
  • Grundy, T. Exploring Strategic Financial Management  (1998) FT Prentice Hall Chap 2 and 4
  • Johnson, G & Scholes, K. Exploring Corporate Strategy 9th edition (2010) 
  • Mills, R & Robertson, J Fundamentals of managerial accounting and finance (1999) chap 11
  • Proctor, R (2006) Managerial Accounting  for decision making  FT Prentice Hall Chaps 3-4

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Strategic Financial Management

  1. Net Present Values of project Alpha and Beta
 Project AlphaYear 1Year 2Year 3Year 4Year 5
Income2,250,0002,500,0003,000,0003,250,000 
Other expenses(1,000,000)(1,100,000)(1,250,000)(1,500,000) 
Net Profit1,250,0001,400,0001,750,0001,750,000 
Taxation (20%) (250,000)(280,000)(350,000)(350,000)
Expenditure – plant and equipment (purchase)(1,500,000)    
Net cash flow(250,000)1,150,0001,470,0001,400,000(350,000)
Discount factor (10%)0.909  0.826  0.751  0.683  0,621
Net cash flow(227,250)949,9001,103,970956,200(217,350)

NPV = (-227,250) +949,900+1,103,970+956,200+ (-217,350)

=2,565,470

Project BetaYear 1Year 2Year 3Year 4Year 5
Income2,200,0002,200,0002,200,0002,200,000 
Expenditure – plant and equipment hire(375,000)(375,000)(375,000)(375,000) 
Other expenses(900,000)(990,000)(1,000,000)(1,100,000) 
Net Profit925,000835,000825,000725,000 
Taxation (20%) (185,000)(167,000)(165,000)(145,000)
Net cash flow925,000650,000658,000560,000(145,000)
Discount factor (10%)0.909  0.826  0.751  0.683  0,621
Net cash flow840,825536,900494,158382,480(90,045)

NPV =840,825+536,900+494,158+382,480+ (-90,045)

    =2,164,318

Strategic Financial Management

  • Usefulness of net present value and two other methods as  project appraisal tools

Net Present Value

The net present value is considered one of the most valuable project appraisal tools due to its ability to determine the net cash flow at any particular present time (Collier, 2015). However, there are other useful factors in the application of net present value as discussed below.

The net present value is useful as a project appraisal tool because it helps investors to determine the viability of projects before they can invest in them (Collier, 2015). Through calculating the net present value of a project’s future cash flows, a company can determine whether the project is worth investing in. A negative net present value would indicate that the project is not viable while a positive net present value is an indication that the investor can go ahead to invest in the project (Arnold, 2013).

The net present value is useful because it recognizes the differences in money value and is hence useful in ensuring accurate projection of cash flow. In this relation, every period’s cash flows are discounted in order to provide for the fact that the future value of currency is worth less in terms of the present value (Erickson, 2013). This ensures that any income and expenditure is accurately measured to determine the present value of the project.

The net present value allows companies to make investment decisions regarding long-term projects whose cash flow projection is less certain than short-term projects. This is because the net present value recognizes the inherent uncertainty of long-term projects. To achieve this, net present value ensures that cash flows projected further into the project period have less impact on the present value than those which happen earlier in the project (Arnold, 2013). Through the use of net present value, firms put the cost of capital and inherent risk into consideration when making future predictions…..

Strategic Financial Management

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International Finance Discussion

International Finance
International Finance

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International Finance

Order Instructions:

Recently, Marriott International opened the Al Jadaff hotel in Dubai. Discuss qualitatively (no need to use any numbers) how Marriott International should adjust the estimated cash flow for the project and the discount rate when evaluating this project. Which adjustment (cash flow or discount rate) do you believe would be most effective in reflecting the risk of this foreign project?

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International Finance

Qualitative discussion on the adjustment of cash flows for Marriott International

Through the investment in the Al Jadaff hotel in Dubai, Marriott International exposes themselves to country risk. The firm may choose to use cash flow adjustment methods to determine the present value of the project – which would drive further operational, investment and financing decisions. The use of cash flow adjustments would primarily involve identification of prominent risk factors in each year (Damodaran, 2008). Each risk factor is used to discount the estimated cash flow for each year. The result is a net present value of the hotel determined from adjusted cash flows to various risk factors.

