Dividend policy: BP decided to increase dividend as profit rise

The final stage of maximizing shareholders wealth is how to return benefits to those investors and dividend is one of the ways to return the profits. However, the decision whether company pays dividend or not affect shareholders’ wealth. Miller & Modigliani (M&M) argued that dividend policy and share prices are irrelevant in theory. However, in reality, their argument still work? In reality, divided policy is related to share price.

What make reality different from theory?

Firstly, there is a group of investors concern much about stable and trustful cash flow from dividend. A rapid change of dividend policy, especially cut the amount of dividend (although using as retain earning to invest good future project) cause negative reaction from investors. Why  do investors concern so much about dividend payments? Reality is not perfect. Changing in dividend policy make investors have to change their investment portfolio, suffer tax payment. Both elements create expense which will turn profits of their future investments to dust. Investors will suffer lose due to minimize shareholders’ wealth. Second, the level of future risk acceptations of investors is different. Do you prefer receive dividend today or keep it for future investments which are consider as increase benefits? How many percentages do future projects success? So you would like to receive dividend or reinvest? Moreover, as mention about, reality is not perfect. Investors have to face a lot of expense such as: transactions costs, tax and agency costs.       

Thus, what company should do is keep a stable dividend policy and avoiding suddenly change if does not carefully consider its long-term effects. However, the stable dividend policy often makes investors think about its growth. Does company not develop much which related to unchanged dividend policy? Moreover, if company makes a lot profits while does not have any or have few positive projects, the result is company will keep to much cash due to waste money. All of those affect negative to share price due to shareholders’ wealth.       
        
As a example of dividend policies, according to BBC News (2012), BP has increased its dividend to shareholders by 14% because of increasing in profit. It seems to be a good news to investors. However, in reality, share prices of BP still suffer some lose because the legal liabilities because of the 2010 Gulf of Mexico oil spill continue to affect the company's shares. Thus, does the dividend policy relate to share prices? Or I wonder that because of the legal liability badly affect share price so BP has rise dividend payments in order to attract investors to increase share price which got negative suffer from the liabilities.     

In my opinion, the dividend policy does not solely affect market share price. There are other factors along to dividend policy affects share price.    

Source:   

http://www.bbc.co.uk/news/business-16915491

Capital structure: De Beers plans to cut debt

BBC (2009) stated that De Beers plans to raise its capital investments from investors to $1billion to reduce its debts. I think about my previous lecture topic’s capital structure. If the low level WACC of project presents high level of present value of future cash flows thus shareholders’ wealth is increasing, it will be beneficial to company with high level of debt. As the debt level increases, the actual cost of loan to the company is lower because the interest on the debt is deduced. Moreover, lenders does not share profits to company’s profit. They only require a fixed amount of interest annually. In addition, lenders do not dilute ownership interests and control of existing shareholders. In general, the cost of debt financing is cheaper than equity financing.

However, why De Beers plans to increase equity instead of debt? The problem incurs because of advantage of debt compared to equity which is company only has to pay a fixed amount of money and doesn’t have to pay any extra amount of money when company makes profit. Problem is what about when company makes lose? Company still has to pay that amount of money without any discount. De Beers experiences a bad year in which first-half profits fall by 99% as a result of a collapse in the price of diamonds. How can De Beer pay for the interest of current amount of debt ($3.5bn) while it has financial trouble? In this case, I think the De Beers’ s decision to increase level of equity is right. According to the case, it remind me about the advantages of equity compared to debt, during difficult financial periods, high level of equity can avoid company from risk because equity financing does not require to be paid. Moreover, the larger level of gearing, the more risky lenders and shareholders consider company. Lenders and shareholders would require more interest and dividends to guarantee their interests.

The lesson is that high gearing level is not always is the goods options. There is no perfect capital structure fomula applying to all project and company in imperfect world. In term of diversification approach, company should raising capital by both equity financing and debt financing because the two forms of financing together can work well to reduce the downsides of each. However, working to find out the right ratio is every difficult in order to maximize shareholder wealth. Depend on particular situation; company might decided the suitable capital structure to fit with the requirements. It will vary according to various aspects such as: type of business, revenue and profits, cash flows and a mount of money need to be financed.

