Week 11: Dividend Policy

Previously, I have discussed about the opportunities for companies to do an investment decision and raising finance decision. Now, I will write about examine the dividend decision in which more or less could influenced by the investment and financing decision. Traditionally, if nothing special for doing the investment, it would be better if increase the dividend and then give it to the shareholders or if it is difficult to get the finance or if it is too expensive, maybe, it would be best if just keep the money to finance the business instead of paying the dividend to the shareholders.

How do the companies pay off the dividends? The UK companies mostly pay the dividend twice a year (interim and final dividend) only from the accumulated distributed profit in order to protect the creditors who were willing to lending money to companies and thus, obviously the companies must have enough cash to pay the dividend to the shareholders. Every company probably need to have the dividend policy before they can pay the dividend (in which dividend policy is the policy that company uses to determine on how much it will pay out to shareholders in dividend) and should intend to maximise the shareholder wealth. And this is also explained in classic study by Porterfield (1965) which he argued that a dividend payment would only do so if the new share price+dividend is equal or higher than previous share price.

Even so, there is an objection from others where according to Modigliani & Millar (1961), the dividend policy is irrelevance to the share price that company is actually valued from future earning potential and not dividends that paid now thus, amount of earnings distributed are not determined the share value but the investment policy does. Additionally, a rational investor is preferred more on dividend rather than the capital gains therefore, the investors are actually indifferent between these two because of the fact that M&M think the investment policy could maximise the company's market value where investing in positive NPV projects in order to increase the positive cash flow might increase the share price thus increase the wealth of shareholders as well.

In other part, Modigliani and Millar also argue that dividends represents a residual payment which investing in all projects that can get a positive NPV and if earnings are left over, they should pay the dividend however, if no surplus after all earnings are invested, no need to pay the dividend while the market value of the company should rise to reflect the future increasing returns. Thus, they believed that dividend decision is merely a financing decision but they did not argue that paying the dividends are irrelevant to company's valuation because the company's valuation is unaffected by the timing of paying the dividend due to the same impact if pay or not paying the dividend however, if dividends are not paid, the shares of the company become not worth at all.

Even so, there are other argument that supported the relevance of dividend before Modigliani & Millar where according to Traditional View; Linter (1956) and Gordon (1959), the investors are more preferable to have the dividends than capital gains because of the uncertainty of future gains in uncertain investments. Thus, as they would prefer on dividends, the market value of the company will influence by the dividend policy for example, if a company pay low dividend to investors, they might swap to other company that pay more dividend to them and this will result on the decrease in share price of the company.

Conceptually, the investors do not have any kind of access to get any internal information of the business so, they see the dividends as the signal to have an idea about the company's performance (high dividends: good performance and low dividends: bad performance). However, the reverse may be true in reality; (where high dividends: lack of attractive investments therefore they get lower future investment returns and low dividend: attractive investments therefore they get better future prospects).

The clientele effect argued that shareholders are not indifferent to dividends versus capital gains due to the need for a regular income to meet their liabilities but however, M&M argue that they could create their own by selling shares but the best if they can consider the control implications, transaction costs, time consuming and tax position. So, investors will be attracted to company's that best suit with their need especially when the company does the best dividend policy. In other problem that might occur in dividend decision is the agency problem which the shareholders may want on high dividend payment to avoid the manager from investing in poor projects but this tend to be burden to managers as their amount of retained profit for them will be lower and they have to raise fund externally and this may be costly thus forces them to justify the spending.

As a conclusion, the dividend decision might have several choices for a company to choose whether to forces promoting a high, low, stable or fluctuating dividend payment where actually in practice, a company may tend to avoid a very low dividend to avoid from lose investor confidence, avoid very high dividend payment to have a backup for long-term future and aim for stable dividends that could give a stable growth. Like the Felda Global Ventures Holding Bhd ( FGV) which this company is situated in Malaysia, its' dividend policy is to pay a high 'good' dividend to their shareholders every year regardless of the presence of uncertain economic condition (Business Times, 2013) as this being their company's pledge which is to distribute at least 50% from its net profit as dividend to the shareholders. This is shows that this company is highly concerned for their shareholders value because they will make sure that all the shareholders will get return on their investments and this might be as the example for other company in order to maintain or create shareholders value while making profitability.

