How might a company’s investment decision making recognise the various interests of its stakeholders?
Assignment question:
How might a company’s investment decision making recognise the various interests of its stakeholders?
Required
- Prepare a critical literature review on corporate purpose and the impacts of investment decisions on shareholder value and stakeholders
- Evaluate Claude plc’s proposed investments using appropriate corporate finance concepts studied on this module and assess their impacts on the company’s financial condition and shareholder value
- Evaluate Claude plc’s proposed financing arrangements and assess their impacts on the company’s financial condition and shareholder value
- Incorporate your conclusions from evaluating Claude plc’s proposed investmentsand financing into your essay and discuss how theory suggests what their impacts may be for stakeholders
Additional Guidance
- Place your workings of financial information in an appendix to your essay
- You should set out your workings in full detail
- Incorporate the key findings of your financial evaluations within your essay
Suggested references
Donaldson, T. and Preston, L. E. (1995) ‘The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications’, Academy of Management Review, 20(1), pp. 65–91.
Friedman, M. (1970) ‘The Social Responsibility of Business is to Increase its Profits’, in Zimmerli, W. C., Richter, K. and Holzinger, M. (eds.) (2007) Corporate ethics and corporate governance. Berlin: Springer, pp. 173-179.
Jensen, M. C. (2010) ‘Value Maximization, Stakeholder Theory, and the Corporate Objective Function’, Journal of Applied Corporate Finance, 22(1), pp. 32–42.
Case study information for Claude plc
Claude plc has been listed on a stock exchange for 3 years and now has a large number of diverse shareholders none of whom exceeds a 5% stake. It has been in business for over 50 years and prior to listing was owned by a family whose members no longer exert significant influence. Historically the family dominated the company and pursued a paternalistic approach to the employees and communities where the company operated.
The company now has a new chief executive officer who wishes to quickly develop the company through a major project.
Summarised financial statements for Claude plc
| Income statement | £’000 |
| Revenue | 300,000 |
| Cost of sales | ( 150,000) |
| Gross profit | 150,000 |
| Overhead expenses | ( 135,000) |
| Operating profit | 15,000 |
| Interest payable | ( 5,000) |
| Profits before tax | 10,000 |
| Corporation tax | ( 2,500) |
| Earnings | 7,500 |
| Statement of financial position | |
| Total assets | 185,000 |
| Share capital | 4,000 |
| Share premium | 16,000 |
| Retained earnings | 40,000 |
| Total equity | 60,000 |
| Non-current liabilities | |
| 10 year loan notes 5% | 100,000 |
| Current liabilities | 25,000 |
| Total equity and liabilities | 185,000 |
| Current share price | £60.00 |
| Interest rate on loan notes | 5.0% |
| Beta factor | 1.15 |
| Equity risk premium | 4.0% |
| Yield on government bonds | 3.4% |
| Gross profit margin | 50.0% |
| Tax rate | 25.0% |
Project summary (£’000 unless stated otherwise)
This project involves acquiring new technology and equipment to revitalise the company’s existing production and enable expansion into new markets. The project requires immediate investment of 170,000 in capital expenditure which is expected to have a useful life of 10 years with nil residual value. In addition the company will need to immediately acquire inventory with at a cost of 30,000 and in year 1 will incur costs of 15,000 for employee redundancies. The project is expected to achieve revenues of 75,000 in year 1, 85,000 in year 2, 100,000 in year 3, 120,000 in year 4 and 125,000 in each of years 5 to 10. The gross margin is the same as the company’s current rate. There will be additional overheads of 6,000 for each year from 1 to 10. The project is expected to cease at the end of year 10.
Claude plc proposes to finance this project by executing a rights issue to raise 50% of the immediate cash requirement. It proposes to issue a new series of 10 year loan notes on the same terms as the current loan notes to finance the other 50%. Claude plc’s shares have a par value of £1.00. The loan notes have a market value equal to their nominal value.