Week 4: Raising corporate finance

It is commonly known that money is very important in one's life. Without money, it is very difficult to survive in this world that is increasingly developed. So does the business. Without enough money, how individual could run the business. Money in the sense of business normally is capital. A firm might needs the sufficient capital or even more money to run the business. Therefore, a firm needs to generate or increase the company's financial as to secure for long term period. Most people might think it is easy for a company to get money in order to stabilize or enhance the company's financial. However, this is the reality- that companies require to use several methods and go through several processes which they might have to concern if they want to improve the company's finances in order to sustain their business.

 

Therefore, based on this week’s lecture, there are some matters will be discussed throughout this blog-that a firm probably the management, needs to considered a several methods and processes they have to go through in order to raise the corporate finance. First of all, managers might need to consider the shareholders’ value where their shareholders always expect to get a high return on their investment. So, a firm possibly requires achieving an appropriate rate of return for the investors so that it will be easy to get the new funds from them as they are happy with the performance of firm’s activities and the possible high of return they might get from it. It will be good if the firm could have the lower cost of capital or cost of finance and get the higher return for the investors.

 

A firm could raise the capital or finance probably by two types that are long term equity finance and long term debt finance. Long term equity finance is by selling the ordinary shares to new investor perhaps via the stock exchange, or sells the shares to the existing shareholders in the firm that involve various issuing methods such as offer for sales, placing, tender offer and stock exchange introduction. So, as the ordinary shareholders, they probably have the rights towards the firm in terms of any rewards or returns or compensation as the definitive bearer of firm’s risk. Before a firm can sell its shares, the shares need to be quoted in the stock market which the firm also needs to fulfill the several listing requirements that set by UKLA Listing Rules so that it would be easy to get new long-term funds in future, however, to gain the stock exchange quotation probably costly, so as alternative, a firm may sell the shares in terms of right issue which is more cheaper of issuing costs to the existing shareholders first before offer to other investors.

 

Contrast to long-term debt finance, debt itself explain to something that needs to be paid back. The method of repayment might be through the negotiation period of repayment or pay total of debt at the end of borrowing. This includes several types of long term bonds (debentures or loan stock), international debt finance (eurobonds) or borrow from bank and other financial institution. For instances, Business Times News  (2013) reports that, Multi Agro Gemilang Plantation in Jakarta, Indonesia is using a bank loan to build its second palm factory as its financial provider to raise the capital of its development in order to earn more profit. This shows that this company is using long-term debt finance in order to improve its finance thus to increase the shareholder's wealth. Possible reasons why they have chosen this type of finance because it is a low legal costs and administration which also more cheaper of issuing costs than equity finance with lower of investor risk. They also might get the funds quickly as the bank loan process could be simple and more flexible where they can negotiate with the bank in terms of repayment of loan without penalty if the firm does a good performance than they expected.

 

As a summary, there are many ways in order to raise the corporate finance with such various characteristics, advantage and disadvantage of long-term equity finance and debt finance that a firm could choose or consider perhaps also concern in maintaining the shareholder's value.

Week 3 (Trial 2): Stock Market Efficiency

In this week lecture,  I have learned about the stock market and how to evaluate the stock market efficiency or in other words, to what extent the stock market is regard as efficient for some cases. Stock market is very important to government and industry in order to raise their long-term capital to finance the investment or joint-ventures abroad, investors also can have their excitement of returns in their investment, and not forget where society might get the advantage from this which grant a more appropriate allocation of sources so that they can get a maximum mix of goods and services. The stock market or stock exchange needs to be well-run for the good of all sorts of participants such as buyers, sellers and investors. For instances, help firms to find funds and grow its business, and allocation of capital will be more appropriate if there is a well-run stock market.

 

However, there also might have the opposite of a well-run stock exchange therefore, this can be avoid with the 3 different levels which had defined by the economist: weak-form efficiency where the share price is reflect regarding the information based on the past movement and the history of share price is meaningless as it can not predict the future, semi-strong efficiency which share prices are fully reflect with all relevant publicly available information and strong-form efficiency indicates that share price reflect with all relevant information including private information where the insider dealing are know more about their share price movement other than others do.

 

Lets look at this case where Facebook's share price was fall down by more than 9% due to the fourth quarter of its profit was down by 79% as reported in Money Morning Newspaper on 31st January 2013. Could we identify or examine if this change of share price react rationally and quickly and what about the evaluation of its efficiency? Is it in the weak-form or semi-strong form or strong form efficiency? Well, Facebook's revenue was $1.59 billion, up 40% year over year and $1.53 billion in future. The Menlo Park, CA-based company's advertising business grew at its quickest pace since before the company's initial public offering (IPO) on May 18, 2012, and contributed to the robust revenue growth but then its shares ended the volatile after-hours session down some 4% at $29.98. The sell off continued Thursday with its shares down by 3.52% in early morning trading.

 

From that news, it is shows that the share price will change which is, it is unforcastable and react quickly and rationally if any new information about a firm is revealed in the stock market and this also indicates that the share price of Facebook is in  semi-form efficiency because the share price is reflect not only based on the past information but also the current information as the investor also can predict for the future whether FB can make money in the future or not.

Week 2 (Trial 1): Shareholder value creation

A successful business is a business that could earn more and high profit continuously from its operation. Well, I think this is such a conventional aim or objective of a business where a firm or company might want to focus on profit maximization  The Board of Directors may set out the aims or objectives as the guidance for management teams to be aware of. In a company, the financial management is the crucial division for the company to survive in the long term of the business. Therefore, the financial manager is playing a big role in the firms' organisation such as to make a decision om company's investment, advising about allocation of funds and so on.

 

 However, do they realize that they need to consider about their shareholder too?Shareholders are also important  because without them especially the investors, the firm or company could not run the business probably regarding insufficient of capital or finance. The shareholders also has rights in a company, if they are happy with the management and performance of the company, they perhaps will stay in, otherwise the company will lose its shareholders. In other words, if possible, avoid the term managerialism which this term will separate the ownership and its control where the management team might pursue objectives attractive to them but do not give benefits to the shareholders. So, management also has to bear in mind on how to create the shareholder value in order to retain their shareholders.

 

For instance, the Sunway Berhad which is situated in Malaysia, they bought a new land located in Johor Bahru on 23rd January 2013 in order to generate an estimated gross of development. This acquisition is to contribute positively to the company's future earnings and to improve the shareholder value. From this, I could tell that the company is not just making a development and future earnings but also concerned about their shareholder value.  Maybe I can illustrate some example the rationale of creating the shareholder value i.e. shareholders are the owner of the company and they have rights on it. If a bankruptcy occurs, they can bear the risk with their wealth such as high dividend paid or rewards or returns.Though, profit maximisation shoul not be ignored because the profit maximisation can be as the alternative aim for a company. For instance, when the company gain more profit, obviously the shareholders' value also tend to be high.

 

But, how to maintain this aim which focus on shareholder wealth maximisation in a firm? Before that, the management team in Sunway Berhad might need the 3 elements that are finance, strategy and organisational capabilities in which those have to stick together if they want to generate the shareholder wealth maximisation in a consistent manner . According to Alfred Rappaport's article that I have read, there are several ways that Sunway Berhad might develop in order to maintain of generating shareholder value continuously which includes,  they have made a strategic decision that probably maximize the expected future value, provide the investors with value relevant information, and make acquisitions that maximise expected value.

Week 1: Introduction

I'm new in blog! This blog is created in order to complete my assessment in this subject during my final year degree study at University of Northumbria, United Kingdom.