...CAPITAL STRUCTURES DECISIONS Dividends, Capital Structures Decisions Ma. Cesarlita G. Josol MBA - Acquisitions Strayer University 1 DIVIDENDS, CAPITAL STRUCTURES DECISIONS 2 Use the following information for Questions 1 through 3: Boehm Corporation has had stable earnings growth of 8% a year for the past 10 years and in 2013 Boehm paid dividends of $2.6 million on net income of $9.8 million. However, in 2014 earnings are expected to jump to $12.6 million, and Boehm plans to invest $7.3 million in a plant expansion. This one- time unusual earnings growth won’t be maintained, though, and after 2014 Boehm will return to its previous 8% earnings growth rate. Its target debt ratio is 35%. Calculate Boehm’s total dividends for 2014 under each of the following policies: Growth rate Net Income Dividend Dividend/Net Income Ratio Dividend/Net Income % 8% 2013 $9.8 $2.6 0.265306 26.5306% 2014 $10.584 $2.808 2014 $12.600 $3.34 QUESTION #1: Calculate Boehm’s total dividends for 2014 if its 2014 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. Step 1: Find the dividend / net income ratio for 2013 Dividend/ Net Income Ratio = Dividend 2013 / Net Income2013 = $2.6 million / $9.8 million = 0.265306 Dividend/Net Income Ratio = 26.5306 % **The dividend/net income ratio will be used as the rate for the projection of dividends Step 2: Calculate the 2014 projected net income using the long-run growth rate...
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...Background Study Capital budgeting is the process by which firms determine how to invest their capital. Included in this process are the decisions to invest in new projects, reassess the amount of capital already invested in existing projects, allocate and ration capital across divisions, and acquire other firms. In essence, the capital budgeting process defines the set and size of a firm’s real assets, which in turn generate the cash flows that ultimately determine its profitability, value and viability. In principle, a firm’s decision to invest in a new project should be made according to whether the project increases the wealth of the firm’s shareholders. For example, the Net Present Value (NPV) rule specifies an objective process by which firms can assess the value that new capital investments are expected to create. As Graham and Harvey (2001) document this rule has steadily gained in popularity since Dean (1951) formally introduced it, but its widespread use has not eliminated the human element in capital budgeting. Because the estimation of a project’s future cash flows and the rate at which they should be discounted is still a relatively subjective process, the behavioural traits of managers still affect this process. Capital budgeting is a process that is used to determine whether or not certain projects are worthwhile investments. Another term for capital budgeting is called an “investment appraisal.” Every firm has both a limited amount of capital available and a desire...
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...related with making profit. (According to the economics concept of factors of production, rent given to landlord, wage given to labour, interest given to capital and profit given to shareholders or proprietors), a business concern needs finance to meet all the requirements. Hence finance may be called as capital, investment, fund etc., but each term is having different meanings and unique characters. Increasing the profit is the main aim of any kind of economic activity. MEANING OF FINANCE: Finance may be defined as the art and science of managing money. It includes financial service and financial instruments. Finance also is referred as the provision of money at the time when it is needed. Finance function is the procurement of funds and their effective utilization in business concerns. DEFINITION OF FINANCE: According to Khan and Jain, “Finance is the art and science of managing money”. Webster’s Ninth New Collegiate Dictionary defines finance as “the Science on study of the management of funds’ and the management of fund as the system that includes the circulation of money, the granting of credit, the making of investments, and the provision of banking facilities. TYPES OF FINANCE: Finance is one of the important and integral part of business concerns, hence, it plays a...
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...Capital Budgeting Firms continually invest funds in assets and these assets produce income and cash flows that the firms can then either reinvest in more assets or pay to its owners. These assets represent the firm's capital. Capital is the firm's total assets and is comprised of all tangible and intangible assets. These assets include physical assets (such as land, buildings, equipment, and machinery), as well as assets that represent property rights (such as accounts receivable, notes, stocks, and bonds). When we refer to capital investment, we are referring to the firm's investment in its assets. The term "capital" also has come to mean the funds used to finance the firm's assets. In this sense, capital consists of notes, bonds, stock, and short-term financing. We use the term "capital structure" to refer to the mix of these different sources of capital used to finance a firm's assets. The term "capital" in financial management, a firm's resources and the funds committed to these resources, does not mean the same thing in other fields. In accounting, the term "capital" means the owners' equity, the difference between the amount of a firm's assets and its liabilities. In economics, the term "capital" means the physical (real) of the firm, and therefore excludes the assets that represent property rights. In law the term "capital" refers to the amount of owners' equity required by statute for the protection of creditors. This amounts to the "stated capital", which often is...