Discount Rate Adjustment

Alternatively, Marriott International may choose to use the discount rate as an adjustment method. In this case, when evaluating the Al Jadaff hotel project, the firm should use the prevailing discount rate as a measure to estimate the country’s risk rating. This done owing to the correlation between the discount rate and the project’s rate of return. As such, the adjustment to the rate of return or the discount rate in the capital budgeting approach may be useful in the determination of country risk (Madura, 2008, pp. 459 – 460).

Most effective approach in reflecting risk of the foreign project

The better method that provides an effective approach is the use of estimated cash flows. The effectiveness of this approach stems from the use of each individual cash flow and the specific form of risk affecting that particular cash flow….

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Foreign currency Transactions

Foreign currency Transactions
Foreign currency Transactions

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Foreign currency Transactions

Complete two exercises in accounting for foreign currency transactions and translating financial statements from a foreign currency into U.S. dollars.

With the expansion of U.S. business interests in foreign countries, the need to use and understand foreign currency transaction actions has become commonplace in accounting.

By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:

  • Competency 2: Evaluate the influence of global money markets on financial statements.
    • Journalize foreign currency borrowing transactions.
    • Determine the effective cost of borrowing.
    • Prepare financial statements in LCU units.
    • Translate financial statement amounts to U.S. dollars.
    • Compute translation adjustments.

Context

In today’s global economy, many companies transact business in currencies other than their reporting currency. Merchandise may be imported or exported with prices stated in a foreign currency. For reporting purposes, foreign currency balances must be stated in terms of the company’s reporting currency by multiplying it by an exchange rate.

To address this issue, accountants face two questions in restating foreign currency balances:

  • What is the appropriate exchange rate for restating foreign currency balances?
  • And how does one account for changes in the exchange rate?

For this reason, companies often engage in foreign currency hedging activities to avoid the adverse impact of exchange rate changes. Accountants must then determine how to properly account for these hedging activities.

Because many companies have significant financial involvement in foreign countries, the process by which foreign currency financial statements are translated into U.S. dollars has special accounting importance. The two major issues related to the translation process are:

  • Which method to use.
  • Where to report the resulting translation adjustment in the consolidated financial statements.

Translation methods differ on the basis of which accounts are translated at the current exchange rate and which are translated at historical rates. Accounts translated at the current exchange rate are exposed to translation adjustment. Different translation methods give rise to different concepts of balance sheet exposure.

Question to Consider

To deepen your understanding, you are encouraged to consider the questions below concerning foreign currency transactions and discuss them with a fellow learner, a work associate, an interested friend, or a member of the business community.

  • What are the reporting issues when a company transacts business in foreign countries?
  • How does a company become exposed to foreign exchange risk?
  • What is hedge accounting, and how is it applied?
  • Why would a company prefer a foreign currency option over a forward contract in hedging a foreign currency firm commitment?
  • Why would a company prefer a forward contract over an option in hedging a foreign currency asset or liability?
  • What is a translation adjustment, and how is it computed?
  • What role do exchange rates play in the translation process?
  • How does a remeasurement differ from a translation?
  • What methods should be used to translate financial statements?

Resources

Required Resources

The following resources are required to complete the assessment.

Library Resources

Flood, J. M. (2014). Wiley GAAP 2014: Interpretation and application of generally accepted accounting principles (12th ed.). Hoboken, NJ: John Wiley & Sons.

  • Chapter 51, “ASC 830 Foreign Currency Matters.”
Internet Resources

Access the following resources by clicking the links provided. Please note that URLs change frequently. Permissions for the following links have been either granted or deemed appropriate for educational use at the time of course publication.

Hoyle, J. B., Schaefer, T., & Doupnik, T. (2014). Fundamentals of advanced accounting (6th ed.). New York, NY: McGraw-Hill Education.

  • Chapter 7, “Foreign Currency Transactions and Hedging Foreign Exchange Risk.”
  • Chapter 8, “Translation of Foreign Currency Financial Statements.”

Assessment Instructions

Complete Exercises 1 and 2 in the Foreign Currency Excel Workbook, linked in the Required Resources for this assessment. All financial information and applicable instructions are provided on each exercise worksheet.

Exercise 1: Foreign Currency Borrowing

  • Journalize foreign currency borrowing transactions.
  • Determine the effective cost of borrowing.

Exercise 2: Financial Statement Translation

  • Prepare financial statements in LCU units.
  • Translate financial statement amounts to U.S. dollars.
  • Compute translation adjustments.

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Partnerships Assessment

Partnerships
Partnerships

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Partnerships

Order Instructions

Complete two exercises in accounting for the equity of a pass-through entity, such as an LLC, limited partnership, or general partnership structure.

