Dividend

Dividend payment is an important factor for maximising shareholder wealth.  Porterfield (1965) argued the dividend add to the old share price and calculate the new share price. Modigliani and Miller (1961) stated dividend have no effect on the share price. They believe dividend payment is irrelevance and that is not affecting the share price of the company. The Modigliani and Miller argued the   share price of the company is depending on the gains from future investment.

The future investment is a share holder money, therefore companies have to invest that money should be invest in the positive NPV investment. If the investments not invest in the project that should be deliver to the shareholders through dividend.

Most of the shareholders are require dividend but if the dividend not enough on their investment then they sell off the shares and invest on that who deliver the more dividend on the investment.

The most of the companies in the 2008 and 2009, they suspended the dividend payment because of credit crunch caused by housing market collapse. In this period most of the investors accept the companies can’t pay the dividend.

In the UK, companies paying two type of dividend such as interim dividend and final dividend.  In the recent BBC news 2010 the Seven Trent profit have halved despite a rise in revenues as the water firm faced a series of charges. The company cut it interim dividend by 2.5% to 26.04P in 2010 -2011.

The seven Trent introduce the new dividend policy for the period 2011-2012 and 2014-2015 should be RPI plus 3%. Because of that, they want to good progress in many key areas including further improvement in customer services.  

Dividend payment is give an opportunity to restore the investors and share price in the stock market.

Capital Structure

Capital structure is an important for a firm. Proportion of debt in the capital structure can influence the cost of capital and wealth of the shareholders. If, as a result of increasing the gearing ratio, this lead to increase in financial distress causes the shareholders and creditors to demand more return. But the gearing ratio can’t be too low. In the traditional view, the firm have to maintain optimum balance between cost of capital and debt.

In 1958, Modigliani and Miller’s concluded that the value of the firm remains constant; it doesn’t make difference between equity and debt. They assume, it not aligns with the real financial market such as taxation, perfect capital market with perfect information available all economic agents and no transaction cost.

Increasing in debt could be effect the share price of the firm.  So it wouldn’t make a sense to the shareholder and high risk faced the company. To mitigate the risk company have to invest in lower risk debt. This is further enhanced the tax relief on debt capital. Debt to equity can also be affected by other factors such as borrowing capacity, reinvestment risk.....etc.

In the recent BBC news ( 2009) De Beers, the world’s largest diamond producer plans to raise $1bn rights issue from investors to cut debt. Because the company debt’s currently have $3.5bn, by reducing the De Beers level of debt could improving the capital structure of the company. This enables the company to take an advantage of new investment opportunities.   

Risk Assessment and Investment Appraisal Tools

Investment decision is an important factor for investors and businesses, because they want to get the required return from the investment or increase capital of investment. The companies have many investment opportunities in related and unrelated businesses, But all not given the same gains. The investors have to choose which investment opportunity could give adequate return for them.

The companies have used different investment appraisal tools to assess the return, risk of the project/ investment. Such tools are Payback period, Accounting Rate of Return, Net Present Value (NPV), Internal Rate of Return (IRR) and Discounted Cash Flow (DCF). These tools give a clear relationship about project risk and returns, efficiency and future outcomes. Some investment has high risk and high return, for example Air line industry.

The NPV assess the time value for money, also NPV shows whether it could increase the value of the project. The positive NPV of the project/investment worthwhile, but on the other hand negative NPV should be worthless, due to negative cash flow from the project. The positive NPV should increase shareholder wealth as well as achieve the organisation goal.  For example the British Nuclear Fuels Ltd’s plan to open a new reprocessing plant at the Sellafield nuclear power station in 2001. But the Irish Government was opposed to this decision. According the BBC, the UK government and British Nuclear Fuels Ltd’s argument for opening the plant was focused around the “significant economic benefits” the scheme could have also have net present value of £216m.  

Payback period is an estimate the time taken to recover the original capital. However, in the shortcoming some investment decision does not deliver the perfect return. For example the Kraft acquired Cadbury, the Kraft paid 40% premium for the above deal. The Kraft shareholders of Warren Buffett were unhappy about the acquisition. Because, they are know definitely going to lose in this acquisition.

The Credit Crunch

The credit crisis started in the US, the analysis links the credit crises to the sub-prime mortgage business. This is a bank give high risk loan to people with poor credit histories. The Collateralised Debt obligations (CDOs) sold on to investors globally. This source of CDOs increases the liquidity in the market places. The CDOs are AAA rate assets, rates of return were huge. The bank were issuing long term mortgage against investing in assets.

The house prices falling but interest rate rising, this lead to people cannot pay their mortgages. Therefore investors suffer looses and they cannot reluctant to take more CDOs. The credit market is rumblings as bank are reluctant to lend each other.

The sub-prime mortgage crisis is quickly effect all over the world. The US federal bank and EU central bank tries to make money available for bank to borrow with lower interest rate. But the liquidity crisis not solve, bank remain trouble with lending each other. The cash become a rare; businesses were finding is difficult to fund. The lack of credit leads to job losses, bankruptcies and increase in living cost.  The public were severing problems with this crisis.  The Lehman Brothers was the first major bank to collapse in the credit crisis.