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...sufficient returns on invested capital, with an intention to maximise the wealth of the owners. The financial manager plays the crucial role in the modern enterprise by supporting investment decision, financing decision, and also the profit distribution decision. He/she also helps the firm in balancing cash inflows and cash outflows, and in turn to maintain the liquidity position of the firm. How does the modern financial manager differ from the traditional financial manager? Does the modern financial manager's role differ for the large diversified firm and the small to medium size firm? The traditional financial manager was generally involved in the regular finance activities, e.g., banking operations, record keeping, management of the cash flow on a regular basis, and informing the funds requirements to the top management, etc. But, the role of financial manager has been enhanced in the today's environment; he/she takes an active role in financing, investment, distribution of profits, and liquidity decisions. In addition, he/she is also involved in the custody and safeguarding of financial and physical assets, efficient allocation of funds, etc. The role of financial manager in case of diversified firm is more complicated in comparison with a small and medium size firm. A diversified firm has several products and divisions and varied financial needs. The conflicting interests of divisional managers make the work of financial manager quite difficult in a...
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...Chapter 1 Introduction to Corporate Finance Week 1 by Hee Soo Lee Learning Goals The basic types of financial management decisions and the role of the financial manager The financial implications of the different forms of business organization The goal of financial management The conflicts of interest that can arise between owners and managers The various types of financial markets 2 Chapter Structure 1.1 The Types of Firms 1.2 Ownership Versus Control of Corporations 1.3 The Stock Market 3 What is Corporate Finance? Three important questions that are answered when you start your own business: - What long-term investments should you take on? (business type, building, machinery, and equipment?) - Where will you get the long-term financing to pay for the investment? (bring other owners or borrowing?) - How will you manage the everyday financial activities of the firm? (collecting from customers and paying suppliers) Corporate finance is the study of ways to answer these three questions Finance can be defined as the art and science of managing money Finance is concerned with the process, institutions, markets, and instruments involved in the transfer of money among individuals, businesses, and governments 4 Legal Forms of Business Organization Three major forms Sole Proprietorship : business owned by a single individual Partnership: business formed by two or more individuals...
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...Capital budgeting (or investment appraisal) is the planning process used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It is budget for major capital, or investment, expenditures.[1] Many formal methods are used in capital budgeting, including the techniques such as Accounting rate of return Payback period Net present value Profitability index Internal rate of return Modified internal rate of return Equivalent annuity Real options valuation These methods use the incremental cash flows from each potential investment, or project. Techniques based on accounting earnings and accounting rules are sometimes used - though economists consider this to be improper - such as the accounting rate of return, and "return on investment." Simplified and hybrid methods are used as well, such as payback period and discounted payback period. acoording to two Economist Khizar Hayyat And Saqlain Shah: capital budgeting is a long term economics decision making it is called capital budgiting Each potential project's value should be estimated using a discounted cash flow (DCF) valuation, to find its net present value (NPV). (First applied to Corporate Finance by Joel Dean in 1951; see also Fisher separation theorem, John Burr Williams: Theory.) This valuation requires estimating the size and timing of all the incremental cash flows from...