Source:

http://news.bbc.co.uk/1/hi/business/8387839.stm

Socially responbile Investment: VEDAN Vietnam issue

After finishing my lecture about SRI, it reminded me about issue of VEDAN Company in Vietnam, my own country. VEDAN company seems to have no responsibility to Vietnamese people and environment when discharge untreated waste into Thi Vai River, made the pollution level increasing. In 1995, VEDAN had compensated Vietnamese people near Thi Vai River area 15 billion VND however, the issue was keep continuing until early 2009 when VEDAN Vietnam was caught in flagrant. As a result, the life of Vietnamese people near the river was affected badly.

Why was VEDAN Vietnam so bad about corporate social responsibility? I think it is all about company’s recognization of CSR.  According to research by the World Bank, barriers and challenges to the implementation of social responsibility of enterprises, including: awareness of the concept of social responsibility is limited; productivity affected to make and many rules of behavior and lack of financial and technical resources to carry out social responsibility standards (especially for small and medium enterprises); the confusion caused by differential regulation of codes of conduct and the Code of Labor and local regulations affecting the implementation of the code of conduct. As such, the implementation of social responsibility of business is not an easy problem. However, in this context, I think company need to take social responsibility because consumers, investors, policy makers and non-governmental organizations worldwide is increasingly more interested in the impact of globalization on workers' rights, environmental and community welfare. The company does not make social responsibility can no longer market access opportunities. Consider VEDAN case, now reputation of VEDAN Vietnam is not as the same as in the past. Compare to AJINOMOTO Vietnam, the profit and market share of VEDAN is much less as a result of ignore CSR. If I were a social responsibility investor, I would rather not invest in VEDAN because of what it did to my country.

Social responsibility investment covers many more aspects. Many studies have shown that a modern enterprise can only be considered as social responsibility investment when ensuring their activities do not cause harm to the ecological environment i.e. to show the environmentally friendly in its manufacturing process.  This is a very important criteria for consumers. Firm has to concern about its employees not only phisical but also on mental.  Firm forces employees to work until exhausted or has no solution to help them reproduce their labor power are entirely against to the social responsibility.  Company must also respect the equal rights of men and women, not be discriminated against in terms of gender in employment and wages. Moreover, firm has to provide good quality product, not harm the health of consumers, this is a very important criteria of being responsible business to consumers. Company should aside part of their profits to contribute to the community support activities. Because community and burden to the community is a goal that businesses have social responsibilities towards the development objectives alongside its profits. Indeed, there are many children were saved, more children are in school ..., if businesses are willing to share with the community benefits.

However, the problem is how company can balance all those aspects and support shareholder wealth when has to spend a lot of money to those social issues. I think CSR is not about company’s own responsibility, it is about shareholders’ responsibility as well. That is what we call socially responsible investment. Investors will make investment decision where they concern and think it is right by themselves.        

Credit crunch in 2008: the main reasons and effect on Vietnam’s economics

The direct and most obvious cause of the financial crisis is the collapse of the real estate market. There are three main factors created a bubble in real estate market. 

Firstly, starting from 2001, to help the economy out of stagnation, the U.S. Federal Reserve (Fed) has continued to lower interest rates, leading to the bank to lower interest rates for mortgages real estate.  In mid 2000, the Fed's interest rate is above 6% but then interest rates were cut continuously, until mid 2003, only 1%.

Secondly, in terms of home ownership, the government's general policy at that time was to encourage and create conditions for poor people to borrow money easily to buy a home.  This is done largely through two companies are government-sponsored Fannie Mae and Freddie Mac. The two companies will help to pump capital into the real estate market by buying loans of commercial banks, turn them into vouchers secured by mortgage loans (mortgage-backed securities - MBS), and then sold to Wall Street investors, especially investment banking giants like Bear Stearns and Merrill Lynch.