Partnerships are a common and popular form of business structure.

By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:

  • Competency 3: Evaluate partnership accounting issues.
    • Calculate needed partner investment.
    • Calculate goodwill resulting from admission of a new partner.
    • Calculate bonus resulting from admission of a new partner.
    • Calculate partnership capital balances.
    • Prepare a partnership liquidation schedule.

Context

The partnership form of business ownership is popular for many reasons, including the ease of creation and the avoidance of the double taxation inherent in corporate ownership. However, the unlimited liability normally restricts the growth potential for most partnerships. As a result, most partnerships remain small in relation to their larger corporate brothers.

During the formation and operation stages of a partnership’s life, several issues require closer study, because of their impact on the financial status of individual partners. Initially, there is the issue of allocating the initial contributions of each partner in relation to their ownership and liability share. During ongoing operations, the issue of allocating annual income and losses sustained by the business must be handled. Lastly, the issues of taking on new partners and the withdrawal of current partners will affect the financial stability of the partnership.

Although a business unit can exist indefinitely through the periodic admission of new partners, termination of business activities and liquidation of property can take place for a number of reasons. Several important financial issues surface during these times in the life of a partnership.

Questions to consider

erested friend, or a member of the business community.

  • How are partner contributions valued and recorded?
  • How is annual income allocated among individual capital accounts?
  • What restructuring takes place when new partners enter and existing partners leave?
  • Under what circumstances would a partnership be liquidated?
  • How should an accountant report liquidation of a partnership?
  • How are assets distributed during liquidation?

Consider the following case:

A client of the CPA firm of Smith and Wesson is a medical practice of seven local doctors. One doctor has been sued for several million dollars as the result of a recent operation. Because of what appears to be this doctor’s poor judgment, a patient died. Although that doctor was solely involved with the patient in question, the lawsuit names the entire practice as a defendant. Originally, four of these doctors formed this business as a general partnership. However, five years ago, the partners converted the business to a limited liability partnership based on the laws of the state in which they operate.

  • What liability do the other six partners in this medical practice have in connection with this lawsuit?
  • What factors are important in determining the exact liability, if any, of these six doctors?

Resources

Required Resources

The following resources are required to complete the assessment.

Resources

Hoyle, J. B., Schaefer, T., & Doupnik, T. (2014). Fundamentals of advanced accounting (6th ed.). New York, NY: McGraw-Hill Education.

  • Chapter 9, “Partnerships: Formation and Operation.”
  • Chapter 10, “Partnerships: Termination and Liquidation.”

Assessment Instructions

Complete Exercises 1 and 2 in the Partnerships Excel Workbook, linked in the Required Resources for this assessment. All financial information and applicable instructions are provided on each exercise worksheet.

Exercise 1: Partnership Operations

  • Calculate partnership capital balances.
  • Calculate needed partner investment.
  • Calculate goodwill resulting from admission of a new partner.
  • Calculate bonus resulting from admission of a new partner.

Exercise 2: Partnership Liquidation Schedule

  • Prepare a partnership liquidation schedule.

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Biblical Concepts of Finance and Accounting

Biblical Concepts of Finance and Accounting
Biblical Concepts of Finance and Accounting

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Biblical Concepts of Finance and Accounting

Order Instructions:

You will write an word essay in current APA format that focuses on how biblical concepts are related to the fields of accounting and finance. The essay must incorporate a thoughtful analysis (considering assumptions, analyzing implications, comparing/contrasting concepts) of accounting, finance, and your faith. The paper must include at least 3 peer-reviewed references in addition to the Bible and course textbook

Biblical Concepts of Finance and Accounting

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Biblical Concepts of Finance and Accounting

While the notion of a connection between religion and core concepts of finance and accounting may seem far-fetched initially, a deeper analysis and look into the religious laws and standings offers a different perspective. From such research and analysis of relevant sources, concepts such as savings, budgeting, maintenance of records, debt management, financial planning, and the importance of labor and productivity are clearly visible from a biblical perspective. This paper looks into the connection between various biblical concepts and their connection to finance and accounting.

A culture of savings

Saving is the concept and act of putting a share of income aside on purpose as a means of deferred spending. The financial reason behind the concept of spending is usually a means of reduction of costs, the creation of future cash flow, or a form of insurance. The concept of saving is fundamental in the areas of personal finance as well as business accounting. In personal finance, for example, the ability of an individual or a family to set some money aside each year during their active work age allows them to pursue a number of options in the future.

