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Employee Motivation : a Powerful New Method Critical Review

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Question 1 Sources of finance of high-tech firm
There are a number of ways of raising finance for a business. The type of finance chosen depends on the nature of the business. Large organizations are able to use a wider variety of finance sources than are smaller ones. Sources of finance can be classified into internal sources (raised from within the organisation) and external (raised from an outside source). There are five internal sources of finance, owner’s investment, retained profits, sale of fixed assets, sale of stock and debt collection. There are also five external sources of finance, bank loan or overdraft, additional partners, share issue, leasing, hire purchase mortgage, trade credit and government grants.
For a high-tech company, firstly, long-term sources of finance should be used. For example, owner’s investment should become the first fund of the company. Owner’s investment is money which comes from the owner’s own savings. It is the form of start up capital - used when the business is setting up, it also can be used for business expansion. Owner’s investment is a long-term source of finance and there is no interest needs to be paid. But owner’s investment is a limit to the amount because of the owner has a limited amount that can be invest. The founder should look for more money from other aspects in order to start up a new company successfully. Bank loan is a good choice for the founder. Bank loan is money borrowed at an agreed rate of interest over a set period of time. It can be regarded as the medium or long-term source of finance. Because the repayments are spread over a period of time, which is good for budgeting of company, founders for company starting up or operation usually use bank loan. A further way of raising funds that has become popular is through venture capital. Merchant banks and investment specialists may be willing to provide finance for a promising and fast-growing smaller business. Share issue and mortgage also belong to the long-term sources of finance, and they are also the good choice for founders. Share issue is suitable for a limited company. For a successful high-tech company, share issue is a necessary way for raising money. Mortgage is a loan secured on property and once all repayments are made the business will own the asset. But mortgage is also an expensive method, if business does not keep up with repayments the property could be repossessed. The founder of high-tech company also can use the medium or short –term sources of finance. Such as sale of stock, debt collection, leasing, bank overdraft and trade credit etc. Business may also qualify for grants. Government assistance and funding is sometimes made available to businesses that meet certain conditions. For example, grants and loans may be available to firms setting up in rural areas or where there is high unemployment. Therefore, the founders may look for funding from government grants. (Perk, 2007)
Question 2 Rights issue
A rights issue is an invitation to existing shareholders to purchase additional new shares in the company. More specifically, this type of issue gives existing shareholders securities called “right”, which, well, give the shareholders the right to purchase new shares at a discount to the market price on a stated future date. The company is giving shareholders a chance to increase their exposure to the stock at a discount price. But until the date at which the new shares can be purchased, shareholders may trade the rights on the market the same way they would trade ordinary shares. The rights issued to a shareholder have a value, thus compensating current shareholders for the future dilution of their existing shares’ value (Brealey, 2006). A rights issue is directly offered to all shareholders of record or through broker dealers of record and may be exercised in full or partially. Subscription rights may either be transferable, allowing the subscription-rights holder to sell them privately, on the open market or not at all. A rights issue to shareholders is generally made as a tax-free dividend on a ratio basis, because the company receives shareholders’ money in exchange for shares, a rights issue is a source of capital in an organization. Troubled companies typically use rights issues to pay down debt, especially when they are unable to borrow more money. But not all companies that pursue rights offerings are rickety. Some with healthy balance sheets use them to fund acquisitions and growth strategies. For reassurance that it will raise the finances, companies will usually, but not always, have its rights issue underwritten by an investment bank. It is awfully easy for investors to get tempted by the prospect of buying discounted shares with a rights issue. But it is not always a certainty that people are getting a bargain. But besides knowing the ex-rights share price, investors need to know the purpose of the additional funding before accepting or rejecting a rights issue. Be sure of looking for a compelling explanation of why the rights issue and share dilution are needed as part of the recovery plan. Obviously, a rights issue can offer a quick fix for a troubled balance sheet, but it doesn't necessarily mean management will address the underlying problems that weakened the balance sheet in the first place. Shareholders should be cautious.
Question 3 Types of swap
In finance, a swap is a derivative in which counterparties exchange cash flows of one party’s financial instruments for those of the other party’s financial instrument. Unlike options and futures, swaps are not exchange-traded instruments. Instead, swaps are customized contracts that are traded in the over-the-counter (OTC) market between private parties. Firms and financial institutions dominate the swaps market, with few individuals ever participating. Because swaps occur on the OTC market, there is always the risk of a counterparty defaulting on the swap.