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...Ratio Analysis: Financial Rations- relationships determined from firms financial information and used for comparison purposes. Short Term Solvency or Liquidity Rations: ✓ These ratios provide information about the firm’s liquidity. The primary concern us the firm’s ability to pay its bills over a short run without undue stress. The focus on current assets and liabilities. Generally, but not always, the book value and the market value of a firm’s current assets/liabilities are similar as their life is not long enough to cause huge differences. 1. Current Ration= Current Assets/Current Liabilities o Because current assets and liabilities are, in principle, converted to cash within twelve months, the current ratio is a measure of short-term liquidity; the unit measure is either in dollars or times. For a creditor, the higher the current ratio, the better. For firms, the higher the current ratio indicates liquidity and also an inefficient use of cash and other short-term assets. He ratio should generally be at least one. 2. The Quick of Acid-Test Ration= (Current Assets-Inventory)/Current Liabilities o Inventory is often the least liquid current asset, it’s the one for which the book value is the least reliable as measures do market value and the quality of the inventory isn’t considered. Relatively large inventories are often a sign of short-term trouble. The firm may have overbought /over produced because of overestimated sales. Using cash to...
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...the long-term goals of a corporation. Their main goal is to maximize the value of stock shares. Stockholder wealth maximization is the appropriate goal for management decisions. The risk and timing associated with expected earnings per share and cash flows are considered in order to maximize the price of the firm’s common stock. Maximizing shareholder wealth is maximizing purchasing power or maximizing the flow of discounted cash flow to shareholders over a long term period. This is because under wealth maximization, more importance is given to cash flows rather than profitability. A basic principle is that ultimately wealth maximization should be discovered in increased net worth or value of business. So, to measure the same, value of business is said to be a function of two factors – earnings per share and capitalization rate. For a business, it is not necessary that profit maximization should be the only objective; it may concentrate on various other aspects like increasing sales, capturing more market share etc, which will take care of profitability. Some factors in profit comparison does not allow for are: (a) Future prospects; (b) Risk; and (c) Accounting problems. Q2: A financial manager is expected to maximize the value of a firm to shareholders. The financial manager is an intermediary between capital markets and the firm’s operations, responsible for both financing decisions (decisions that involve raising money) and investment decisions (decisions that...
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...Guillermo Furniture. The firm has come to a crossroads in its industry. Due to competitive forces that have recently entered the firm’s market, the firm must decide if it should make capital investments to become a high tech manufacturer, become a distributor, or due nothing and continue its traditional course of operations. Capital investments are instrumental to future successes realizable by Guillermo and “business profitability ultimately hinges, to a large extent, on the quality of a few capital investment decisions” (Edmonds, 2007). As a result, we will explore recommendations for Guillermo to vacate its current landscape of operations for a more innovative approach as a high tech manufacturer or distributor. The goal of this brief is to convey the most appropriate management of Guillermo Furniture’s capital funds and ascertain the best return on the firm’s investments. There are various techniques available for the firm to utilize. Consequently, this memo will also serve to explain the fundamental differences between the following two techniques, net present value (NPV) and internal rate of return (IRR). Differences: NPV and IRR There are many techniques available for managers to use when analyzing potential capital investments. NPV compares the present value of an investment with the costs associated with the investment. The difference between the present value and the cost of the investment equals the net present value of the investment. When the net present value...
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...life blood of every corporation. In the era of modern trade and commerce, business firm have to decide from where they will raise fund, where they will invest and how much of the profit will be distributed among the shareholders. “Finance” Came from Latin word “finis” means “dealing with the money”.finace is called the art and science of managing money. At the micro level, finance is the study of financial planning, asset management and fund raising for business and financial institutions. At the macro level, finance is the study of financial institution and financial markets and how they operate within the financial systems in both the domestic and global economics. Scholar’s view: “Finance consists of providing and utilizing the money, capital rights, credit and funds of any kind which are employed in the operation of an enterprise.” _George R Terry “Finance is concerned with the process, institutionsmarkets and instruments involved in the transfer of money among and between individuals, business and governments”. _Lawrence J Gitman From the above discussion, it can be said that finance is the process of financial planning, identification of sources of fund raising, investment of fund, protection of fund, distribution of profit to achieve the goal of the organization...