Thirdly, because of the transformation of loans into investment instruments, the credit markets to serve the real estate market is no longer the sole playground of the commercial bank or other lending company specializing in real estate mortgage anymore.  It has become a new playing field for investors, is able to mobilize capital from anywhere, including foreign capital flows.

Because the formation, trading, insurance and MBS, is extremely complex, it is out of control of the government generally.  Because of lack of control, the greed and adventure have become popular characteristics of investors. In addition, because the majority can sell loans to other companies that turn them into MBS, the commercial banks have become more risk in lending, despite the possibility borrower's repayment capacity.

For three reasons, the real estate market became very busy, there are many low-income people who have good credit or not, rushing to buy the house.  Regardless of ability to repay the subprime group, loan for this group skyrocketed. Because of easy loans, housing demand is very high up, pull up the property prices continuously.  This also leads to investment problems that people expect house prices will continue growth.  As a result, consumers are willing to buy houses at high prices, regardless of actual value and the ability to repay because they think they will sell if necessary to repay the bank.  Therefore, a bubble has formed in the real estate market.

 In addition, because of differences in risks of all kinds of MBS (mortgage-backed securities), so the insurance companies and risk assessment, such as AIG, also jumped in to sell insurance for investors MBS (mortgage-backed securities).   This incident has created new series and added other components to jump into the game, because this type of insurance sold in the real booming estate market are very profitable.

Worry about changes in inflation, Federal Reserve began increasing interest rates, forcing the banks to push interest rates for mortgages higher more; leading to the real estate market slowdown began in early 2006.  High interest rate cause the intensity of borrowing loans to  buy houses decreased .  House prices began to slide as supply exceeded demand.    People begin to lose the ability to repay beucase the new interest rates were adjusted quite high.  As a result, they decided to leave home for the bank expropriation.

 The more people unable to pay the bank every month results the value of the MBS was declining.  Thus, the devaluation  of MBS means that their properties lose value due to capital shortage.  Besides, the insurance company MBS, such as AIG, also fall into the hell when they guarantee more bad loans.  In addition, the commercial bank or mortgage company retains most of its loans also look at capital flows and their credit is exhausted because of loss rate repayment capacity of borrowers increasingly

In summary, because there are many tangled relationships between borrowers and lending components for direct and indirect, the decline in the real estate market has a direct effect on the financial markets in general.  Degree of spread and severity of the problem is due to the buyers and sellers of financial instruments has pulled too many investment components, inside and outside the country, in the game in the rules of the playing field is still missing or unclear.

The impact of crisis on Vietnam economic is probably negligible. The direct effect is limited because Vietnam did not participate much in the world financial market participants and trading derivative securities. Direct investment (FDI) in Vietnam is probably not affected much by the crisis in the U.S. currency because the main investors in Vietnam are Japan, South Korea, Taiwan, etc. The influences of the U.S. recession on Vietnamese economic may be in the export sector.  The United States accounts for more than 20% of total export turnover of Vietnam.  Most of our products are exported to the U.S are apparel, footwear and seafood, so in short-term those export portfolios are influenced most.

Mergers and acquisitions: Pringles sold by P&G to Diamond Foods.

