Corporate Finance

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CORPORATE FINANCE

Changes in Corporate Leadership

After CitiGroup made announcement that CharlesPrince was no longer the company CEO, there were various significantimpact there were to be expected after placing Vikram Pandit as thenew CEO. Some of the changes were related to the firm financialdecision making process. The change in leadership of the firm was avery crucial function. The change in leadership assisted inestablishing the company clear vision and communication of the visionwith others. As well, there were chances of resolving any conflictthat was experienced between individuals who had direct roles andresponsibilities in the company. The change in leadership achievedclear management of the firm with achievement of ways thatcoordinated all the resources that were available (Gitman,1976).

The change in leadership assisted the companyto maintain a singular focus toward all its operations. As well, thebusiness was protected from having various individuals who would settheir attempts of making the same business decisions. The newmanagement in the firm was capable of getting other employees who hadskills and knowledge of focusing on the company original goals. Allpoor business practices were easily corrected while havingcapabilities of solving al internal conflicts among the employees.The change in the leadership of the firm assisted the organization inthe cited aspects and this created chances of making better financialdecision of the company (Ross, Westerfield &amp Jaffe, 2005).

Linkages

It is important for the business to integrate the cash flow, ratioanalysis, financial statements and time value of money in case abusiness is looking for better ways of financing certain project.This may be crucial, mainly when the firm is try to seek forfinancial assistance from the bank or other sources. The aboveconcept would be crucial for the parties involved in financing theproject. The cash flow concept would be crucial for all the parties.This will be vital since the business will have to ensure there isenough cash that is in operation to cater for all the expenses (Ross,Westerfield &amp Jaffe, 2005).

As well, the concept of ratio analysis as well will be importantsince all the parties will have to consider some sort of ratios suchas the current ratio (current asset divided by current liabilities)or even the working capital of the firm (current assets- currentliabilities). These ratios will be important to indicate the networth of the business and the current operations positions(Gitman, 1976). Considering the financial statements, it wouldbe of value to the financiers of the project being undertaken. Thefinanciers of the project will be concerned with the total image ofthe firm and the capability of the company finance strength. Finally,the concept of time value of money would be important to the companyor the firm. The firm may wish to understand the best projects thatare worth the actual amount that would be repaid for the loan or thebond taken (Ross, Westerfield &ampJaffe, 2005).

More Linkage

Investors have concerns of the rate of return that is expected fromthe investment and the risks that are involved in the investmentundertaken. The investor will always have the desire of takinginvestments that are of low risk with higher returns. The fact isthat, there is a trade-off between the financial return and thefinancial risks. The linkages are important when it comes toevaluation of risk free and return premium (Gitman,1976). The manager is capable of distinguishing between the risk freeinvestment and risk premium. The risk free investment has certainguaranteed rate of return and there are no chances of fluctuation ordefaults. The linkages are useful tool that assist in understandingthe relationship between the financial return and the financial risks(Ross, Westerfield &amp Jaffe, 2005).

When managing the firm assets and liabilities, the manager is at aposition to incorporate the linkage and deal with the scenarios ofcompensating on the promised rate of return or lose all theinvestments. Actually, a manager is capable of deciding for examplewhen it come to debt market and consider the possibilities of return.Another example is when it comes to stock, that may tend to beworthless or worth depending on the amount of money invested (Gitman,1976).

Does Size Matter?

The relation between the firm size and the risk to performance hasbeen raising lots of interest. The small and the medium firms havethe potentiality of growing but they face challenges related tohigher financing cost with higher changes of failing compared to thelarge firms. In case of diminishing returns on profitability, thereare chances of increased firm size. There is relation between thefirm size, risks and the level of returns that accounts for theprofitability and size (Gitman, 1976).

According to an argument, there are chances of risk-return trade offthat tend to be higher on rates of return obtained by taking risks.In the firms, the risk is easily measured by the volatility of rateof returns. When comparing the large firms with the small mediumfirms, the large firm will tend to take more risks and hence faceuncertainties. In small medium firms, there are higher levels ofvolatility especially in the rate of returns.

Capital Budgeting In Multinationals

In international capital budgeting decisions, there are moredemanding additional considerations that must be accounted for. Someof the additional consideration may include the exchange rate risk,transfer pricing, political risks among others.

Exchange rate risks arise due to fluctuations experienced in theexchange rate of the foreign and domestic currency. To deal with thischallenge, the organization will have to apply some techniques suchas hedging the cash flows in the short term. As well, theorganization may be forced to borrow from the foreign market usingforeign currency and be able to counteract the long-term exchangerate risks.