Such options include the ability to fund education for their offspring, capital for a business venture, and consumption during retirement. On the other hand, in business accounting, savings is predominantly in the reduction of costs such as costs of production, sales, and recurrent expenditures in a bid to improve the profit margin.

Biblical Concepts of Finance and Accounting

The concept of savings, as observed, is important in both personal finance and corporate accounting and finance procedures. In addition, several scriptures relate this concept to biblical teachings of savings. In Proverbs 21: 20, the bible states that “The wise store up choice food and olive oil, but fools gulp theirs down.” (Biblica, Inc., 2011) This is indicative of the wisdom of saving up for future uncertainties. The absence of such a saving culture is likened to a fool who eats up all their produce after a bountiful harvest.

In addition, Proverbs 22: 3 states, “The prudent see danger and take refuge, but the simple keep going and pay the penalty.” This implies the need for insurance and retirement plans in tandem with earlier examples as well as those provided by Rodgers and Gago (2006, pp. 129 – 131 ). Additional scriptures indicating the importance of saving include Genesis 41: 35, Proverbs 30: 24 – 25, and 2nd Corinthians 12: 14.

Debt Management

The ability to manage debt effectively is integral to personal and corporate finance and accounting. In personal finance, the wisdom to choose which form of debt is useful is critical to maintaining a level of financial wellness. Expanding on the example of the family used in the previous section, if the choice to spend the portion of income dedicated to irrelevant and depreciating purchases rather than an interest generating savings plan, the family would be in debt for a long period.

In the corporate context, a company that relies on borrowings to start and keep it afloat will always be in a losing battle and in a position of servitude (Despain, 2017, p. 409). Another key concept within the realm of debt management is cosigning, since the need to cosign implies a lack of trust between the lender and the borrower, thereby requiring a third party…..

Biblical Concepts of Finance and Accounting

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Consolidations Assessment

Consolidations
Consolidations

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Consolidations

Overview

Complete two exercises in accounting for outside ownership (noncontrolling interest) and eliminating intercompany transactions, resulting in unrealized gains and losses.

When one company acquires control of a subsidiary company, the ownership interest of the parent may be less than 100 percent.

By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:

  • Competency 1: Consolidate financial statement information.
  •   Calculate intra-entity transfer account balances.
  • Competency 2: Evaluate the influence of global money markets on financial statements.
  • Determine consolidated balances.

Context

A parent company need not acquire 100 percent of a subsidiary’s stock to form a business combination. Only control over the decision-making process is necessary—a level that has historically been achieved by obtaining a majority of the voting shares. Ownership of any subsidiary stock that is retained by outside, unrelated parties is collectively referred to as noncontrolling interest.

A consolidation takes on an added degree of complexity when a noncontrolling interest is present. The noncontrolling interest represents a group of subsidiary owners, and their equity is recognized by the parent in its consolidated financial statements. Valuation of subsidiary assets and liabilities poses a problem when a noncontrolling interest is present and follows the acquisition method. There are any number of challenges facing accountants with respect to noncontrolling interest issues. Central to these issues is the financial statement presentation for both entities.

In Assessment 1, you analyzed the deferral and subsequent recognition of gains created by inventory transfers between two affiliated companies in connection with equity method accounting. In that case, intra-entity profits are not realized until the earning process culminates in a sale to an unrelated party. A parallel logic can be applied to transactions between companies within a business combination. Such sales within a single economic entity create neither profits nor losses.

The opportunity for such direct acquisition, especially of inventory, is often the underlying motive for the creation of the business combination. Because the transaction was not made with an outside, unrelated party, the sales and purchases created by the transfer must be accounted for by accountants with each entity. This is true regardless of the asset, be it inventory, land, or depreciable assets.

Question to Consider

To deepen your understanding, you are encouraged to consider the questions below concerning consolidations and discuss them with a fellow learner, a work associate, an interested friend, or a member of the business community.

  • What accounting and reporting are appropriate for a noncontrolling interest?
  • How are additional stock purchases by a parent corporation in its subsidiary consolidated?
  • How are subsidiary revenues and expenses reported on a consolidated income statement when the parent gains control during the current accounting period?
  • What are the accounting and reporting effects, if the parent buys or sells shares of a subsidiary?
  • What are the accounting and reporting effects of intra-entity asset transfers?
  • What are the balance sheet effects of intra-entity transactions when a noncontrolling interest is present?
  • Why would a corporation choose one type of interest over the other when purchasing a stake in another corporation?
  • What are the advantages and disadvantages of each interest type for the acquiring and subsidiary corporation?