There are mainly five types of swap, including interest rate swap, currency swaps, credit default swaps, commodity swap and equity swap. Interest rate swap is used mostly. Interest rate swaps is more active in financial markets trading species, but also globalization of financial markets, it is a financial innovation tools under the rapid increase of financial risks. It is widely used to hedge interest rate risk, expand financing channels, to reduce financing costs and enhanced asset-liability management. A currency swap means an arrangement in which two parties exchange specific amounts of different currencies initially, and a series of interest payments on the initial cash flows are exchanged. Often, one party will pay a fixed interest rate, while another will pay a floating exchange rate. At the maturity of the swap, the principal amounts are exchanged back. Unlike an interest rate swap, the principal and interest are both exchanged by using currency. People who using currency swap for securing cheaper debt and hedging against exchange rate fluctuations. A credit default swap is similar to an insurance contract because it provides protection against specific credit events. In a typical credit default swap, the party sells credit risk, usually associated with a corporate bond or underlying credit asset, to the counterparty. The buyer pays a periodic fee or premium, normally expressed in basis points on the notional amount, to the seller. In return, the seller pays default payment upon a default. However, if any default does not occur during the term of the swap, then the buyer continues to pay the premium till maturity. Traditionally, there is no exchange of money when the two parties enter into the contracts. The payments are done only during the term of the contract. By purchasing credit protection through credit default swap, one can create a short position without the requirement of initial cash expenditure. In short, credit default swaps can be utilized as a vehicle to diversify or hedge credit portfolio. A commodity swap is an agreement whereby a floating price based on an underlying commodity is traded for a fixed price over a specified period. It is similar to a Fixed-Floating interest rate swap. The difference is that in an Interest rate swap the floating leg is based on standard Interest rates such as LIBOR, but the floating leg of a commodity swap is based on the price of underlying commodity such as oil. Equity swap is a refinancing deal in which a debt holder gets an equity position in exchange for cancellation of the debt. It is used in order to avoid transaction costs, to avoid locally based dividend taxes, limitations on leverage or to get around rules governing the particular type of investment that an institution can hold.
Question 4 Bond value calculations
According to the question, we can know that,
Face value of bond is $1000, the coupon interest rate is 7%, and there are 9 years to maturity and the yield to maturity is 10%.
Using the formula then we can know,
The present value of principal is $1000/(1+YTM)t =$1000/(1+10%)9 =$424.1
The coupon payment is $1000*7%=$70
The present value of coupon payments is $70*[(1-1/(1+10%)9)/10%]=$403.13
The price of bond is equal to present value of coupon plus present value of principal,
Therefore the value of bond is $424.1+$403.13=$827.23
Question 5 Acquisitions
Acquisitions are often made as part of a company’s growth strategy whereby it is more beneficial to take over an existing firm’s operations compared to expanding on its own. Acquisitions are often paid in cash, the acquiring company’s stock or a combination of both. There are some reasons for acquisition. Firstly, The most used word in acquisition is synergy, which is the idea that by combining business activities, performance will increase and costs will decrease. Secondly, acquisition will help for increasing supply-chain pricing power. By buying out one of its suppliers or one of the distributors, a business can eliminate a level of costs. Thirdly, Mergers can give the acquiring company an opportunity to grow market share without having to really earn it by doing the work themselves, they can buy a competitor’s business for a price instead.
Before making the acquisition, leaders of company should take several factors into consideration. At first, they should examine the financial statements of the company under consideration carefully. It is important to understand the current debt levels and the timing of the obligations. Secondly, they should do a comprehensive analysis about the target company, which include its industry, products (service) and competitors. Thirdly, management of the target company also should be taken into consideration. Because of it refers to whether or not will the acquirers keep any of the existing management or will bring in new executives. Additionally, the challenge for managers is to ensure that their acquisitions are among those that do create value for their shareholders. Thus managers need to know how to create value from acquisitions. To be concluded, an overall due diligence should be made before an acquisition.

Reference 1, Brealey.R.A, Myer.S.C, Allen.F., (2006): Principal of Corporate Finance, McGraw-Hill. 2, Choudhry.M., (2006): The Credit Default Swap Basis, Bloomberg Press. 3, Graham.B., (2006): The Intelligent Investor, Harper Business. 4, McDonald.R.L., (2003): Derivatives Market, Pearson Education. 5, Miron.P. Swannell.P., (1991): Pricing and Hedging Swaps, Euromoney Books. 6, Perk.J.B, Demarzo.P.M., (2007): Corporate Finance, Pearson Education. 7, Rose.P.S Hudgins.S.C., (2005): Bank Management and Finance Service, McGraw-Hill. 8, Tirde.J., (2005): The Theory of Corporate Finance, Princeton University Press. 9, Vachan.D., (2007): Mergers and Acquisitions, Penguin Group. 10, Wessels.D. Goedhart.M. Kaler.T., (1990): Valuation: Measuring and Managing the Value of Companies, Mckiney&Company.

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