Transfer pricing refers to all the internal prices that tend to bedifferent in the market places for goods that move from onesubsidiary to another but within the same multinational firm.Transfer price effect the capital budgeting since it affects thevalue of cash flows and the value of the project. This will occursince there is distort of the value of costs and incremental cashflows hence using the incoherent financial data (Gitman,1976).

Political risk in a country may account for the challenges related totransfer of returns on investments form the foreign country to thehome country due to action taken by the foreign authority. Thediscount rate will have to indicate the cost of capital and reflectthe political risk. Such risks will have to be adjusted henceaffecting the capital decision making.

Capital budgeting is as well affected by taxes. The tax will have tovary from region to region and it has major effects. The companieswill be expected to pay for taxes on the net cash benefits that willresult from the investment. As well, the companies will usedepreciation costs as part of capital investment in offsetting thetax burden (Ross, Westerfield &amp Jordan, 2000).

Finally, the company will have to approach the project with theinternational strategic point of view rather than the strategicfinancial perspective. This will have an effect to capital budgetingsince the company will have to invest in certain country to ensureit access a continued positive NPV.

Capital Structure Decisions

There are several factors considered in capital budgeting decisions.For instance, management style ranges from the aggressive toconservative. If the management will be conservative, there are lesschances of using debt with an aim of increasing the profit. Anotherfactor to consider is the tax exposure of the firm. The firm shouldhave an understanding that debt repayment is tax deductible. Hence,the company tax rate may be high while using debt as a mean offinancing a project. As well, use of the debt to financing the firmhas higher chances of protecting some of the income from taxes (Ross,Westerfield &amp Jordan, 2000).

There is the need to account and consider others firm capitalstructure. The company structure will always be influenced by theindustry. All companies that are in the same industry will havechances of producing related products using related cost ofproduction, with similar profitability levels and this will dictatethat the pattern of the capital structure will almost be the same.Finally, the market condition may have a crucial impact to thecompany capital structure. If there are struggle in the market, thefirm may face challenges related to borrowing of funds to financecertain project. Companies will have limited access to the capitaldue to market concerns and the interest’s rate may be higher thanexpected (Ross, Westerfield &amp Jordan, 2000).

International Credit Management

In the international credit management, there are complex and higherrisks compared to the domestic markets. On historical perspective,the international trade was taken to be of low risk and was directlyattributed to short term, self-liquidated, secure and of short life.However, the international margins have been facing some significantrisks that include micro, macro and product risks. Some of the microrisks that are encountered are related to the individuals and thecustomers’ level and way of confining the financial and creditoperational risk related to the business. On the other hand, themacro risks are the external factors that have an impact to theclient’s international trade business. Some of the frequent risksin this case are related to country, foreign exchanges risk,industrial risks, frauds and banking risks.

Some of the risks in the international credit management are relatedto the political and economic stability level of the country. Aswell, the exchange controls have an impact to the internationalcredits. All the factors above affect the honor of the country totake commitments and pay in time. Receipts and payment using foreigncurrencies is part of occurrences in the international trades. Theeconomic, political and all the speculative reasons have affected theexchange rate and fluctuations (Ross, Westerfield &amp Jordan,2000).

Mergers

AT&ampT And DirecTV Merger

According to the merger, AT&ampT was expected to acquire DirecTv for$49 billion. The merger deal was expected to create a new telecom anda television for the rival cable firms. As well, it aimed at raisingmore concerns related to competition and the available options forthe clients. The deal would gain the AT&ampT 20 million USsubscribers and a company that had strong cash flows with ability ofenlarging the offer (Kang, 2014).

After the merger, there were chances that the company formed wouldoffer phone, pay-TV subscriptions and higher speed internet for moreclients. This is a latest mega deal introduced dramatic shift in thetelecommunication industry (Kang, 2014).

AT&ampT had failed in acquiring another wireless provider company(T-Mobile) and it was in its long search for a better and alternativeacquisition. The company choices were quite limited and regulatorsissued concerns that the higher speed internet and wireless marketare not quite competitive. The company expects that it would gainbroader strategic benefits that will be sourced from acquiring thesecond largest provider of pay station in the country.

Reference list:

Kang, C. (2014 May). AT&ampT and DirecTV announce $49 billionmerger. The Washington post. Retrieved on 15thJanuary 2015, from:http://www.washingtonpost.com/business/technology/atandt-directv-announce-48-billion-merger/2014/05/18/62ffc980-dec1-11e3-810f-764fe508b82d_story.html

Gitman, L. J. (1976). Principles of managerial finance. NewYork: Harper &amp Row.

Ross, S. A., Westerfield, R., &amp Jaffe, J. F. (2005). Corporatefinance. Boston: McGraw-Hill/Irwin.

Ross, S. A., Westerfield, R., &amp Jordan, B. D. (2000).Fundamentals of corporate finance. Boston: Irwin/McGraw-Hill.