Consider the following case:

In 2001, PepsiCo and the Quaker Oats Company reached an agreement to become one company. Refer to the associated New York Times article and the SEC document linked in the Suggested Resources under the Internet Resources heading when considering the following:.

  • What type of marriage does this represent?
  • Who are the winners and losers?
  • Could this marriage happen today?

Push-down accounting is a method of accounting in which the financial statements of a subsidiary are presented to reflect the costs incurred by the parent company in buying the subsidiary, instead of the subsidiary’s historical costs. The purchase costs of the parent company are shown in the subsidiary’s statements. Although the use of push-down accounting for external reporting is limited, this method has gained favor for internal reporting purposes.

  • Why has push-down accounting gained popularity for internal reporting purposes?

Resources

Click the links provided to view the following resource:

Suggested Resources

                Carmichael, D. R., & Graham, L. (2012). Accountants’ handbook, volume 1: Financial accounting and general topics (12th ed.). Hoboken, NJ: John Wiley & Sons.

  • Chapter 20, “Partnerships and Joint Ventures.”
Internet Resources

Access the following resources by clicking the links provided. Please note that URLs change frequently. Permissions for the following links have been either granted or deemed appropriate for educational use at the time of course publication.

Book

Hoyle, J. B., Schaefer, T., & Doupnik, T. (2014). Fundamentals of advanced accounting (6th ed.). New York, NY: McGraw-Hill Education. 

  • Chapter 4, “Consolidated Financial Statements and Outside Ownership.”
  • Chapter 5, “Consolidated Financial Statements – Intra-Entity Asset Transactions.”

Assessment Instructions

Complete Exercises 1 and 2 in the Consolidations Excel Workbook, linked in the Required Resources for this assessment. All financial information and applicable instructions are provided on each exercise worksheet

Exercise 1: Consolidated Balances

  • Determine consolidated balances.

Exercise 2: Financial Statement Balance Adjustments

  • Calculate intra-entity transfer account balances.

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Shareholder Value Creation Case Study

Shareholder Value Creation
Shareholder Value Creation

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Shareholder Value Creation

ORDER INSTRUCTIONS

  1. Case 5: Genzyme and related investors:

Objective of this case

  • The case focuses on corporate governance issues by discussing how the objectives of a large activist shareholder can potentially conflict with the core vision of the target company’s management.
  • Learning how capital investment and payout policy decisions can affect shareholder value creation.
  • The case offers an opportunity for discussion on how board composition and executive compensation may help align management with shareholders’ interests in a public company.
  • Please listen to the video first: http://youtu.be/6LF_CB7Pa3U

Shareholder Value Creation

Summary of case 5

Genzyme reached record revenues of $4.6 billion in 2008 and was expected to generate an increasing level of free cash flow in coming years. But operational problems in one manufacturing plant had led to a warning letter in late February 2009 from the U.S. Food and Drug Administration (FDA), which, combined with news on impending health care reform, had pushed Genzyme’s stock price from a high of $70.42 down to a low of $56.38.

Genzyme was being targeted by Relational Investors (RI), an “activist” investment fund that had a 2.6% stake in the company at the end of March 2009. RI had a history of engagements with the boards of numerous companies that, in several instances, resulted in the CEO’s forced resignation.

Ralph Whitworth, RI cofounder and principal, met with Termeer and delivered a presentation, arguing that Genzyme was trading at a discount.

He offered recommendations on how Genzyme could address this:

(1) improve capital allocation decisions;

(2) implement a share-buyback or dividend program;

 (3) improve board composition by adding more members with financial expertise; and

 (4) focus executive compensation on performance metrics.

Shareholder Value Creation

Table 1

  Data in Case:
What’s a biotech company?Rare diseases/genetic disorders/small populations FDA approval (expensive/slow/low probability)Case pgs. 2–3
How do you succeed?Orphan drug (seven-year exclusive) Intensive R&D/strong pipelineCase pgs. 2–3 Case Exhibit 4
Genzyme’s business modelDiversified: segments (GD-CR-BI-HO)     GD CR BI HO Other % revenues 53% 22.8% 10.6% 2.4% 11.1% CFROI 25.8% 8.8% Acquisitions ($ million 97–07) 12 1,943 942 2,081 596   Free cash flows (funding acquisitions): expected to grow    Case Exhibit 7 Case Exhibit 8 Case Exhibit 6     Case Exhibit 13
Genzyme’s financial strategyNo dividends and open-market repurchases (some competitors do!) No debtCase p. 6 Case Exhibits 1 and 4

GENZYME AND RELATIONAL INVESTORS:

SCIENCE AND BUSINESS COLLIDE?

