CORPORATE FINANCE AND VALUATION
SECTION A
QUESTION 2
a). The main types of the share repurchase
The share repurchase is referred to as the act of the company re-acquisition of its shares back from the shareholders. These involve returning the money to the shareholders. The share that is repurchased is usually seen as the alternative to the company dividends. When the company buy back its shares, it assists the company in the reduction of the shares that are issued to the public of the nation through the stock exchange. By the situation where the company reduces the number of the shares held by the public, it means that the earning per share increases.
The share repurchase can be done some different types, this include:
1.Selective buybacks
There is a situation where an identical offer is made to each shareholder of the company to sell a certain share to the company. These offers are usually communicated to some specific group of the shareholders in the company. As it is noted in the US, there is no need for the special shareholders’ approval of the selective buyback. From the research in the UK, the stipulated scheme has to approve by all shareholders or a special resolution that entails of the 75% majority members
2.Employee share scheme buyback
There is a situation where the company repurchases the shares held by the salaried employees of the salaried directors. These are mostly done for those associated with the company or the employees who works in the related company as the company repurchasing the shares. For this to be approved, it requires an ordinary resolution
3 Non-market buybacks
There is a situation where the company that is selling its shares is a listed company. For this situation, the company buybacks the shares in on-market trading in the stock exchange. This is buying the shares as just a normal customer but end up repurchasing its own shares that were already issued in the stock market. This usually the company to increase earnings per shares. For this situation, the stock exchange rules as are the one that applies here
4 Minimum holding buyback
This also applies to the listed company where it buys the unmarketable parcels of the shares from the shareholders. The repurchased shares are cancelled, but these type does not require a resolution.
B
Present and discuss types of dividends
Dividends are the portion of earnings that is always given to the equity shareholders after the financial year of the company. These are always distributed among the equity shareholders. According to the IFRS, the equity shareholders are awarded after the company have paid for all its expenses. These expenses include the payment to the loan interest and the preferred shares.
The dividend can be divided into the following types.
- Cash dividend
This is the most common means through which the company pays its dividends in terms of cash. However, payment of the dividend by cash requires the company to have huge cash in hand or in the bank. These hence means that in case the company decide to use the cash dividend in its dividend issuance, the company usually have high cash flow, and the payment does not cause the cash shortage in the firm. In the situation where the company is used to use the cash dividends, and the cash is not sufficient to pay for the dividends, the company opt to borrow funds to cater to the shortage.
2.scrip dividend
This is a type of the dividends in which the shareholders of the company are usually paid in terms of the promissory note. The issued promissory note is just applicable for a very short term and hence meaning it has a short maturity. These promissory can either be bearing the interest or not. Most of the time, the company uses this type of dividend in the situation where is suffering from a shortage of cash or the company has weak liquidity position.
3.Bond dividend
It is noted that the bond dividend is the same as the band scrip divided. The only difference between the two mentioned above is on their maturity date. The bond dividend is known for caring a longer maturity date compared to the scrip dividend, which is mostly known to carry a shorter maturity. The bond dividend is also known to bear the interest.
4.Property dividend
This are types of the dividend that are paid in the company in the situation where the company has many assets that are no longer necessary to the firm, and hence the shareholders accept them as a form of payment
5.Stock dividend
This is also one of the key types of the dividend where the company pays the equity shareholders in the form of issuing bonuses to them.
SECTION B
Question 3
Present and discuss the accounting-based approach to assessing financial distress
The financial distress of the company is used to refer to that situation where a certain company does not make to meet its daily operation. This is mostly checked with the cash flows of the company; sometimes, the cash flows of the company tend to be less compared to the required expenses of the company. In this discussion, the financial statement analysis or the account reports are used to assess the company likelihood of financial distress. For this purpose, it usually analyses the probability that the firm will not be able to pay its debt in the long term run.
The financial statement or the account-based approach was mostly used by the creditors in the determination of the company worthiness of the payment of the amount they credit the company. At the current world, the accounting-based approach is ubiquitous and has been seen to in cooperating a lot of the ratios to analyses the trade suppliers, investors, management, banks and many other stakeholders in the operation of the firm and the cause of the financial distress. Of late, the accounting-based approach has introduced the analyses on either the default in the bond or the bankruptcy of the firm.
In the accounting-based approach, it uses the liquidity ratios to analyses the company viability or the ability to settle for its debt when they fall used. In the determination of the financial distress in the future, the approach usually analyses the current assets of the firm, the ability to pay for the short term liabilities. According to this approach, the current asset of the firm should be twice the current liabilities of the firm to indicate that the firm is viable. The accounting-based approach has also been seen to incorporate the quick ratio. This ratio shows how the firm can quickly convert its assets into cash and hence manage to settle its debts when they fall due. This usually includes excluding the inventory from the analysis. The reason for excluding the inventory is because the inventory is not that liquid compared to the cash in hand or in the bank or the amounts paid in advances.
Question 4
Discuss the benefits and limitations of large investors as an internal corporate governance mechanism
The internal corporate governance mechanisms are that group of the large investors that are set to ensure that proper actions are taken by the management of the firm. The reason for this is that most of the providers of the firm’s capital are not there to control the daily firm’s operations. These hence calls for these capital providers to set the corporate governance mechanisms to ensure that the management works towards the best interest of the owners of the firms or the capital providers. The mechanism is usually controlled by the owners of the firm. This mechanism is used to control the corporate risk and the controls of corporate assurance.
Advantages of using large investors as the internal corporate governance mechanisms
(a). By the company setting this internal corporate governance helps the firms in ensuring that the stakeholders of the firm, for example, the employees, customers, and the investors are well protected. This also ensures that there is quality in the provision of the services by ensuring that the company stakeholders are well looked after. This controls the management from mistreatment of the firm employees because there is an upper helm that is protecting all the firm stakeholders.
(b). By using the large investors as an internal corporate governance mechanism allow the chosen directors, for example, Woolworth who can win the major awards for the excellent performance of the firm. This is because these large investors know well the firm and hence will not act as the competitors but as working towards the excellent of the company.
The disadvantage of setting large investors as the internal corporate governance mechanisms
(a). There is going to be some additional cost. This is because before the firm set this internal corporate mechanism, they were not incurring this cost and hence leading to the decrease of the company profit.
(b). Some of the company tend not to manage to incorporate these internal corporate mechanisms set and hence the continues conflicts over time among the directors of the firm. This is because these are just voluntary, and they can be removed at any time.