Week 10: Capital Structure

Before I start to write on this week’s blog, I just want to revise back regarding the topic ‘raising corporate finance’ where this topic has some connection with this week’s blog (related to capital structure).

A company could raise its’ finance by applying the two main ways; by equity finance or debt finance. As a revision, raising finance via equity financing by having investors to issuing shares seems like the best way especially for those who want to expand their business without paying back to the investors but they just need to share the profits or deliver an appropriate return to the investors. However, equity financing may need returns that are higher than the rate that you probably need to pay for a bank loan, plus the cost is more expensive than debt financing and more risky for the investors. In addition, the investors also might want some ownership from the company and this may occur the agency problem where some people in the company might not agree with the investors since they need to discuss first before making any decision with investors.

On the other hand, debt financing (a loan from bank or any lending institution) is cheaper than issuing shares as the issuing and transaction costs is lower and less of debt interest that need to pay due to tax reduction. Applying this form of raising finance also do not have to give up a part of company profit as a return to the investors and they have no right in the company. Apart from this, debt financing is less risky for the lenders as the borrowers are obliged to make repayment of the loan including the interest. Therefore, after all, in order to obtain the optimal capital structure (capital structure= the way a firm finances its’ assets through the equity or debt or combination of both), since debt finance is cheaper, all company may need to do is to increase the gearing level (with the consideration if this changes could increase the shareholder wealth) in order to reduce its’ cost of capital (as a wise firm will use the right way to keep their true cost of capital low as possible).

But, a company has to bear in mind where higher debt or gearing may cause the risk of financial distress costs. Furthermore, the various components of cost of capital is depending on the market values (which change on a daily basis), where then the market values are depending on the firm’s prospects (which it is depends on the investors belief on the success of this activity). A firm prospects are influenced by capital structure, thus, if a firm has too much debt, in which they still need to pay the interest regardless with high or low profits in good or bad years, could result s on interference in creating the shareholder wealth. Overall, increasing the gearing level could give an advantage to the decreasing of WACC, but also may cause the increasing of shareholders’ risks (that thus, they will demand a higher return for the risks they are taking).

Based on the traditional view, decreasing the WACC (merely changing the company’s capital structure) by increasing the gearing level indeed will affect on the increased of the share price, returns per share, value of the company and shareholders’ wealth thus, can attain an optimal capital structure but then, this also tend to increased the risks if the gearing level always rising.

However, Modigliani and Miller stressed that the company’s capital structure has no impact on WACC so, there is no optimal structure exists and that the company’s value is merely depending on the business risks. In addition, their assumptions that there is no taxation (while in real world, individuals and companies need to pay taxes, therefore the introducing of taxation give them additional advantage to using the debt capital-as mentioned before, there is tax reduction by using this form of raising finance), there are perfect capital markets with perfect information available to all people with no financial distress and liquidation costs thus make individuals can borrow as cheaply as corporation. Even so, people cannot rely on their assumptions, as perfect markets do not really exist in the real practice until they have corrected their assumptions in 1963.

Lets have an idea of the importance of the capital structure. In real world, according to the recent news in Bloomberg (April, 2013) where Fiat SpA(F), the Italian car-maker wants to buy the remaining stake in Chrysler Group LLC by cash (considering the disposal of some assets to control its debt) and no issuing new shares. Fiat is also planning to raise its finance via loan from banks. This means that Fiat is structuring its’ capital in the form of debt financing. This is perhaps by raising its finance through debt finance, they would get better benefits from it to their business rather than use the equity finance. However, the management may affect on some factors on borrowing decisions such as, capacity to borrow, managerial preferences, pecking order, financial slack, signalling, control, industry group gearing, motivation, reinvestment risks, operating and strategic efficiency as their business sales was slightly worse last year. In addition, the CEO of this company believes that to close with the deal (buy remaining stake in Chrysler Group LLC), its capital structure has to be looked at for the long term in order to survive the business in a long run.