BBC News, April 5, 2011, Pringles was sold to Diamond Foods for $2.35bn (£1.44bn). Diamond will pay $1.5bn for Pringles and take on $850m of its debt. Bob McDonald, chief executive of P&G said it was a "terrific deal for our shareholders". If it is a bad deal which does not create P&G shareholders’ wealth, why P&G keep going on the deal. In P&G chief executive position, Mc Donald wants to increase the value of deal in purpose by stating the quote. In reality, P&G’s core business is a personal care and household products. Pringles as a food bands stood as the exception in P&G’s portfolio. It might not bring many benefits to P&G as it imaged. It would be difficult to manage business in two different kinds of industries. It would made P&G forget about it core business. Thus, I think the decision to sell Pringle is the right decision for P&G business and shareholders.
In 2010, Diamond Food had bought Kettle Foods Chips for $615 million from Lion Capital. In both case, they are both mergers deal but merger strategies are different. I am confusing whether Kettle deal are horizontal merger or conglomerate merger. Base on the definition, in horizontal merger two companies which are engaged in similar lines of activity are combines. The past core business of Diamond are popcorn and nuts while Kettle’s business is potato chips. Is it in the similar line of activities? In contrast, a Conglomerate merger is the combining of two firms which operate in unrelated areas. Diamond’s previous business and Kettle’s business are in the same industry, food industry. Is it irrelevant? In Pringle deal, I am sure that Diamond Foods conduct Horizontal merger in which Pringles Chips are combined with Kettle Food Chips of Diamonds Inc.
The motivation purposes of two mergers are different base on the different strategic merger. In Kettle merger, the motivation is entry to new market. Compare to precious business, Potato Chips market is completely different one to Diamond Inc. Thus, the quick way to enter potato Chips market is merger. One more motivation makes Diamond enterprise decided to buy Kettle Chips is risk diversification. The investment portfolios of Diamond were diversified when firm bought Kettle. The overall income of company will be less risky if profits of popcorn and/or nuts reduce. In another hand, the motivation of acquiring Pringles is different. One of the forces driving the acquisition is the attempt to increase market power of Diamond. Diamond already owes Kettle chips, and then bought Pringles will increase ability to control over the price of product in theory. However, I wonder that Diamond still keep the previous brand name of products separately, Pringle and Kettle, can this increase its market power or compete between two brand in the same company? I think it fails to control selling price in term of customer power. However, in term of supplier power, Pringles merger will reduce supplier power as a result, Diamond could control price over price of inputs instead of outputs. Another significant advantage of Pringles acquisition is the ability to exploit economics of scales. Merger Pringles to Kettle Foods helps Diamond save money in manufacturing capital, distribution channel, R&D, administration. Although two deals’ motivation has some differences, they might have the same motivation which is managerial motives. The acquisition might lead to mangers’ higher salary, power, and achievement satisfaction.

In the previous merger, Kettle deal, Diamond paid by cash to Lion Capital. It brought benefits to Diamond that are to retain the same level of control of shareholder over their company and the transaction gave greater chance to success because cash have obvious value then cash is more preferable. However, if Diamond borrowed the cash to pay for the Kettle deal, it might affect financial gearing of company. Investors do not prefer company which have high gearing ratio. From my point of view, just because the value of deal is not much $625 million, the decisions paying by cash of Diamond did not negatively affect shareholders’ wealth. It created Diamond shareholders’ value. In contrast, Pringles deal is a big deal compared to Kettle, $2.35 billion, so applying by cash is impossible. Diamond decided to pay $1.5 billion in stock market and $850 million in debt. Because it is a big deal, so paying by shares would not ruin the cash flow of Diamond intermediately, but it will affect the power of existing shareholders’ position. Diamond shareholders own about 43% while  P&G shareholders will own the rest. In this case, I think the company, which creates more shareholder value, is P&G rather than Diamond.

The stock price of Diamond increases because of the acquisition decision.(http://www.nasdaq.com/symbol/dmnd/interactive-chart). Diamond shareholders were happy about that. The Pringles acquisition might go well as both enterprises expected unless there is no Department of Justice’s investigation in Diamond accounting practices in 2012. The stock market of Diamond went down more than 60% value after DOJ reported which make Diamond be unable to finance the Pringles deal. February 10, 2012, the stock price of P&G fell down 0.3% as the result  P&G has decided it will cancel its sales of Pringles snack to Diamond Food Inc. If the sales were in process, the stock market price of P&G fell down more than that. Fortunately, after terminating its deal with Diamond Foods, P&G has now entered into an agreement with Kellogg to sell its Pringles for $2.7 billion in cash which makes P&G’s stock price grow to $72.   