The solution was made by the US government agrees a $ 700bn bail – out that plan to borrow the money from world financial market and the UK government launches its own bail out. The banks have to confidence with the housing market. The most important banks have to planning the risk and spreading the risk in different portfolio. So how these bankers were did?

Therefore specific regulation would be most useful to the investment assets, which will help to avoid the problems again in the world. If the same mistake will be come in the future, that could be far more serious than before. Therefore bank have to strict control in credit system.

International Mergers and Acquisitions

Mergers and Acquisitions is an opportunity for investment in different countries. There are many reasons behind such as competitive advantage, economics of scale, increase product portfolio and market entry. Also companies can gain synergy through combined of two entities.  If the particular company is cannot create that synergy because they have some kind of value. But other company have other kind of knowledge. Therefore combined entity creates value greater than the separate entities.

In the recent news Alpha Natural resources and Massey energy agree to $8.5 billion combination. This is creating a premier coal operator in the US and a global leader in metallurgical coal supply. Alpha Natural Resources is one of the America’s premier goal suppliers with coal production capacity of greater than 90 million tons a year. The Massey Energy company is the largest coal producer in central Appalachia.

In this merger activity the Massey Energy company share holders received 1.025 shares of Alpha common stock at the closing share price value of $69.33 as at 28^th January 2011 and $10 in cash for each share of Massey common stock.  This represents that the Massey Energy received 21% premium of their current share price.

After the mergers the shareholders of Alpha owned approximately 54% and Massey owned 46% of the combined entity. Therefore the both company shareholders will gain on the advantage of industry leader in the robust production portfolio. However it has the scale to capitalize for further growth opportunities in global environment.

As predicted by the Alpha’s chief executive officer, Mr. Crutchfield, we have a proven history of successful integration inception in 2002. And he further stated we will build strong track record through strategic growth, this is not a just combination of assets but it focus on people, environment and community in the future.

In this transformational deal of merger has created shareholder value that is evidence from the above deal in the short run.  In the future, can create the value or destroy the value?

Foreign Direct Investment (FDI)

Foreign direct investment plays a key role in the development of economy for countries in the Middle East such as Dubai, Malaysia, Bahrain.

The recent news reported foreign direct investment in Dubai increased to 30 percent in the year 2011 compare it to 2010. Since its development and there are several agreements with the other countries such as South American and Chinese. This helped by rising confidence as its debt problems ease and influx of South American and Chinese companies.

The latest available data from the central bank shows that in 2009 direct investment in to the UAE as a whole plummeted to Dh14.7billion from Dh50.4billion in 2008, but the data does not give the breakdown of Dubai. While increasing investor confidence has seen more than 40 entries in Dubai, the new companies coming from Brazil, Chile, China, Korea, United States and Europe. According to A.T Kearney’s 2010 foreign direct investment confidence index, the UAE is the most attractive investment destination in the Middle East. Middle East is ranked at 11^th in the world wide. But the 2010 foreign direct investment confidence index ranked, Dubai is one of the top 25 global destinations, Supported by the city rankings of Dubai which ranked 1^st place in the Middle East.

Approximately 70 percent of the global FDI inflows are going to the Middle East, but most of the inflows are invested in Dubai. Because Dubai’s of unique locations, infrastructure and value proposition as a factor for the investors. In addition city is as demonstrating an ease of doing every business.  

The FDI enhances economic development effectively in Dubai. It has generated massive profit from increases in FDI, this lead to increase in job vacancies and better life style. Therefore lower level of interest rate, the public easy to borrow and invest new business opportunities. The Dubai has grown quickly than other countries.



Corporate Risk Management and Exchange Rate

            Generally, companies are facing number of risks in the competitive environment. Such as financial risk, market risk and reputation risk. The financial risk is the most important role play in the corporate environment. The financial risk driven by internally or externally, but externally driven risks are unpredictable. Such as currency exchange rate risk and interest rate risk.

            The large multinational companies will be used different currencies for their international trading. In the Europe countries exposure the exchange rate effect, they have introduced the new currency to mitigate the risk of their transactions. This will encourage the Europe to trade there businesses with in the countries rather than going to abroad, Such as America.

            Exchange rates have become very important when entering in to the international transaction. In this situation, we don’t know the exchange rate have to strengthen or weaken. If the company could sold some goods to other companies, the exchange rate is strengthen the company have received an profit from exchange but the rate is weaken the company made a loss from that transaction.

The recent news reported that the Toyota’s quarterly profit has drop 39% due to strength of the yen. Toyota President Akio Toyoda has said that the yen needs to be trading at a minimum of 90 to the US dollar to keep Japan's manufacturing sector competitive. The yen is currently trading at close to 82 per dollar, significantly stronger than Mr Toyoda's target rate. The buyers have to pay more to buy Toyota; therefore they won’t to buy the Toyota cars. There fore buyers went other car market. Therefore they want to exposure the transaction risk in this situation. Most companies adopt currency where their main operation occurs. This is helping them to mitigate the risk. Another method is adapt a stable currency for their transactions, Such as Dollar or Pound. If you had the money available for investment which do you think would be the most interesting way to invest it, in the stock market or in a market for monetary exchange?