Therefore, considering the company’s capital structure carefully is important for those who want to success and sustain their business in the long lifetime..

Week 9: Family Business Financing

This week I had a guest lecture on the topic of family business financing. It is sounds interesting for those who have a family business to learn this topic. The topic was about how an individual in the family business (FB) can make an effective decision making to finance their business or raising the capital of their business. It is important to consider such as; what the family do in order to raise the firm's capital and how they choose the approach in terms of financing. Thus, there are two key areas in order to ensure the successful of the family business; it is probably by having an appropriate governance structures or corporate governance and good financing. Family business is also important because it has owned a large control from time to time in the UK and US.

So, what kind of the themes that we expect to see in the family business in the future? Family business is expected to expand or growth their business perhaps to become a large firm, to make sure employment is continues, a stability environment is important to support the business,a continuous on numbers of trajectory in order to growth and perhaps we expect them to be listed in the stock market because it would be easy for them to gain the finance or raise the capital in order to expand or growth their business.

However, if they cannot get any finance and capital, how they can grow? They will be limited to be able to continue on upwards trajectory in terms of the continuation of services whether in local, national or internationally, could be difficult to get special treat from the community as family business often involve in local community because that is how the business is growth when they have the close relationship with the community; it is also not just  about the employment but related to the stakeholders issue because community is the big stakeholder in the local community.

But, why is getting fund be the major problem for FB? why is this happen? Traditionally, the public companies are not difficult to raise the capital because they are listed in the stock exchange. Unlike the family business, it is facing the problem to growth the business because they do not listing their companies on the stock market because they most probably do not want to produce any detail documentation regarding their financial accounts due to they are very closed environments and the nature of them being protective of family secrets and illusive. Therefore, it may leads to the reluctance from the capital borrowers because of they cannot see the business's activities that can convince them whether they have made a right investment, whether the company will use the money well or even whether the investor could receive their return of their money. Hence, in order to get the capital easily, the firms must be transparency the way the accounts and finance are presented as this issue is very important for the shareholders.

In addition, not all family business is a small business. There are also a larger family business who wish to get the outside equity capital which also tend to have a problem in financing their firm or has difficulties to raise the capital; agency problem- where the members or managers act for their own interest only instead of maybe to increase the shareholders wealth, this cause to the lenders not trust the business because the firm tend to forget the value of the particular outside investor. Therefore, they end up with the problem which it will be hard for them to expand or growth or to perform their business activities.

Apart from this, family business also can face with relationships and conflict problem in the business. The relationship problem among the family members itself could occur the conflict i.e. when the fundamental issue of the way an equity or capital should be raise as the conflict matter. Some of these goes around if there are multiple sons conflict in which son will takeover the business; to be the primus inter pares, insufficient reflected by the incumbents which then effect to the frustrations and thus they are not allowed to make any mistakes that restricting on the personal growth probably for the children who are going to takeover the business. Therefore, perhaps, by sit down together and discussed the issues or problems could resolve the conflict.

Consequently, by monitoring several aspects such as considering value of differential generation and behavioral issues are important and may impact on an effective decision making to finance their business and avoiding a conflict:; value= differing values in individuals for instance, younger generation that they might have a different or better view on how to finance the business and behavioral issues; for FB which are close relationship with the employees itself, it is important for the business to remain stable of this element in order to get the right financial planning. Overall, there are a lot of factors that might effected the financing decision making by the family business such as, the firms' culture itself, the business goals that need to achieved, the right attitudes towards the debt financing and so on...

Week 8: Credit Crunch !