In conclusion, the Kettle deal has expanded Diamond’s business and created Diamond’s shareholders wealth. In contrast, Pringles acquisition between Diamond and P&G did not complete and brought benefit to both companies. It ruin shareholder’s wealth of both companies especially, P&G. The reason for the merger failure is an unexpected and unmanageable reason which is DOJ financial investigation.      

Sources:

http://www.bbc.co.uk/news/business-12973728

http://www.forbes.com/sites/greatspeculations/2012/02/21/pg-puts-down-the-pringles-stock-going-to-72/   

http://www.bloomberg.com/news/2012-02-10/p-g-said-to-seek-termination-of-pringles-sale-to-diamond-foods.html

http://business.time.com/2012/02/15/kellogg-to-buy-pringles-pg-diamond-end-deal/

FDI in Africa : the transformation

On Friday, 2 March 2012, Reuters stated that “capital flows into Africa are seen growing significantly in 2012 as investors seeking higher returns out of Europe, look at the continent for better opportunities in infrastructure projects, a World Bank's senior official said.” The question is that why have FDI developed strongly in Africa in recent years? What are the reasons make foreign investors ignore Africa as a location for investment?

Why FDI is an importance for Africa? FDI is seen as the solution for Africa economics problem overall. There are some main keys reasons why Africa wants to attract FDI.

·      Lack of capital sources. FDI is considered as a large inflow of capital when Africa capital base is low. Is is actually right? Although FDI provide fixed physical assets, profit from investment is mobile. Foreign investors can take profit away and reinvest outside countries. Especially, in service industry, the investment in physical infrastructures is low, the mobile portfolio capital flows is highly important. Profits may be higher than the initial investment value and FDI may thus contribute to capital export.       

·      Lack of technology. FDI is expected as one of the methods bringing new technology to Africa. Foreign companies will use their home technologies, then the technologies will be transferred and adapted by local firms.

·      Lack of skills. It is the same as technology innovation. FDI is expected to bring new skills from foreign countries, transfer those skills to local employers and employees.

·      Employment development. FDI is seem as create job opportunities for local people. However, job creation is seem to be domestic benefits in Africa countries. Its means FDI in Africa will reduce people’s job opportunities in other countries.    

·      Competitive motivation. When Africa encourages FDI, the local enterprises will face the higher level of competition. It forced the firms work harder to survive and develop. It is also potential threats for domestic competition. Transnational companies can be harmful host economies by inhibiting entrepreneurship in the country. They will use their competitive advantages such as knowledge, skills, brand image and a variety of support services needed to beat the local competitors and prevent the emergence of local small-scale enterprises.          

Why Africa does not attract FDI much? Even through the location of Africa, the central world location, is one of its advantages, helps foreign investors take transportation advantage, there is a need to take consideration when making FDI decision in Africa. The main reasons are the Africa image does not favourable. Thinking about Africa, people think about unstable political area, starvation, social and help problems and economic disorder. Furthermore, there is a number of reasons that prevent FDI into African countries including market size, lack of policies, lack of profit opportunities, inconsistent setup, negative perceptions, shortage of skills, labour regulations, poor infrastructure and corruption (Consumer Unity Trust Society, 2002). It required high up-front cost and long time preparation when starting investment in Africa. It is indicated that extortion, bribery, and the lack of access to global markets are also some of the factors that discourage FDI in Africa.

So what African governments have done in order to encourage FDI? Africa countries improved their policies and regulatory framework to attract foreign investors, namely, incentives, investment treaties, and investment promotion. Since the 1980s, all SADC governments have comfortable regulations for foreign investors easy to entry:

·      By relaxing the ability to borrow locally although it implies a constraint on a country’s foreign currency reserves,

·      Relaxation of land and mining concession ownership,

·      By forming new kinds of partnerships with the private sector (public private partnerships) in areas, which were previously the responsibility of the government e.g. water distribution. (Mwilima, 2003)

Those regulations can be classified into three main fiscal, financial and rule or regulatory-based (Consumer Unity Trust Society, 2001):

