Monday, June 3, 2019
Finance Essays Financial Management
Finance Essays Financial ManagementRole of fiscal management in Wolfson Microelectronics plc. job 1Financial management is related to the acquisition, financing and management of assets with a future goal and planning.Efficient financial management requires the laying down an prey or goal, because judgement whether a financial decision has been rightly taken or not must be in light of nigh standard. The nigh important goal of a firm in financial context is to maximize the value (wealth) of firm and of the sh ars holders wealth.Maximizing the wealth of share holders (owners) of the firm is judged by the effect of share price which is the result of business decisions.Thus we define role of financial management into three areasInvestmentsInvestment decisions for an investor are based on historical prices and security analysis of financial assets such as stocks and bonds. However from companys point of view investment funds is all about determination out spick-and-span feasible way s to manage the business mainly in area of production, distribution and grocerying.Further more, company also considers which portfolio of the different types of financial assets to hold. A common example could be common stocks, preferred stocks, bonds and debentures etc.With regard of Wolfson Microelectronics, it made investments in Research and Development of cracking equipment and soft wares to $10.6 m alone in 2004. Furthermore, company has intentions to signifi faecest contributions to look for in the future. As a result value of fixed assets rose to $ 29,680k in the year 2004.Wolfson unveil two main ideas behind putting capital expenditure (long-term investments)to time the market requirementdecrease production cost by constant research and designWolfson intelligibly showed its intention not to distribute retained earnings among its shareowners due to the need of capital expenditure in future projects. The future electronics market belongs to consumers digital portable st uff. Wolfsons management is planning to contribute in this huge market share around the world, making it sure they intimidate alive with the high demanding consumer market in the future, though they are newly born public listed company in the London Stock exchange.1. Refer ratio sheet figures (Pg. 53) of Wolfson Microelectronics plc. Annual explanation and Accounts 2004 2) FinancingThis is the second major issue of the firm as the management needs to ascertainHow much money could be available by floating stocks in the market? Based on both factors, a company forms its capital structure. This is also referenced as pay mix.How much money they could borrow to run their business with getting in trouble of getting default or excess borrowings.Wolfson raised investment money to meet their requirements by issuing stocks (an increase of $ 9105 k) and increasing debt by $ 8273 k. In other words, it financed its projects by issuing stocks and bonds to its stakeholders.Wolfson plc. also me ntioned financing of $1204 K as negative-inflow stream as compare to $39,364 K in year 2003 in the form of share capital issues and bank term loan. (3.)3) Dividend policyIn addendum to two important decisions, dividend policy must be viewed as an integral part of the firms financing decision. The dividend payout ratio determines the amount of earnings that can be retained in the firm.Dividend payout ratio = Annual Cash dividends Annual earningsWolfson paid equity dividends of $ 407 K in year 2003 but no dividends were paid in year 2004, but on non-dividend equity, company did not pay dividends to its shareholders. So the dividend payout ratio is Zero for year 2004.As described earlier, it has been clearly mentioned in the annual report to retain all future earnings for investment in development and expansion of business and the management does not look to to pay dividend at least for some years in future. (2.) However, this is not an encouraging sign for shareholders of Wolfson be cause stock investors often judge act of the company stocks by their growth which is possible by declaration of dividends.2.Refer consolidated cash flow statement (Pg.54) of Wolfson Microelectronics plc. Annual Report and Accounts 2004 3. Notes to Cash flow statement (Pg. 72) of Wolfson Microelectronics plc. Annual Report and Accounts 2004 If we combine the effects of the financing, investment with dividend policy, the relation could be in a shape of three schools of thoughtSome argue that Dividend policy is irrelevant because for a company investment and debt decisions are not relevant by the amount of dividend payments. This is also due to the fact when we say that capital markets are perfect and issue and all information is available regarding market conditions and its constituents (companies).Some say that High dividends increase Stock value. They provide the reason that dividends are more certain than capital gains (price growth of the securities), so a firm which is paying less returns but sticks with the dividends is more attractive for the share holders.Thirdly, low dividends increase stock value because some argue that dividends actually hurt the investors in shape of taxes, so less dividend income means less tax deduction for the shareholder.TASK 2Is Wolfson successful to compensate needs of Shareholders? Certainly not according to the annual report 2004. As we discuss earlier, stock investors are not impressed at all astute the fact company is not paying dividends, but one has to consider that Wolfson is a new public listed company in London Stock flip-flop which has a great impact of its grouping directors holdings.If we look at the current price trend of Wolfson Micro Electronics plc. (source uk.finance.yahoo.com), we find that there is good improvement in market price as it is trading above 200p per share from Sept, 2005 to date. The volume of the stock traders is also increased from July onwards, although in odd days there are sudden fall in price and volume which is bit worrying for shareholders. map 2.1But the good aspect is Wolfson stock is performing above mean(a) as compare to FTSE index. If we see the chart 2.2, creating good price increase from beginning of this year.Chart 2.2Lets talk about the expectation of shareholder and growth rate of stock price in absence of dividends (as in the case of Wolfson). As shown in chart 2.3, if there is a decline in dividends, as a result the expectation level will also be decreasing and so as the price of the stock. A rise in the dividend growth then put the expectation of the investors at increasing level as well as the growth in stock price occur.Chart 2.3Would it be better if Remuneration package for a theatre director is based on Shareholders wealth?The concept of shareholders wealth arises from the theory that a company should only work solely for the benefit of these people and has responsibilities to its owners. That could be an effective style in management and i t sounds very good for the investors. Following points should be observed in this regardIf company is giving dividends to its share holders from the reserves allocated in the company retained earnings then there is a honest feeling for stockholders that they will not lose all of their money if company goes bankrupt.Management if decides to use dividends for increasing future value of the firm by utilizing them in capital expenditures, then this also makes sense for a firm like Wolfson that is involved in digital technology. We know that innovations and inventions are constantly taking moorage in this industry which means high proportion of firms money is spent on RD of new products.We have to bear in theme that distribution of dividends also require transaction cost for a firm to pay in the shareholders account plus dividend income is taxable for shareholders.Knowing these facts, if were a Director of Wolfson I would not decide in companys meetings not to distribute dividends to our shareholders at all for number of years. Rather than I would continue to pass shareholders at least some amount of returns in form of dividends. Why I should go for the decision, this is because of following reasonsDirectors and top management are bound by fiduciary duties to act in the good interest of shareholders.Value of my firm will increase if shareholders have more trust in our performance. If we allocate a portion of profit towards them that means that as Directors of Wolfson, we give respect to our shareholders even in tough period of our business cycle (we know our company is new to the stock market but has opportunities to capture its share in the market).Moreover, total shareholder return of Wolfson would be lower than its competitors in the market because when stock investor compares the performance of different companies for his investment, it would be inevitable that share price appreciation and dividends paid are not in a row in our company. The reference group of companies (having similar business) in same sector would also pose threat for us when a shareholder takes investment decision.