Dividends are profits distributed to shareholders of the enterprise when activities of business have achieved good results after a business cycle (usually one year) (Arnold, G. 2008).
When business activities make profits which must pay corporate income tax and the interest remaining (after tax) is called "profit can be distributed to shareholders." However, most of businesses never split all of divisible profits, which they must retain a part relatively large to continue invest in production, sales and new projects, serving the next business cycle. For this reason, the shareholders meeting held in last business cycle. Directors may be submitted plans to use a certain percentage of profit after tax to the Board of shareholders.to dividends to shareholders
If this plan of dividing the vote to pass, the dividend policy of that year was officially confirmed and takes effect. Some companies also have dividend policy for a period of many years, but also the policy itself is implemented only in some certain conditions.
Because there may exist a number of different stocks in the same enterprise capital structure, there may be some kind of dividend with different levels of priority and conditions for payment of time and different masses. Normally, because there may exist a number of different stocks in the same enterprise capital structure, there may be some kind of dividend with different levels of priority and conditions for payment of time and different masses. (Czinkota, M.R., Ronkainen, I.A. & Moffet, M., 2008)
Reference
Arnold, G. (2008) Corporate Financial Management. Financial Times Prentice Hall Publishing
Czinkota, M.R., Ronkainen, I.A. & Moffet, M. (2008) International Business: 8th Edition, Thomson
Tuesday 10 May 2011
Should company use Debt or Capital Stock
In this case, "costs" mentioned here is the cost can be measured for the mobilization of funding for the operation of the business. With debt, that is s interest of debt which businesses must pay. With equity, cost of capital is understood as the right to sufficient income to satisfy shareholders when they decide to contribute capital to the company. (Charles W.L.Hill, 2002)
For example, if you run a small business and need funding of about $ 40,000, you can loan amount of $ 40,000 with interest rate of 10% in bank or you can sell 25% shares of your company to neighbourhood with $ 40,000.
Assume the following year, your business can generate operating profit was $ 20,000. If you decide to loan in bank with interest expense (also referred to as the cost of debt financing) would be $ 4,000, remain your profit with $ 16,000. Conversely, if you used the equity financing, which means you have no debt and of course there is no interest expense but you can only hold 75% of the profits of the business (25% belonging owned by your neighbor). Therefore, now your profit is only $ 15,000 (75% x $ 20,000).
From this example, you may see debt is cheaper than equity so very easy to understand when the shareholders of the company decide to issue debt rather than equity. Tax is also a factor help debt issuing situation becomes better (Hymer, Stephen H. , 1960). the benefits of debt financing with fixed interest rates sometimes can be a disadvantage. Because it is a fixed cost financing, whether your business activity good, more income or even losing money, the enterprise is to ensure the payment of interest and repayment schedule original maturity, so an debt increasing of the enterprise also means increased financial risk (Buckley, A. 2007).
About a company is expected to business well, debt financing can be used frequently at lower cost than equity financing. However, if the company cannot operate well to create a large amount of cash, the interest expense can be a burden (Charles W.L.Hill, 2002).
Evidently, the enterprise can never be 100% sure about the amount of income in the future (although they could have reasonably expected) and when the future income of the enterprise as unstable, increasing risk. Thus, firms in low-risk business, with stable cash flows often use debt more than firms in sectors more risk (Buckley, A., 2007).
Reference
Charles W.L.Hill, (2002) “International Business: Competing in global market”, The Magraw Hill Companies. United States.
Buckley, A. (2007) Multinational Finance, Pearson
For example, if you run a small business and need funding of about $ 40,000, you can loan amount of $ 40,000 with interest rate of 10% in bank or you can sell 25% shares of your company to neighbourhood with $ 40,000.
Assume the following year, your business can generate operating profit was $ 20,000. If you decide to loan in bank with interest expense (also referred to as the cost of debt financing) would be $ 4,000, remain your profit with $ 16,000. Conversely, if you used the equity financing, which means you have no debt and of course there is no interest expense but you can only hold 75% of the profits of the business (25% belonging owned by your neighbor). Therefore, now your profit is only $ 15,000 (75% x $ 20,000).
From this example, you may see debt is cheaper than equity so very easy to understand when the shareholders of the company decide to issue debt rather than equity. Tax is also a factor help debt issuing situation becomes better (Hymer, Stephen H. , 1960). the benefits of debt financing with fixed interest rates sometimes can be a disadvantage. Because it is a fixed cost financing, whether your business activity good, more income or even losing money, the enterprise is to ensure the payment of interest and repayment schedule original maturity, so an debt increasing of the enterprise also means increased financial risk (Buckley, A. 2007).