Raising Finance

Medium size companies have to looking for expand there businesses through investment. Such investment through family members and have come to the conclusion you need to find others. There are large numbers of ways that it is possible, depending on the riskiness and amount of return you can offer.

The main option is to float the company in the stock exchange. This allows large cash to take place. But not to pay back, this could be achieved through tender offer. Another more secure method is that of a stock exchange introduction where the shares pre purchased. Once listed on the stock exchange further cash could raise through right issue.

Bond also an option to raised finance. There are varies types of bond. If the company must choose which form of bond to use raised the finances? Bond holders have received a fixed rate of interest through the period and after a matured period the amount borrowed will be pay back.

Bank loans are another way to raise the finance, who doesn’t want to reduce the control of the owner.  This is a possibility of entering in to a spreading the risk of the between the investors to raise large amount of finance. This requires finance received paid back at a latter date.

The recent articles have looked at the current stock exchange and their collaboration most notably LSE and TSE worth of £4.2 billion and the NYSE and Deutsche Bourse worth £14.4 billion (Montreal, 2011). The recent financial time noted people are worried that deals. Are collaborations going to benefit medium size businesses if they decided to use stock exchange to float the company?

Just looking at the Premier League and the Spanish League it is interesting to see the amount of debt some football clubs have been saddled with. Manchester United in particular faces such high interest payments, from bank loans, that they account for a large proportion of profits leaving little if no money left for serious investment. Would their owners have been better off raising finance from elsewhere?

stock exchange and stock market efficiency

Stock exchange is a market for selling and buying the public companies shares.  There are lot of shares trading in the market per a single day. In 2011, it’s more than $80Trillion per day. The global financial market developed in 1980s and 1990s, before 1980s there are many barriers to move to the global market such as capital barriers and government restrictions. The global financial market has to help for the investors, companies and economy. The companies have to access the capital, opportunity to expand through acquisition and growing young companies to obtain finance and market attaches a price to risk.

The stock market efficiency is the extent to which share prices at all times fairly reflect all relevant available information. The market efficiency can be weak, semi and strong form. In the recent report stated Moss Boss shares surged more than 14% to 27.25p after the company announced its was selling its 15 Hugo Boss stores. Moss Bros will sell the stores back to Hugo Boss for £16.5m, ending a 16-year franchise deal. Because they want to focus on their core stores and right to move strategically and operationally. The Moss Bros made a loss from this franchise around £0.3 million for the year.

Looking at recent example, the shell’s share price was fall by 3% in a single day. They have release there reported profit, but the profit around double compare to last year. The perfect information does not work in the market. But the price of the oil has risen by 15% compare to previous year. The investors have not happy about the profit. It would suggest that even trying to predict share price movement is difficult in the market.

In the Tuner report says, stock market pricing is individual pricing not a rational. The shell’s share price a surprising thing. This is an unpredictable.

With the level of uncertainty, can stock market be seen anything more than speculative gambling?

BP shareholders are loss dividend by £40bn

The latest reports have estimated £40bn loss in dividend payment. BP is a multi mega international company. The BP have been losses over the past years, due to safety regulations problems lead to disasters Mexican Gulf oil spill and explosion on Texas city also bad management. The CEO has been changes continuously over a period of time, Such as in 2006, departure of Browne and Hayward in 2010. They have to get more remuneration, pension and other benefits from their work but not focus on shareholder wealth maximisation.

The Texas City explosion was a result of varies cost cutting such as training of the staff and poor management of safety. The CEO (Browne) has to show the performance of the achievement but not the benefit of the workers and the environment. He wants to get more remuneration, however the Gulf oil spill was an insufficient quality in packing cement. The explosion has affected the employees and local community. The employees have lost their future life. The safety management of BP found that safety measures not adequate to measure the safety in a safe way. The cost cutting and poor management are short term objective not the long term survival of the company. This could have increase share price in the shorter period of time but not their objective to ultimately increase the shareholder wealth. The BP invested all over the businesses to make shareholders confidence. They can redevelop their position in the future.

The explosion has lead to destroy the entire company’s reputation and image of the BP. The image can’t develop easily in the future. BP has lost their stakeholders and future investors. If the BP have to get permission from other country to operate a business unit, they can’t deliver the permission due to the explosion reoccurred in the future.

Latest report covered the difficulty in production operation in the Russia. Because the BP’s venture TNK-BP passes a case in the high court regarding share swap agreement and Arctic exploration agreements between BP and Rosneft(another Russian company) without TNK-BP permission.

BP analysis says the emerging economies to lead energy growth to 2030 and renewable to out- grow oil. This is not a predictable environment because some technologies will change the energy production without oil. The BP will further loss of the wealth.

The management and executive have to do more effective way to balance the shareholder wealth and stakeholder satisfaction. But BP example is helpful to the management what they want to do. But the executive have to increase the share price through profitability and belief that benefit for the overall community.