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................................................................................................. 1 2. How does Marriott use its estimate of its cost of capital? Does this make sense? ...... 3 3. What is the weighted average cost of capital for Marriott Corporation? ..................... 4 4. What type of investments would you value using Marriott’s WACC? ........................ 6 5. If Marriott used a single corporate hurdle rate for evaluating investment opportunities in each of its lines of business, what would happen to the company over time? ......... 7 6. What is the cost of capital for the lodging and restaurant divisions of Marriott? ........ 8 7. What is the cost of capital for Marriott’s contract services division? How can you estimate its equity costs without publicly traded comparable companies? ................ 11 APPENDIX I – Math Utilized to Derive WACC for Marriott .......................................... 13 APPENDIX II – Math Utilized to Derive WACC for Divisions ...................................... 16 BA 626 Financial Decision Making ii 1. Are the four components of Marriott’s financial strategy consistent with its growth...
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...Principles of Managerial Finance Solution Lawrence J. Gitman PART 5 Short-Term Financial Decisions CHAPTERS IN THIS PART 14 Working Capital and Current Assets Management 15 Current Liabilities Management INTEGRATIVE CASE 5: CASA DE DISEÑO Find out more at www.kawsarbd1.weebly.com 372 Last saved and edited by Md.Kawsar Siddiqui Principles of Managerial Finance Solution Lawrence J. Gitman CHAPTER 14 Working Capital and Current Assets Management INSTRUCTOR’S RESOURCES Overview This chapter introduces the fundamentals and describes the interrelationship of net working capital, profitability, and risk in managing the firm's current asset accounts. The chapter then focuses on the management of three major current asset accounts⎯cash, accounts receivable and inventory. A brief discussion of general inventory management policies, international inventory management, and several specific inventory management techniques: ABC, economic order quantity (EOQ), reorder point, materials requirement planning (MRP), and just-in-time (JIT). The key aspects of accounts receivable management are discussed: credit policy, credit terms, and collection policy. The chapter also discusses the additional risk factors involved in managing international accounts receivable. Examples demonstrate the effect of changes in credit policy. Also discussed is the impact of changes in cash discounts PMF DISK This chapter's topics are not covered on the...
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...are: a) Investment of Long-term asset-mix decisions These decisions (also referred to as capital budgeting decisions) relates to the allocation of funds among investment projects. They refer to the firm’s decision to commit current funds to the purchase of fixed assets in expectation of future cash inflows from these projects. Investment proposals are evaluated in terms of both risk and expected return. Investment decisions also relates to recommitting funds when an old asset becomes less productive. This is referred to as replacement decision. b) Financing decisions Financing decision refers to the decision on the sources of funds to finance investment projects. The finance manager must decide the proportion of equity and debt. The mix of debt and equity affects the firm’s cost of financing as well as the financial risk. This will further be discussed under the risk return trade-off. c) Division of earnings decision The finance manager must decide whether the firm should distribute all profits to the shareholders, retain them, or distribute a portion and retain a portion. The earnings must also be distributed to other providers of funds such as preference shareholder, and debt providers of funds such as preference shareholders and debt providers. The firm’s dividend policy may influence the determination of the value of the firm and therefore the finance manager must decide the optimum dividend – payout ratio so as to maximise the value of the firm. d) Liquidity...
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...outside the U.S. It will identify the economic concepts that apply to this firm and how the concepts can be used to address the firm’s problems and opportunities. It will identify the economic and political policies that affect this firm and how the policies impact business decisions. It will discuss how the firm uses technology for strategic advantages and the impact of globalization for the firm. Economics for the Global Manager Introduction The world’s largest; Boeing is an aerospace company that leads the manufacturing of commercial jetliners. Boeing also has manufacturer defense, space, and security systems (About Us, 2013). Boeing’s global operations have supply and manufacturer activities outside the U.S. (Backgrounder, 2013). The economic concepts that apply to this firm are manufacturing of commercial jetliners as well as defense, space, and security systems and these concepts can be used to address the firm’s problems and opportunities (About Us, 2013). The economic and political policies that affect this firm are economic growth and political turmoil and these policies impact business decisions (Long-Term Market, 2013). The firm uses technology for strategic advantages by ¬making plans in its research and development investments to maximize potential returns and the impact of globalization for the firm (Arkell, 2005). Boeing Boeing is the world’s largest aerospace company that has a long tradition of leadership and innovation. It leads the field in the manufacturing...
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