Since in the 2007, there has been a serious phenomenon that people had to face which was the credit crunch problem! They thought that it was similar like the term recession (due to bad of economy) while it is not. What is meant by credit crunch actually? The credit crunch is regard as “severe shortage of money or credit” where it is the outcome of selling the debt badly. For instance, when the banks lend money to those who are need it and then they could not be able to pay back their loans, and as a result, the borrowers need to mortgage their property such as house to recover the bank’s losses however, it still cannot help much and the lenders still lost their money in the end, therefore, there was a credit crisis because of banks or lenders cannot give out the loans for they to survive! So from now, those banks and lenders are more likely to be cautious of lending money to others.

Can we determine the roots of the crisis? Well yes, because the current financial crisis has occurred from 2001 due to the Internet boom and the shock of September 11 from the terrorist attacks. Other than that, the Federal bumped money into the US economy and slashed its main interest rate where the rate is too low for too long! But, what was the cause of this continuous credit crunch? It is begins with the sub-prime borrower in United States in which this kind of people has a lower level of particular earnings that may lead to not capable to endorse their earnings which thus carry the household with a  lack of credit history. Probably, it was a wrong decision when the United States mortgage industry aiming this type of people in order to help them by promised them with the opportunities to purchase their own house with less strict of the repayment loans.

Therefore, it could tell that the mortgages have been wrongly sell to those who are not certain of what they are doing; buying. This is happened perhaps due to the shortage of an effective rules in the industry which then permit this industry to provide vast amount loans to the sub-prime with less concern of the borrower's ability to used the loans well and facing with the dropped value of the security/salvation.

As I have found the recent news in The Telegraph News (2013), in Italy, the country is nearly facing with the phase 3 of credit crunch which has happened in 2008-2009 and 2011. Many of the companies are run out of critical funding, threatening a slide into deeper depressions because of the banks are too frightened to lend money to them. As a result of this, most of the companies are lack of liquidity and predicted going to bankrupt every day due to difficult to obtain the capital of investment for their organisations. Why is this happened? It is because of some particular people are not paying the debts on time therefore, the late payments are lead to the serious problems across the board in Italy and thus, also leads to the suffocated economy in this country.

It is clear to determine the consequences of the credit crunch where it will cause the prolonged recession or slow recovery of the economy, reducing the availability of borrowing and increase the cost of bank lending and bond & equity finance, depressing the share price and houses that could adverse wealth and collateral effects on household spending and business investment, a general increase in uncertainty feeding through into reducing the business and consumer spending and confidence and lastly, could lead to bad impacts on UK exports to US, other economies may have the direct or indirect effects due to the credit crunch problem.

However, there are some ways for business to operate during the financial crisis; i.e. the Italy companies might avoid this crisis by understand and maximising the company's current cash as the cash is very valuable in a company. Other than that, they could try to identify and minimising their business's operational risk, providing or producing several scenario planning for the business to be prepared well to facing with the crisis if it is happen in some time and lastly, maintaining the confidence of the main stakeholders by open lines of communication with the major bankers and always be transparent (business's financial accounts and activities) to them in order to convince them that they are not make a wrong decision to lend the money.

Week 7: Mergers and Acquisition

Last week I have discussed regarding the foreign direct investment, how a company (International Business) can invest abroad. This week, I am going to share about the other opportunity for International Business to make an investment abroad in order to expand or growth their business; an activity of mergers and acquisitions by another company. It is an essential role of the mergers and acquisition of a company in corporate finance because it is also regard as the external growth for most companies while other companies feel that it is a constant threat of their independent existence. The term acquisition as define by Arnold (2008;865) "a purchase of one firm by another with the associated implication of financial and managerial domination" which also known as takeover where a company acquire for another company's ordinary share capital, financed by cash payment, issue of securities or a combination of both.