Table  2

  Data in Case:
What is Relational Investors?Activist investor (vs. Carl Icahn or others?) Engagement battles (% acquired, changes, length of stay?) Performance  Case Exhibits 10 and 11 Case Exhibit 9
Keys to success?Industry expertise—CFROI analysis Focus: corporate governance Quick turnover: invest, make changes, exit!Case Exhibit 8
Why target Genzyme?Intrinsic vs. market value Free cash flow Focus on GD—CFROI 2.6% stake—is that a lot? other shareholders?Case Exhibit 12 Case Exhibit 13 Case Exhibits 7 and 8 Case Exhibits 2 and 11

Shareholder Value Creation

GENZYME AND RELATIONAL INVESTORS: SCIENCE AND BUSINESS COLLIDE?

Table  3

IssueRelational Investors’ CriticismsGenzyme’s DefenseWhat Happened?
Capital allocationDiversification outside GD (case Exhibit 6) is destroying shareholder value because non-GD segment’s CFROI low (case Exhibit 8).Diversification is necessary and investments in biotech take long time to pay back.Capital allocation committee (chaired by Whitworth); hold on new acquisitions; sale of genetics testing business (2010-Q3).
Share repurchaseFCF should be returned to shareholders in buybacks (see other firms—case Exhibit 4) when internal use generating less than cost of capital (case Exhibit 8).Need FCF to make long-term investments.  Announcement of $2 billion open-market share buyback program and debt issue (2010-Q2).
Board compositionNeed new board members with finance and accounting backgrounds.Termeer needs board on his side in case of fight (as with Icahn in 2007).Added to board: Bertolini, Whitworth, one Icahn director (Burkaroff) and two independent directors. (Exhibit TN5)
Executive payIncentives are based on revenue generation and not profitability.Sensitive subject for Termeer and board.Revised bonus incentive structure

Assignment of case 5

  1. What is the business model for Genzyme? What does Termeer want for his company going forward?

      See table 1 of case 5 in the case reading file

  • What is the business model for Relational Investors?

See the table 2 in the case reading file

a.  Or can Termeer manage him by agreeing to some of Whitworth’s demands but avoid giving into demands that might compromise the core mission of Genzyme?

b.  If so why? How might those changes improve or adversely affect the company and performance?

See the table 2 in the case reading file

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Shareholder Value Creation Case Study Essay

Case 5

The business model is the treatment aiming at individuals with genetic diseases. Genzyme’s business model is diversified with five segments namely: GD, CR, BI, HO and other. Percentage revenue generated by GD, CR, BI, HO and other are….

What is the business model to the rational investor?

The business model of Rational Investor is concerned with profits and rational investor aims at companies with bad…

Should Termeer fight Whitworth?

Termeer should try to create a compromise for both his key missions for…..

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Corporate Value Creation Case Study

Corporate Value Creation
Corporate Value Creation

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Corporate Value Creation

  1. Case 4: The Battle for Value, FedEx Corp. vs UPS

Summary of case 4:

This case assesses the financial performance of FedEx Corp. and United Parcel Service, Inc (UPS). The two firms have competed intensely for dominance of the overnight express package industry. This case is intended for use in an introductory discussion of corporate value creation and its sources.

Objectives:

The contrasting record of the two firms affords a platform to:

  • Define excellence from a corporate-finance perspective.
  • Assess economic profit analysis (also known as Economic Value Added) and, more generally, the measurement of financial performance and health. The case provides a complete historical economic profit analysis for both firms, and permits comparison with other classic approaches to historical performance analysis.
  • Evaluate the financial implications of rigorous competition and corporate transformation.

Corporate Value Creation

Main concepts of case 4

  1. Economic Value added: definition, Strength and weakness, the factors that affect EVA

Key information:

1.    FedEx is growing more rapidly than UPS.

2.    The stunning comparison between FedEx and UPS appears in the returns to investors, given in case Exhibit 8, and summarized in the third row of Table 1.