About a company is expected to business well, debt financing can be used frequently at lower cost than equity financing. However, if the company cannot operate well to create a large amount of cash, the interest expense can be a burden (Charles W.L.Hill, 2002).
Evidently, the enterprise can never be 100% sure about the amount of income in the future (although they could have reasonably expected) and when the future income of the enterprise as unstable, increasing risk. Thus, firms in low-risk business, with stable cash flows often use debt more than firms in sectors more risk (Buckley, A., 2007).
Reference
Charles W.L.Hill, (2002) “International Business: Competing in global market”, The Magraw Hill Companies. United States.
Buckley, A. (2007) Multinational Finance, Pearson
Tuesday 29 March 2011
Advantage and disadvantage of Investment Appraisal Tools
Problems make investment decisions for a business or company need to be evaluated and scrutinized by investors when investors always want to earn profits for themselves, but there are also risks losing. To help investors do this, they need to use the Investment Appraisal Tools as Payback Period, Accounting Rate of Return, Net Present Value (NPV), Internal Rate of Return (IRR) and Discounted Cash Flow (DCF) which build detailed reports on the issues involved and influential in the investment process, predicting that adversely affect the investment process. From there we made the investment options most appropriate.
NPV
NPV normally be considered not only indicators but also are considered the best method to assess the profitability of the project because they show the project's net income after recovery of initial investment capital and cover all costs (including inflation). (Arnold C. Harberger, 1972)
However, the NPV method has disadvantages that require precise calculation of costs, but this is often difficult to implement for long projects. So in reality it is a development cost of capital discount rate (usually due to investor expectations on the basis of calculations to consider the factors that impact on investment projects). (Michael Roemer and Joseph J. Stern,1975
One other disadvantages of the NPV do not show profitability calculated at the percent rate thus affecting the difficult choice of investment opportunities.
IRR
IRR can be calculated by interpolation as the under block and the above block, however, thanks to the application of Excel, the IRR calculation easy. It is important to understand the meaning of IRR. If this value is greater than the value of the discount rate (opportunity cost) when that the project worthwhile. (Donald R. Lessard and Daniel L. Wisecarver)
IRR method has the advantage of easy calculation because regardless of the cost of capital, very convenient to compare investment opportunities because profitability were showed as a percentage. The core meaning of IRR show for investors can know the cost of capital using the highest possible acceptable. If they exceed so capital using is inefficient. (Donald R. Lessard and Daniel L. Wisecarver, 1975)
Disadvantages of the IRR is calculated on the basis of cost of capital will thus could lead to identifying the profitability of the project. Investors will not know how much money they have. (Arnold C. Harberger, 1972)
NPV
NPV normally be considered not only indicators but also are considered the best method to assess the profitability of the project because they show the project's net income after recovery of initial investment capital and cover all costs (including inflation). (Arnold C. Harberger, 1972)
However, the NPV method has disadvantages that require precise calculation of costs, but this is often difficult to implement for long projects. So in reality it is a development cost of capital discount rate (usually due to investor expectations on the basis of calculations to consider the factors that impact on investment projects). (Michael Roemer and Joseph J. Stern,1975
One other disadvantages of the NPV do not show profitability calculated at the percent rate thus affecting the difficult choice of investment opportunities.
IRR
IRR can be calculated by interpolation as the under block and the above block, however, thanks to the application of Excel, the IRR calculation easy. It is important to understand the meaning of IRR. If this value is greater than the value of the discount rate (opportunity cost) when that the project worthwhile. (Donald R. Lessard and Daniel L. Wisecarver)
IRR method has the advantage of easy calculation because regardless of the cost of capital, very convenient to compare investment opportunities because profitability were showed as a percentage. The core meaning of IRR show for investors can know the cost of capital using the highest possible acceptable. If they exceed so capital using is inefficient. (Donald R. Lessard and Daniel L. Wisecarver, 1975)
Disadvantages of the IRR is calculated on the basis of cost of capital will thus could lead to identifying the profitability of the project. Investors will not know how much money they have. (Arnold C. Harberger, 1972)
Bad credit crunch of US in 2009
Fiscal deficit of the U.S at a record 482 billion dollars in 2009, the objective of the U.S. government monetary fund is using reserves to impacts into market, in order to save the economy is in recession (BBC). This problem occurred mainly caused by the economic crisis, it has made most banks and large companies to bankruptcy this leads to the budget reserves of US have to focus on help these large companies to stabilize economies. Besides, this also leads to increase of unemployment. So many companies and people affected by this credit crunch therefore tariff reduced that further made fiscal deficits of the United States.