 

In reality, acquisition's process is quite hard rather than simply purchasing the machinery or build a factory. It must target the company and considering the potential benefits of acquired that particular company, also need to bid the target company that might involves a big amount of the price. While mergers' definition by Arnold (2008;865) is " combining of two business entities under common ownership" which also regard as a friendly reorganisation of assets into a new organisation. This activity is still focusing on a certain economic sectors where there will be based on the sector concentration which based on the same industries. For instance, the financial services industry i.e. bank wants to acquire another bank, healthcare sector with the healthcare firm and etc.

 

Why there are mergers activity in business world? It is perhaps because of these reasons:

1) synergy: when the assets and /or operations of two companies are complement to each other, so that may

be able to reduce cost. But however, it is difficult to quantify before companies combine and difficult to realise once combination has occurred.

 

2) bargain buying: where the target company's price is low than its present value

 

3) managerial motives: this activity occurs because of the managerial interest where the managers might want to pursue base on their interest rather than to increase the shareholders' wealth.

 

4)third party motives: it is about receiving a high dividend paid that advisers may want to achieve behind this activity.

 

Other than that, there are also some causes behind the current merger and acquisition activity's trend in the some particular period; firstly, the mergers & acquisition occurred in 1999-2000 due to they want to increase in mega deals and global corporations, secondly, due to UK peak periods in the late 1980's and 1990's, the Merger & acquisition activity is reasonable to level of the economic risk and due to the economic uncertainty, the uncertainty of political also affected thus, link to this activity in order to levels of political risk. However, effect from several issues such as the US and world recession fears that have been reduced the corporate activity, the reduction in bank lines of credit, the market's confidence is declined and some business tend to focus on their own core business made the mergers & acquisitions activity became slow in 2000-2002.

 

As a result of the slowdown in M&A activity during that period, Mergers and acquisition activity is possibly useful only if it can increase the acquiring company shareholder's wealth. So, probably by merging and acquiring other company in the slowdown period of M&A during the bargaining of low share price, deregulation of market and turnaround situations and restructuring are the best time to do this M&A activity and also may give a potential benefit to the acquiring company shareholder's wealth. Nevertheless, during 2004 onward, the M&A activity become active because of the major economic factors; the increase of the GDP due to the strong and vibrant economies are suitable to make the FDI which has strong linkage between FDI and GDP growth, the weakening in Dollars make the investment more attractive in US as the US companies become cheaper and easy to acquire and due to the increasing in oil /resource prices which then increase the viability of previously unprofitable locations.

 

In contrast, M&A's process also tend to fail to generate value for the acquiring shareholders while Jensen and Meckling (1976) stressed that any activity in the financial management, there should be include the aim to increase the value of shareholder ; that is the basic principle of it . Why is this happen? It is because of there is misguided of strategies (strategic plans are being value destroyed instead of creating the value), over optimism (underestimate the investment required in merger activity) and failure of integration of management in the firm which intend to do the merger activity. In spite of this, there are also other group who might influenced by this activity especially the various stakeholders such as the employees itself, management and directors, government, society (job losses), local community (loose major employment) and suppliers (cutting cost happen which is not good for them) and customers (get benefit from the combination of business).

 

In current activity of M&A, regarding the Business Times (2013), in which the Japanese lender (Bank of Tokyo-Mitsubishi UFJ) probably wish to improve their finance by purchasing another Indonesian Bank as the Tokyo-based lender is maintaining focused in Asia when it comes to expansion, said the deputy president in Bank of Tokyo. They are also intended to buy Philippines ' banks, however there is no discussion or deal yet with the local lenders. Therefore, they are trying to improve their network and commercial banking business to run this activity quickly if there is the best target and timing for them to do so. From this activity, it is reports that Mitsubishi's move could create the acquire shareholder wealth where they could help the Indonesian central bank's plan to consolidate its banking system. If this is really happening, they probably successful in this activity as they are be able to create value for the acquire shareholder.

