Week 11: Dividend policy

Dividend policy

Based on my research, most of investors are more likely to choose dividend payment rather than capital gains, since it needs a long-term period and it can be considered more risky for most of the investor. I think the investors would like to get cash dividend due to additional capital gains from bonus share for them. Based on the theory of “ Bird-in-the-hand” theory most of people will think the long-term gains is more risky rather than existing dividend. All these things above are from the investor perspective.

It brought my attention that there is another perspective from the shareholders and the managers from the company about the dividend policy. The managers and shareholders in the company should consider of how long their company have succeed of the company, because they should consider about the saving more earnings for their expansion or project. My logic says that the investor will maintain their shares if they see the company’s is growing, but if they see the company that they invested stay at the same point they will think twice to maintain their shares. I think the company should increase their dividend in sequence to maintain the investors to keep invest in the company. However, the company which been invested should decide carefully in making the dividend policy, because it can make their company suffers losses.

Everyone must be now about the company that produced the famous iPhone 5, iPad, iPod, MacBook, and iMac, which is Apple Company, in this blog I will take this company as the real firm example. I was very surprised when I see the annual report of Apple Company in 2013; it stated that the cash return with the amount of $45 billion has overdue by three years. The result from this statement bring the shares from Apple Company $10.09, it is lower than before. The boards of Apple Company were predicts the decreasing of the iPhone 5 sales is due to the new of the upcoming Samsung Galaxy 4, which is the toughest competitor of iPhone 5. I am not saying that iPhone 5 having bad sales, but it is not as booming as the first launch.

The research and development team of Apple Company still working hard in order to satisfying and attract more customers by developing new iOS 6.1 for Apple’s gadget. They hope by this development, they will increase their sales and leads to an increase of the revenue. To conclude, it can be seen that Apple Company aiming for the long-term growth strategy of innovation. I think it is better for them to cuts their dividend return to avoid lack of capital in their company and they could focus on the process of the development of their gadgets and technologies. They should compete with the competitive market of technology nowadays in order to make the company keep survive.

Week 10: Optimal Capital Structure

Optimal Capital Structure

Optimal capital structure is categorized as one of the best ratio from debt-to-equity ratio and it can give understanding of the next step of risk in company for the potential investor. The theory of equity financing gives states that in equity financing is more less risky than a loan and also will brings more credibility to our company. Through the equity financing the investor expected in a long-term view return, by then the company will have more cash for expanding their business and accomplish the objective of company. Moreover, in equity financing the company is not required to payback the investment to the investor in the case if the business of the company fail. In addition, the company should consider the disadvantages from equity finance like the investor needs to have the some of the ownership in the company, it is not easy to find the loyal investor for the company, and before the company making a decision, they should discuss with their investor first.

In the case of debt financing, the company can choose for their loan period (short or long term). The company could see the exact interest and the proper principle of the loans and cannot be changed, besides that; the interest from the loan is tax deductible. The most important thing from debt financing is the bank or lending firms does not have a right to take give suggestion or take any decision in the company, because they does not have any ownership in the company. However, the company should consider the period of time, which already sets before, if the company relies to much to the debt, it will make the cash flow of the company got a big problem, and paying debt is not easy in a business, since the debt will be in a large amount and automatically the interest will be high as well.

Nonetheless, the company should consider disadvantages of both ways. In the case of Scottish Widows Investment partnership, this is part of the business from Lloyds TSB group, one of the largest banks in United Kingdom. Lloyds TSB sold 20% stake in wealth manager St James’s place, in order to increase their market price. Based on my opinion, Lloyds TSB choose to take lower debt ration, because they thing with the low debt of ration the investor will more attractive to invest to the Scottish Widows investment. The investor might think the company could handle every situation and finally the investor will get higher rate of return. To conclude, I think Lloyds TSB do the right thing to attract the investor in order to optimize their capital to expand their business or in the case I am the one who will invest to the company, definitely I will invest to the Scottish widows investment, since the company shown a good prospectus for the long term and short term.

Week 9: Family owned business in USA

Family owned business in USA

There are 90 percent of business in United States of America are owned by a family business. Based on my observation, in operating family business, there will be more trust, but the arising percentage of the conflict is higher in family business. The family business institute states there are only 12 percent of family businesses that can survive after the third generation of the family. 

It is more complicated and challenging to managing finance in family business.

Family business is not required to have all the member of the business should be from the family member, usually the family member in the family business be the top manager and includes the owner. However, the participation of family member in the top board could help the company for the long-term growth. The usual issues why the family business is collapse, is because the individual wealth maximization.

I will take Cargill Company as the example of the family business. This family business was founded at 1865. The family member controlled the executive position in this company for almost 100 years until there is a non-family member becomes the one of the executive member in Cargill Company during 1960. However, this company still could success in achieving their goal in the long-term period. Cargill company do not suffering a conflict in their business since this company founded.