·      Fiscal Incentives

·      Reduced tax rates

·      Tax holidays,

·      Double tax treaties

·      Subsidies,

·      Exemptions from import duties

·      Accelerated depreciation allowances

·      Investment and reinvestment allowances

·      Specific deductions from gross earnings for national income tax purposes

·      Deductions from social security contributions

·      Financial Incentives

·      Grants

·      Loan and loan guarantees

·      Rules-based incentives

·      Modifying rules on worker’s rights

·      Modifying environmental standards

·      Greater protection for intellectual property rights

Besides, Africa countries have entered investment treaties, both bilateral investment treaties and multilateral ones to encourage foreign investors (Consumer Unity Trust Society, 2001) such as the Convention establishing the Multilateral Investment Guarantee Agency (MIGA) and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States

·      Fair and equitable treatment for foreign investors in terms of applications for investment approval and setting up their businesses

·      Specific provisions on expropriation and non-commercial losses and compensation for the same, and

·      Dispute or conflict settlement mechanism

Last but not least activities which Africa country have done in order to attract FDI is investment promotion. many African countries suffer from a negative image. To overcome the drawback, most African countries have established investment promotion agencies (IPA) whose role is conducting marketing activities to attract FDI  and take care of foreign firms once they operating in the countries (Mwilima, 2003):

·      By acting as a one stop for investors to deal with regulatory and administrative requirements, and

·      By changing or modifying investor perception of the country by attending and organizing investor fairs and by distributing materials.

·      Investment promotion covers a range of activities, including investment generation, investment facilitation, aftercare services, and policy advocacy to enhance the competitiveness of a location.

React to the offers made by African government, in recent years, the trend of FDI in Africa in increasing. Foreign companies are more willing to invest in Africa such as royal Ducth Shell, Vodafone, Unilever, Nestle, etc. For example, Hans Kuropatwa, director of Vodafone Group International state: "Private investors rather than governments are developing mobile telecommunications in Africa. The market is promising, as cellular services are an excellent alternative to the overstretched fixed networks that are in place in many countries. Vodafone places great emphasis on political stability in making investment decisions and is currently concentrating on developing its mobile telecoms businesses in Egypt, Uganda and South Africa."  Changing image of Africa countries, stable political situation is more stable and potential growth opportunities have attracted foreign investment.  

However, all those intensives and actions are extremely favour to foreign investors? Foreign investors might use their economic power to overpower the government policies in order to get their own benefits and damage countries’ social benefits. They are able to take advantages in the form of excessive protection, tax reduction, investment allowances, specific provision, and employee’s right. Accidentally, African governments threat their society.  

In conclusion, FDI is significance to African economics however it potentially contains some drawbacks. Africa’s policies might be useful in the decade, but it might be against the economics in long-term. Thus, African governments need to carefully look at real situations, give right decisions.      

Exchange rate exposure: The fall of Yen currency

The yen has dropped to its lowest point against the US dollar in seven months (BBC news). The dollar rose to 80.24 Japanese yen late Wednesday from 79.71 yen in 21^st Feb 2012. According to BBC news, one of the reasons for the fall is    Part of the reason for the fall is the Bank of Japan's surprise increase of its stimulus measures. Another reason is the strengthen of USD.  

The fluctuation of Yen/USD exchange rate affects upon Japan’s multinational companies and multinational companies operating within the country. The bulk of Japanese exports and imports are denominated in U.S. dollars rather than Japan's local currency, the yen. Japanese exporters are likely to receive dollar revenues but incur most of their costs in yen. Likewise, Japanese importers make dollar payments though sales are likely to be denominated in yen.  