 

In my opinion, the most serious situation where there will be job loses in this activity. Therefore, perhaps, by comply with the Arnold's (2008) ten golden rules for eliminate the 'acquire' employees might satisfied all parties and the managers could set a proper strategies in this activity to meet the interest of all stakeholders within or around the company..

Week 6 : Foreign Direct Investment

On the blog this week, I am going to reflect my learning regarding the how the multinational enterprise involves in the foreign direct investment and the reason behind its involvement in FDI. A classic example which was explained in the Moffet, M., Stonehill, A., and Eiteman, D. (2006) book, Trident became a multinational companies (MNC) after it set up the strategy such as to establish a greenfield market-seeing manufacturing in Germany (may want to satisfy local demand or to find export market instead of their home market), a market-seeing acquisition in Brazil and a production efficiency-seeking joint venture in China (in which motivated to get the lower wage in foreign country) which also had lead them to undertake the foreign direct investment.

Those are also actually the reasons of why a company may want to be a multinational company (MNC) and other reasons also include;

1. Raw material seekers in which the certain raw material could get only from foreign country such as oil, and mining.

2. Knowledge seekers operate in foreign countries to obtain the technology and managerial expertise.

3. Political safety seekers acquire or establish new operations in country that less problem.

Back to the lead of Trident to undertake the FDI, the Foreign Direct Investment (FDI) might occurs when an enterprise wants to purchase the assets or a significant amount of stock (to acquire ownership) of foreign company in order to obtain a measure of management control or in a simple words, an entity who made an investment to another country's entity. It could be in two methods which are Greenfield investment (a parent company that started new venture in foreign country is investing in the building of physical facilities to run the business in foreign country) and international of merger and acquisition activity (where the benefits could be obtained by merge or acquires of foreign subsidiary in foreign country which already got the facilities and manpower). This also can be shown by IKEA who maybe made a greenfield investment in India about $2bn over the next 15 to 20 years to be the first major foreign retailer that wholly owned the outlets (BBC News, 2013). 

The growth of FDI was lead by the increased of international trade, the removal of capital controls, the scale of international capital flows need to grow to support MNC in foreign markets, the world economy become more interdependent, it is also as a closer financial links between countries and greater integration of financial markets. Probably, those are the reasons of why IKEA is doing this type of investment. In addition, the FDI’s growth also impacts the Transnational Companies (TNC) due to the government policy liberalisation, the rapid technology change and need for local market presence as well an increased of global competition for new markets such as Wal-mart where this company is operating in most country   as possibly to meet the demand or need of local community in the particular country . Apart from that, the developing countries are drive to use FDI due to obtaining the overseas resources, to increase the access to return markets, to increase the local capital markets and for their economic growth.

What does a company get from using the FDI?It is perhaps there is an obstacle when to export the goods or production such as the cost incurred therefore, they might want to cut down the transportation costs when exporting the goods and also the effect on the goods being export which may has low value and high weight which can produce easily in any particular location. Therefore, it is better to make a foreign direct investment in other country rather than exporting the goods and production. FDI also is better than licensing because the license will acquire the product knowledge and might become a direct competitor, the company may lose control over product quality and mark down the reputation in foreign markets and as such that know-how skills cannot be transferred. Licensing also tend to be high in agency costs and stealing of technology risk.

The specific benefit that IKEA could get by using the FDI in India as the trade minister of India said the government is encouraging FDI that may create jobs and provide advancement in technology thus could recover their slowing economy (BBC News,2013) therefore, IKEA  could enter the integration into global economy as India nowadays is regard as a huge market that maybe the right opportunity for company to invest in this country to moving forward and thus help this country to boost its economic life or growth.

As a closing, a company that involve with FDI such as IKEA also may gain some advantage which is explained in eclectic paradigm about the nature and direction of FDI that includes; a location advantage ( benefit from locating a particular economic in a specific location), an ownership advantage (benefit that a company has an ownership because it has some significant asset) and an internationalization advantage (internalizing a business activity rather than leaving it to relatively inefficient market).

