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Chapter 1 : Financial strategy Formulation, div yield = div per share /…
Chapter 1 : Financial strategy
Formulation
Financial objectives
profit maximization NOT primary obj
of org as invstor also care abt
future
dividend
finance plans
risk mgt
profit-making comp = maximization of SH's wealth measured by TSR
TSR = div yield + capital gain / loss
Financial strategy formulation
fin strategy - organise org's resources to max SH return by focus on
future CF, fin & risk
max of SH's wealth
fincing decision
use of debt finance
debt fin can help to reduce org's WACC tak?
lvl of gearing depends on these issues :
L
ife cycle - new, growing bus difficult to forecast CF
O
perating gearing - if FC = high proport. of tot cost, CF = volatile
S
tability of rev - highly dynamic bus envir = CF volatile
S
ecurity - if unable to offer security, debt difficult & expensive to obtain
fin planning & ctrl
cash-rich comp kena decide to 1 or more
:check: use cash - invsmt piurpose
:check: pay out cash to SH as div
:check: repurchase own shares (share buyback)
Assets' category
:one: A needed to carry out core act eg plant & mach
:two: A y NOT essential & can be sold @ short notice eg ST marketable invsmt
:three: A y NOT essential & can be sold to raise cash, but may take some time to sell eg LT invsmt, subs comp
risk mgt decision
involve mgt of xchge rate & int rate risk & project mgt issue
the more volatile CF, the more important risk mgt
invsmt decision
key point to max SH wealth
need to be carefully analysed to ensure it is benefcial to investor
div decision
practical div policy
constant payout ratio
logic but can create volatile div movemt if profit volatile
stable growth
set @ level y signal comp's growth but may be difficult to maintain if change circum
residual policy
only pay div after all +ve NPV project hv been funded
scrip div, share buyback, special div
influence of lifecycle
young comp
zero or low div
high growth / invsmt needs
want to min debt as CF = unstable
mature comp
higher div / payout
debt more suitable as CF stable
share buyback
comp can choose to return signif cash to SH by shares buyback ( repurchase)
advtage
avoid increase expectation of higher div in future
provide disaffected SH = exit route
taxed as capital gain if tax on capital gain is below rate used to tax div income
if shares undervalued, comp may be able to buy share @ low price >> benefit remaining SH. fewer shares will improve EPS & DPS ratio
influence of fincing dec
if comp can borrow to finance invsmt, it can still pay div
special div
cash pymt far in excess of div pymt that normally made
impact all SH
more attractive than share buyback if shares overvalued & avoid SH dilute their ctrl
influence if invsmt dec
if comp >> growing, cash should be used to invest in +ve NPV projects so it will not hv liquidity to pay div
scrip div (SD)
comp stimes offer SD (extra share) instead of cash
boost comp's CF
benefit SH if cash = reinvsted in +ve NPV project
enhanced SD
give SH choice whether to take cash or shares but offer generous amt of shares so SH is likely to choose shares rather than cash
div capacity
cash generated in any given yr that avai to pay ordi. SH
invsmt & fin issue will impact on org's capacity to pay div
PAIT & pref div
PLUS
debt repymt, share repurch, A invsmt
LESS
depre, capital raised from new share issue or debt
ESG & Ethics
Ethics & stakeH conflict
ethic issue arise from
conflict btwn needs of diff stakeH gp
framework to dvlp ethic policy
est stakeH concern :one:
ensure y comp's fundamental ethic principle understood by everyone :two:
introduce safeguard to reduce threats to acceptable lvl :three:
ESG framework
understanding of ESG can help to
inform invsmt dec making by ensure invsmt TAK breach comp's ESG commitmt
screen out unsuitable acquisition target whose ESG perf is poor
attract green finance to support share price
GREEN FINANCE
financing of invsmt y provide envir benefit
green loans (GL)
cheaper than std loan due to possible gov incentive & high demand
often carry high admin burden to borrower, who need to demonstrate compliance w loan term
hv consequence to borrower 4 breach ESG prov & loan no longer being considered green
eg higher int rate may be imposed
loan may need to be repaid
sustainability-linked loans (SLL)
loan 4 any purpose (regardless green or not)
in-built pricing mechanism y reduce loan cost if borrower achieve certain sustainable or ESG target
can be used across a range of project rather than fin a single asset
green bonds (GB)
fixed int bond to raise $ 4
climate & envir project
secured bond & hv same cr rating as comp's other debt oblig
come w tax incentive to encourage their use so comp w lower coupon rate can issue this bond
cheaper bcs of rising demand & comp y hv ESG strategy are seen as better borrower
to qualify 4 GB status, must verified by 3rd party
green equity fund
many stock market produce firm y satisfy social & envir criteria
help invstor to target invsmt in comp w higher std of behaviour in social resp
reduction in risk from compliance w high ESG std mean invstor happy w lower return (eg reduction in Ke)
div yield
= div per share / share price
capital gain or loss
= capital gain or loss / share price