In the U.S., the establishment of private credit loans has dropped to lowest level, lower than the 2001 economic recession. In addition, because the risk that inflation brings, the U.S. central bank cannot reduce profits even further. Follow warn of IMF about risk of U.S. credit is pulled by loans of other sectors including cars industries.
In the U.S., the establishment of private credit loans has dropped to lowest level, lower than the 2001 economic recession. In addition, because the risk that inflation brings, the U.S. central bank cannot reduce profits even further. Follow warn of IMF about risk of U.S. credit is pulled by loans of other sectors including cars industries.
Monday 21 March 2011
Effective of acquisition and merger in economy recession
A lot of company care out some business deal in economy recession, they will meet risks and unrealistic. credit market operate abnormal, so finance will become an obstacle not easily overcome. However, about, Companies have strong finance and strategies, so economy recession is good opportunities to them advanced competitive position through acquisitions or merger.
Following analysis of Bain and Company ( a Strategies and global business consulting firm in US) during over 24.000 contracts from 1996 to 2006, acquisition complete In a distant future recession in 2001 to 2002, they earned excess returns three times with similar cases occurred during the previous boom growth (Time, 2008). Consider the long term, reality show the company acquires in the whole time of explosive growth market and downturn performed better than the company only acquired in time of growth.
Although in any economic environment, the most important objectives of the merger and acquisition (M & A) is to deploy the company's strategy. Chinese computer manufacturer Lenovo has bought IBM's Personal Systems Division for around $1.75 billion. Products of Lenovo have strong position in the market after gaining the technology of IBM. Lenovo will also benefit from marketing and sales leads provided by the company's 30,000 strong sales force and through IBM.com. IBM will receive $650 million in cash and $600 million worth of Lenovo shares currently traded on the Hong Kong stock exchange. IBM will also take over some $500 million worth of liabilities from IBM.
In economy recession, M & A activity also make more strategic choices. For example, when the Pfizer expire monopoly of patent about some leading pharmaceutical, which has decided contract acquired competitor Wyeth.
Other industries also tend to reinforce the strength when the market-leading group working to increase strategic options by expanding the scale or scope. For example, wireless phone companies can make more value for their products such as add new software or new content. In 2009, Verizon( a telecommunications company of US) expended 28.1 billion USD to acquire Alltel to have opportunity step into the market in rural areas and remote areas. Verizon Group, major shareholder of Verizon Wireless, said in 2008 its sales had risen 16.4% over 2007. That's why Verizon Wireless remains a steady flow rate of acquisition, including in the context of crisis. From 2004 to 2007, a total the company has conducted 40 acquisitions.
Following analysis of Bain and Company ( a Strategies and global business consulting firm in US) during over 24.000 contracts from 1996 to 2006, acquisition complete In a distant future recession in 2001 to 2002, they earned excess returns three times with similar cases occurred during the previous boom growth (Time, 2008). Consider the long term, reality show the company acquires in the whole time of explosive growth market and downturn performed better than the company only acquired in time of growth.
Although in any economic environment, the most important objectives of the merger and acquisition (M & A) is to deploy the company's strategy. Chinese computer manufacturer Lenovo has bought IBM's Personal Systems Division for around $1.75 billion. Products of Lenovo have strong position in the market after gaining the technology of IBM. Lenovo will also benefit from marketing and sales leads provided by the company's 30,000 strong sales force and through IBM.com. IBM will receive $650 million in cash and $600 million worth of Lenovo shares currently traded on the Hong Kong stock exchange. IBM will also take over some $500 million worth of liabilities from IBM.
In economy recession, M & A activity also make more strategic choices. For example, when the Pfizer expire monopoly of patent about some leading pharmaceutical, which has decided contract acquired competitor Wyeth.