3.    Economic profit analysis is generally consistent with the market return analysis.

Table 1. The strengths and weaknesses of various financial measures.

     Strengths  Weaknesses
  1. Direct inspection of the financial statements  Reveals trends Comparison of absolute sizes  Does not permit a ready assessment of efficiency Biased by size differences Book, not market, values Influenced by GAAP choices Backward, not forward, looking
  2. Financial ratios  Adjusts for size differences (a relative, not absolute, measure)Provides comparative measures of efficiency and growth  Based on book, not market, values Influenced by GAAP choices
  3. Earnings per share (EPS) and price/earnings ratios  Widely-used measures of performance Linked to market price of stock  EPS influenced by GAAP choices
EPS is not a cash flow P/E difficult to interpret Sensitive to choice of observation period
  4. Total returns to investors  Cash flow based Market value based Permits bench marking vs. other investments  Sensitive to choice of observation period Needs to be risk adjusted
  5. Economic profit (EVA)  Risk adjusted Permits bench marking Theoretically linked to market values Logically appealing Increasingly widely used  Influenced by GAAP choices Ignores latent option values  

Table 2 THE BATTLE FOR VALUE, 2004: FEDEX CORP. VS. UNITED PARCEL SERVICE, INC.

Corporate Value Creation

Summary of Comparative Results

   FedExUPSSource (case exhibit number)
  Financial ratio analysis   Activity   Liquidity   Leverage   Profitability   Growth    Improving Improving Declining Worse than UPS High    Weakening Better than FedEx Consistently low Better than FedEx Lower than FedEx2, 3
  EPS  EPS compound annual growth rate (CAGR) 1993–2003 EPS compound annual growth rate (CAGR) 1999–2003        27.54%     6.98%      13.89%     34.30%8
  Total market returns   Cum. total return (1992–2003) Cum. return net of S&P (1992–2003)        528.02% 372.83%        705.95% 550.75%  8
  Economic profit – EVA 2003   Cumulative for 1992–2003 EVA Market value added Difference  (in millions)    $170     ($2,252) $11,191 $13,443  (in millions) $1,195     $4,328 $62,028 $57,7009, 10

Case 4 Assignment

1)  What happened to FedEx and UPS’s stock price in early 2004? Why did they rise? Why did one outpace the other? In an efficient market, how are we to interpret FedEx’s 14% increase in market value?

  • how is a stock value determined?
    • how does the air-transportation agreement affect the two firms stock price?
      • both UPS and FedEx had been laying the foundation for a regional- and international-delivery business in China since the late 1990s. Thus, the latest announcement may indicate the market’s acceptance of that strategy and both firms’ ability to exploit that opportunity.
      • FedEx had acquired air routes into China as early as 1995, whereas UPS did not begin its direct flights into China until 2001.

2) How have UPS and FedEx performed financially? How do you measure financial performance? What do the financial statements and ratios show? What does the stock-price performance tell you? How is EVA calculated? What does it reveal? Does stock price track the historical EVA?

  • Discuss this questions based on the table 1 and table 2 in the case study file
  • EVA: a measure of a company’s financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit, adjusted for taxes on a cash basis.

3) This is a pretty depressing picture for FedEx: Why hasn’t its stock price fallen in absolute terms? How can we rationalize the expectation that FedEx will preserve the value that it currently has?

  • Hint: think of the EVA limitation in table 1.

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Corporate Value Creation Case Study Essay

Part 1

What happened to FedEx and UPS’s stock price in early 2004?The stock price of both FedEx and UPS increased. There was an increase in the price of both the companies because of the companies cum total return from 1992 to 2003, as well as the EPS compound annual growth rate, is high though compound growth rate for FedEx decreased within the years 1999 to 2003. Economic value added of the two companies within 1992 to 2003 is significant. EVA is a representation of company performance and it focuses on shareholders’ value hence its high value shows that the company stock price of the companies in…

Part 2

UPS financial risk is low since its analysis ratio on leverage is low while FedEx financial risk is reducing as indicated by its leverage ratios. Both UPS and FedEx are more liquid, liquidity ratios show that both firms are performing better. Activity ratios show that FedEx is more active than UPS. In conclusion, the two firms’ financial performance is….

Part 3

FedEx profitability ratio is worse, showing that the company is less profitable. Low profitability of a company lowers the company EPS thus lowering its…..