The fall of Yen against US Dollar have energized Japanese manufactures and the economy since Japan is heavily dependent on exports. The weak Yen make exporters cheaper overseas and therefore more competitive. For instance, car manufacturers such as Toyota, Honda and Mitsubishi, have been some of the benefits by the weak yen as it makes their products more competitive abroad. If the Yen’s strengths, it will be a worst hit for Japanese exporters. “Toyota, for example, bases its earnings on an exchange rate of ¥105: every ¥1 appreciation against the dollar costs the firm ¥35 billion ($350m) in annual operating profit. Almost 60% of the companies on the exchange's main market are trading at less than their book value.” (The Economist, 2008). An amount of cash, which Japanese exporters have received, will increase as the result of Yen’s fall. The fall also supports the demand of Japanese products and services so the market shares of Japan firms will increase. Generally, weak Yen have benefited Japanese exporters. However, some industries like automobile industry have to import raw materials, components from outsiders, the fall would incline the costs of those imports, and effect cost advantages. Even companies do not directly import raw materials from international markets, the fall indirectly take away cost advantages through their suppliers who use imports.              

In contrast, the fall brings the advantages for Japanese export companies while make disadvantages for Japanese import companies as well as foreign export firms. This is the drawback because overseas products’ price has been higher than domestics’ price. Profit, which importers and outsiders gain, will be less. Moreover, the weak Yen influences customer demand. The cheaper price of products and service of domestics will make customer switch from overseas products to domestics’ one. Market share of those companies will decrease as well. Foreign companies will lose their Japan market share.

The decline of Yen also effect multinational companies which operating in Japan especially US firms. The Japanese investment requires Yen currency. One, Yen drops against Dollar, the cost of international investment will decrease. However, returns and profits from Japanese subsidiaries have been decreased when foreign companies convert from Yen into USD.               

Multinational tax management: transfer pricing

Kad industrial SA Vietnam Co., Ltd is a entity which has produced clothes to fulfill contracts which parent company in U.S has signed with other foreign partners. This project has generated nearly 14.4 billion accumulated loss which causes the loss is determined by the price below the cost of outsourcing. Analyses of data records, the losses are mainly formed by the depreciation of machinery and equipment in production costs 1.5 times compare to plan. Through the actual inspection process, Da Nang Taxation Department identifies all machinery and equipment of this plant is imported from an old production facility in the U.S. and is included in the value of capital contribution by the parent company. Clearly, productive machinery and equipment is not as declared by the company, but the tax office is difficult to clarify the "suspected case" unit prices below the cost of outsourcing business, because not determine the market price the number of contribution of capital equipment.

Transfer pricing is easily mistaken as cheating on prices they are two different behaviors. However, I think transfer pricing is considered as more sophisticated price cheating because result of the two behavior of fraudulent transfer pricing and prices are leading to the determination of tax liability for state which does not comply with the provisions of the law. However, the price cheating is a fraud which company itself may conduct but transfer pricing can only be done by more than one parties. Inform lower import prices compare to actual prices to evade import tax rates or higher sales prices than sales invoices, revenue accounting to evasion of value added tax (VAT) evasion that corporate income tax (CIT). This  is considered as the price fraud.

The main reason leading Kad company to conduct transfer pricing is related to profit maximization. Business in general, multinational corporations in particular, never give up opportunities to maximize profit, including behavior change price, price fraud, commercial fraud, ... Transferring price of goods, services, capital investment across borders will be harder to detect than the others and even fraud cases detected is not easy to dispose because by government of each country often tend to protect their businesses as the national interest. However, maximize profit does not mean maximizing shareholders’’ wealth (Arnold, 2008). Managers might conduct transfer-pricing base on their own benefits. Transfer pricing is conduct in term of the differences in investment climate, business differences on policies, laws and regulations between countries, etc. also create opportunities for the multinational corporations to develop and implement their transfer pricing. The differences in tax policy; especially tax incentives are the main reason. Almost of developing countries are using the main tax incentives is one tool to attract foreign direct investment. However, is attracting FDI good for country’s economics, for instance, in case of Vietnam Kad industrial SA Ltd?  

As stated above, the objective of transfer pricing is to maximize the profit of a corporation based on minimizing tax obligations. For headquarter of SA industrial firm, transfer pricing to ensure that they achieve benefits such as reducing tax liabilities, maximize profits by allowing them to easily transfer their investment capital or profits of the country or moving abroad (even in cases they are holding loss statement).