There is an opportunities of Cargill company to take, which is sales their shares to the public in order to increase their capital to make an expansion for their company. However, usually family business is closer rather than normal business, because they are more trust to their family members. To conclude, I think Cargill family business company should transparent to public and start selling their shares since they are a successful company and it will bring big potential for the investor and finally they can make the strategy for their future plan. In the case if I was the investor, I will dare to buy the shares in Cargill company, because I can see this company already success since a long time ago and they still can survive with the current condition market.

Week 8: Corporate governance and the financial crisis

Corporate governance and the financial crisis

It is very important for the corporate governance in the banking sector to make the transaction activity well managed in order to avoid the financial crisis. The act of corporate in governance in the bank is to make sure that there is a structure risk management, if risk management is well managed by the corporate governance, all board of directors and the shareholder will know immediately if there is a probability of the financial crisis might occur in the organization. A lack of risk management in the bank could be one of the reasons of the financial crisis. Besides a lack of risk management, the agency theory can be one of the factor that might help to avoid the financial crisis happened in a company. Every single division in the bank should work together as a team to support corporate governance. Besides that, the transparency in the company is one of the important aspects to make the corporate governance work well.

Risk management could help the corporate governance to evade the financial crisis because this is the process where the monitoring and identification of the risk might occur with the endless process and if there is an indication of financial risk might occur, bank can prepare a further steps in sequence to face the risk. The member of the corporate governance in the bank should set the right objective for their firms and the methodology to manage the operation of their bank. There are eight fundamental process/ steps of the risk management, which are the bank should define the evidence that related to the task, after that they should focus of reviewing and analyzing the plan of the process of risk management, the next step is to identify where the risk is occurring from and structuring to evaluates for testing the plan whether it is effective or nor for face the risk. Finally the board of director could divide each risk might happened to every member of the bank to be managed.

Credit crunch can be one of the examples from the financial crisis that might occur in the banking sector. If the corporate of governance in the bank fail to manage the risk management, there is a possibilities of credit crunch might occur, while it is very crucial for the corporate governance to look after the risk management, because if the bank is suffering a bankruptcy, it will harm lots of parties who save or deposit the money to the bank. Credit crunch is the situation where the business can’t upsurge their capital due to the inflation by the government.

If we talking about credit crunch, Northern Rock can be one of the greatest case ever happened. The collapse of the Northern rock is affected by the credit crunch happened in United States of America. The reason of the credit crunch in the Northern Rock is the unpredicted withdrawal of a large amount of money in their bank. This thing could happen because the external and the internal management in their organization do not run the risk management. If the risk management in Northern Rock is well managed, the credit crunch in their company will not occurred. The financial service authority, which can be categorized, as the part of the corporate governance does not work based on their standard to keep the risk management run well. In conclusion, it is very important for bank to look after their corporate governance (executives and employees) to keep working in track to sustain the risk management in their organization, since bank is different from the other company, bank will dealing more with the cash. There will be a bigger risk for the bank to operate their daily activity without a risk management, because do not know what risk they might face in the future.

Week 7: Merger and Acquisition

Mergers and Acquisition

Merger and Acquisition could help the company in increasing their generation for their company’s value, develop their company’s cost efficiency, and increase their market share in the public. Moreover, merger and Acquisition could help the company to generate their tax gains; increase their company’s revenue and cut their capital cost. The activity of merger and acquisition will automatically help the company in generate more shareholders in the company due to the new prospect.

Based on the theory of merger and acquisition, it is very important for the company, which currently suffering numerous problems in their organization and can’t be solved to look after the opportunities of the acquisition. Besides that Merger and acquisition also offer the benefits of joint venture in the form of the generation from cost of efficiency. Since in the joints venture, there will be two-company combining together than automatically the production of the company will increase in larger amount. The increases of the productions will leads to a reduction cost of the production per unit. These are some of the factors of why company will choose to do the merger and acquisition.

In February 2013 CNN money reported that there are three deals of merger activity with the total amount of $56 millions. The biggest merger and acquisition activity is from the Berkshire Hathaway and the 3G with the capital of $28 billion intended to acquire Ketchup giant H.J. Heinz Company with cash. Comcast approved to acquire 49% stake of NBC Universal for $16.7billion.

Freeman & Co was predicted that the bankers in the Virgin/ Liberty deals would get high amount of profit with the fees of $75million. In the other case of the merger deal from Dell Company, the banker will get approximately $100 million. In the case of the acquisition made by the International Exchange acquiring New York Stock Exchange, it makes the shares of New York Stock Exchange grows for almost 38%. Looking from these statements above, it can be concluded that there are lots of parties that will get the benefits from the process of merger and acquisition. For example the in the case of the acquisition between New York Stock Exchange and International Exchange, the buyer, which is the International Exchange get reward in the form of the increases of their company’s share price. To conclude, I think merger and acquisition can give a good opportunities for the strong company to acquire weak company, in the case the strong company could manage and choose the right company for them to acquire.