Week 5: Corporate risk management

Last week I have wrote about how to raise the finance in a corporation due to particular reasons such as intended to expand its business. Now, I am going to share regarding this week's lectures involving the foreign currency exchange rate and the tax issue to see how a corporation is able to manage these things.

 

First of all, we have to understand what is 'foreign exchange rate' in which it is define as the conversion of one currency for another currency. Changes in foreign currency exchange rate might cause the increasing of uncertainty related to the income from abroad's operations or trading internationally. Therefore, a company which is planning to expand its business widely to other country has to face several risks that could occur regarding the currency exchange if they still insist to expand their business globally. It is because, shifting in foreign currency exchange rate could impair the competition position and wreck its profit.

 

In addition, there are some possible impact due to the exchange rate changes on several firm's activities such as, income that a company will get from overseas is uncertain, amount of paying money to the importer at future date also uncertain as the time of deal may be struck, the valuation of foreign assets and liability could change easily due to the foreign exchange movements, the viability of foreign operations in the long-term period unpredictable and the  acceptability or otherwise of abroad's investment project volatile due to the future currency changes might have great impact on estimated NPV.

 

Who is involve in trading? They are the exporters or importer, tourists, fund managers, governments, central banks, speculators and banks. However, the major players are the large commercial banks and speculators as they are dealing on behalf of the clients therefore, they are holding their own proprietary transaction in order to gain profit by taking a position in market. This unstable of exchange-rate movements can give a bad effect for the business and shareholders if it could not manage the possible risks as shown by HSBC Bank in Malaysia where they have managed the foreign exchange rate by first; having a clear understanding of their foreign exchange risk which are describe in 3 types or risks: 

 

a) transaction risk = risk that occur when a company has commitment whether the amount to pay or receive money in foreign currency are depends on the foreign exchange rate movements which ultimately related to imports and exports of goods on credit. Other than that, investing abroad or borrow in a foreign currency also can create the transaction risk.

 

b)translation risk= when there is a foreign subsidiaries, the companies need to translate the figure in the consolidated accounts into the parent company's currency.

 

c)economic risk= risk is arises when a company loss in competitive strength because of foreign exchange movements and thus lead to decrease of the economic value of the company.

 

Other than that, they also have to understand the solution for the risks, developing any strategy using the combination of  spot, forward exchange contract and currency options and then implementing the plan quickly in order to protect the profit. These foreign exchange protection are also might be important for those who are exporters or importers, the owners of overseas assets or joint venture and partnership and companies that have more than one country

 

However, there are also a number of strategies that company (especially a firm with a number of characteristics such as those companies that seek for growth opportunities, financing policy, liquidity, expand their business size and those who have multinational transaction) could hedge themselves by : 

1.  invoice foreign customer and pay money to foreign company in a firm's home currency
2.  do nothing by bear the risk and hoping that the exchange rate movements will deliver a good news for the company
3. netting where multinational subsidiaries of company settle the debt base on net amount instead of gross amount with the parent company
4. matching is involve both group and third parties that matches inflow and outflow in different currencies caused by trade.
5. leading and lagging- the speedy up or delay the payment between now and the original due date of payment
6. forward market hedge which is regularly used by exchanging two currencies at fixed time in the agreement contract
7. money market hedge which involve borrowing money from the money market.

Why a company needs to hedging itself? This is because it has implications on hedging such as to ensure the availability of funds for investment opportunities, and could reducing some of these matters; the financial distress, incentives to under invest, managers' risk and cost to adjust capital structure. Apart from that, the most significant reasons for most companies are due to maximising the shareholder value and the tax function.   This include the tax because most international company may want to minimise the overall worldwide tax burden for their long-term strategic planning, long and short term cash flow and investment or project portfolio.  What most companies do in order to lessened the tax burden include the transfer pricing where this method could manipulate where the profit arise so, they will pay less tax.

 

Overall, a good corporate management would make people in the corporation always glad to work in the organisation...