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Theoretical basis of Finance Paper

Theoretical basis of Finance
Theoretical basis of Finance

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Theoretical basis of Finance

ORDER INSTRUCTIONS

  • Critically assess and evaluate the theoretical basis of finance.
  • Critically analyse, interpret financial data, by the integration of theory and practice investigate and apply relevant tools to the assessment of a variety of organisational problems.
  • Systematically evaluate and synthesise the problem solving mechanisms in relation to financial decision making, utilising application of relevant tools and techniques.

Assessment Task:
Using the FAME database, choose a publicly quoted company of your choice.

Write a business report of 2,400 words on the company from the stance of a potential investor. Your review of the company should discuss which key areas you are considering and why. The use of ratios should be accompanied with the limitations associated with their use and what additional data would be required for a full financial review. Your review should incorporate a commentary as to how well the company is performing within its industry sector and/or against a main competitor.

Theoretical basis of Finance

Consider why there may be differences. Looking to the future, discuss what main risks and opportunities the company is facing and how they are addressing these. This section of your report could include both a financial and a non-financial analysis. Appendices may be used to contain information to support your report. It would not be expected that a full set of accounts should be included in the appendices, but extracts from the accounts may be appropriate. One of the appendices should contain your bibliography. The appendices are not included in the word count.

Write a business report, maximum number of words 2,400, to evaluate a public limited company (PLC) of your choice. Your report should detail the areas that you would consider necessary to review and why, including limitations of the analysis. The report should finish with conclusions and recommendations for the investor.

FORMAT & GUIDANCE

Presentation  

Please refer to the Assessment Guidance (on moodle page) for detailed information on:

– Academic Malpractice

  • APA Reference Guide
  • Late Work Penalties
  • Excess word count penalties

Theoretical basis of Finance

University Generic Marking Criteria  

It is your responsibility to ensure that you are familiar with the above as failure to do this may impact on your achievement in this assessment            

APA Reference Guide and Information can be found here: https://ganymede2.chester.ac.uk/index.php?page_id=1553173 and https://portal.chester.ac.uk/LIS/Pages/FindingInformation/referencing.aspx

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Theoretical basis of Finance

Jaguar Land Rover Automotive PLC is a holding company for the automotive company by the same name. The company, headquartered in Coventry, UK is a subsidiary company to Tata Motors. This paper focuses on the financial analysis for Jaguar Land Rover PLC by looking into the various metrics of financial performance. These metrics used in this analysis include the measures of profitability such as the net profit margin, the return to shareholders’ fund, and the return on capital employed. Other metrics used are the analysis of the company’s liquidity and gearing.

Profitability
Net profit margin

Net profit margin is the ratio that analyses the company percentage of revenue left after all the expenses have been deducted. It shows the company profit earned from the sales it has made. Net profit margin is calculated as: net profit divided by sales multiply by one hundred. Higher net profit margin is an indicator that the company has a good pricing strategy and control any cost incurred effectively. “Jaguar Land Rover Automotive PLC” can use this ratio to compare its performance with other companies in the same industries since firms in the same industry experience almost same environmental change, has got similar cost structure and common customer base (Kraft, 2014).

The net profit margin of a company that is higher than 10% is considered to be better, however, the rage of best net profit margin depends on the industry that the company operates in. in the case of “Jaguar Land Rover Automotive PLC,” it will be good if the company would have been having 10% or more. In general conclusion, the higher the profit margin, and the more profitable the firm is and this margin is affected by the operating expenses (Brigham & Ehrhardt, 2013).

 In the years 2009 and 2010, the company made losses and therefore was not having a net profit margin. This implies that the company expenses in the years 2009 and 2010 are proportionately higher than the years after, it also indicates poor pricing and model and ineffective control of business costs. In the years 2011, 2012, 2013, 2014 and 2015 the company profit margin shoots to over ten percent that is, 11.30%, 11.15%, 10.61%, 12.90% and 11.95% respectively. This indicates a perfect improvement by the company as compared to the previous years.

In these three years, the management of the company seems to have formulated good pricing strategies and exercised effective cost control. This, in turn, has caused the company profit to increase by larger amount hence increased profit margin (Fitó et al., 2013). The company expenses during these five years are observed to be proportionately lower than in the years 2009 and 2010. The company profit margin has decreased by a relatively bigger margin in 2016 and 2017; profit margin has dropped to 7.01% in 2016 then further to 6.27% in 2017 provided the company turnover is higher in those years. Company’s costs have increased in these two years as compared to…….

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