Other industries also tend to reinforce the strength when the market-leading group working to increase strategic options by expanding the scale or scope. For example, wireless phone companies can make more value for their products such as add new software or new content. In 2009, Verizon( a telecommunications company of US) expended 28.1 billion USD to acquire Alltel to have opportunity step into the market in rural areas and remote areas. Verizon Group, major shareholder of Verizon Wireless, said in 2008 its sales had risen 16.4% over 2007. That's why Verizon Wireless remains a steady flow rate of acquisition, including in the context of crisis. From 2004 to 2007, a total the company has conducted 40 acquisitions.
Sunday 13 March 2011
Special advantages of multinational companies
Foreign Direct Investment (FDI): is long term investment method of personal or foreign company invest to other country by set up manufacturing facilities, business whose will have business controlling power
Stephen H. Hymes (1960), John H. Dunning (1981), Rugman A. A. (1987) and some other people said that the multinational corporations have a lot of characteristic advantages such as competences of firm, they allow multinational corporations can pass expense disincentive in foreign country, therefore they ready invest direct into foreign country. When the multinational corporations chose place of investment, they will chose good place where have conditions to help them bring into play characteristic advantages such as labour, position.
Foreign Direct Investment is a method to avoid conflict bipartite commerce. Example Japan has been complained by USA and Euro because Japan have commerce surplus, about USA and Euro have been traded gap in bipartite relationship. To cope, Japan was strengthened to direct investment into those markets. They have produced and sold cars and computers at USA and Euro, to reduce those export goods from Japan. They also invest directly in third countries, and from those they export to North America and Euro market
FDI not only go from more developed countries to less developed countries. Reverse even more strongly. Japan is a direct investment positive countries in American to exploit professional in American. Example: automobile companies in Japan have opened the car parts designed in the U.S. to use American experts. Lenovo is a multinational corporation in China, they bought parts manufacturer laptop of IBM in USA, that is a strategy of Lenovo approach preeminent computer production technologies of IBM
To have a lot of raw materials, many multinational companies invested into countries with abundant resources. The first biggest wave of direct investment was in Japan on the 1950 is for this purpose. China's FDI now has the same purpose.
Monday 7 March 2011
Tranfer pricing norm spells bad news for MNCs
A multinational corporation (MNC) is a corporation or an enterprise that manages production or delivers services in more than one country. It can also be referred to as an international corporation.
Transfer pricing or the pricing of goods or services for cross-border transactions between related parties for tax purposes has been a bone of contention between the taxman and corporate houses. OECD Transfer Pricing Guidelines state, “Transfer prices are significant for both taxpayers and tax administrations because they determine in large part the income and expenses, and therefore taxable profits, of associated enterprises in different tax jurisdictions.” (OECD, 2001)
Reports CNBC-TV18’s Ashwin Mohan shows that “Budget 2011 may have added to the bad blood. For starters, the +/- 5% variation allowed to companies for the purpose of determining the appropriate price has been taken away. That means old calculation of good pricing will become unsuitable in 2011, +/- 5% variation will make them have to adjust all their active from producing to sales to offer new suitable price for their products, making their profits can change and meet difficulties.
Balbir Singh, Senior Tax Partner, DSK Legal feels, “taking away of this margin of 5% is going to further enhance litigation in India because this +/-5% was giving benefit to lot of industries and margin if error permitted is by and large to my mind acceptable even to the tax authorities.”
A clear example The Wind Group is a multinational company manufacturing wind turbines. It has two subsidiaries: Dutch Parts which makes circuit boards for the turbines in The Netherlands and Turbines UK which assembles them in the UK. Dutch Parts are subject to 20 per cent tax in The Netherlands while Turbines UK is subject to 40 per cent tax in the UK. Each year Dutch Parts sells 10,000 circuit boards to Turbines UK. The sale is made at a transfer price of €100 per board, totaling €1,000,000. In the first year both subsidiaries make a pre-tax profit of €800,000 each, earning the Wind Group a total pre-tax profit of €1.6 million . Turbines UK pays €320,000 tax at 40 per cent on its profits, while Dutch Parts only pays €160,000 because of the lower tax rate of 20 per cent in The Netherlands. As a result, the total net profit of the Wind Group for the year is €1,120,000 and its tax bill is €480,000. In the second year Dutch Parts raises the transfer price to €150 per board increasing the total cost of the sale to €1.5 million. Thus, the profits of Dutch Parts rise by €500,000, while those of Turbines UK fall by the same amount.
At the end of the second year the balance sheet of Turbines UK shows a reduced pre-tax profit of €300,000 (reflecting the increased cost of the boards) while Dutch Parts enjoys a rise in pre-tax profits to €1.3 million.
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