In addition, the US parent company contributed investment capital by equipment and machines from their US old facilities; the company headquarters also easily change and modernization of technology through the disposal of outdated equipment, obsolete technology for Vietnam firm at high price. Transfer pricing is conducted through the company and overseas partners, so it also allows the US headquarters reduced the risk of product markets, exchange rate risk, etc. Enterprise benefits by shortening the payback period of investment and interest income even in the period the Vietnam subsidiary is the basis of their investment are reporting losses.

In contrast, transfer pricing not only causes damage to the budget of the country receiving the investment, but also distorts the business environment, and detriment Vietnam domestics firms. In short term, the US government may face difficulties in capital investment because the country's capital investment by the private sector tend to flow to the investment-receiving country, Vietnam in which there is lower tax. However, in the long term, the US government has got double benefits as a new market, pollution reduction by not producing in the country, new resources approach. Especially in countries with high taxes, the government is also entitled to their full tax incentives which Vietnam government has given to foreign investors.

For the host country receiving the investment, we cannot deny what foreign investment has contributed when looking at the real economy after 20 years. However, if fully comprehensive analyzed, we have lost more than received.

Raising capital: the limitation of domestics firm: no more funds for Wrexham FC.

Capital is the fundamental issue for company to grow and develop. There are two main external ways to raising funds: equity and debt. Each form has its own advantages and disadvantages. In this blog, I have only concern about equity financing.

Equity financing is less risky than a loan because firm does not have to pay it back, and it's a good option if company can't afford pay since it is in negative year. Instead, company can raise more funds from investors to the business. Then, company will have more cash on hand for developing the business. However, if company keeps not paying returns in a long period, it will be a trouble because investors see no benefits from holding the shares then they will sell their shares and invest in other profitable companies. Because of unguaranteed returns, shareholders may require returns that could be more than the interest rate. Moreover, investors will require some ownership of the company and a percentage of the profits. It will impact ownership of existing shareholders. There is no tax reduction if financing by equity.

Although there are some disadvantages of equity financing, equity is the fundamental source of capital. It would be positive if company raises a lot of funds from investors. It is an advantage of listed companies, especially, international listed company. If company is listed globally, the liquidity of shares, share price and the reputation of company are improves. As a result, cash flows and funds available are increasing.  

In contrast, it is the limitation of domestic firm when it does not be listed in stock market. It cannot raise enough funds if it needs. BBC News (2011), Wrexham FC fell into crisis since it faces tax bill. The company cannot pay the tax by its own internal resource. It needs help from its shareholders and lenders. However, Wrexham FC is non-listed comapny, it limits their capital financing sources. They can only lean on its investors’ help. However, the investors said that there would be no more funds available for Wrexham FC because they have been invested too much.  There is another way to raise funds is debt financing. However, in this negative situation, it must be risky if lenders give away their money because the Wrexham’s ability to pay back is low. They need to look at interest payment ability then no lenders is willing to give money to Wrexham FC except a small amount of fans of Wrexham FC. As a result, Wrexham FC is going to be takeover however, until now no investors is willing to commit the deal. Organization might go bankrupt and destroy shareholders wealth.   

Weight averages cost of capital: errors when calculating WACC

In order to invest in a project or a business unit strategy, a firm needs to raise capital. The capital can be raised from several sources such as equity shares, bonds, and return earning.  However, nothing is free. Finance providers have taken risks when investing money in a company so they require an acceptable return. Shareholders expect a return on their invested money, and bondholders expect an interest payment annually. At a certain level of risk of project, there is a minimum level of required rate of return (WACC). At least, company is expected to pay interest on its borrowing money, pay its shareholders directly as dividends if it cannot make a capital investment, which will increase returns for shareholders. The more risky project is the more required rate of returns is. Therefore, estimating WACC is very important. Calculating WACC correctly is also every significant because WACC is used as a tool to approve or reject projects. If the cost of capital is calculated incorrectly, then we may be approve projects that will reduce benefits to shareholders, or reject projects that could benefit shareholders. However, how does company calculate accurately? Is there any errors when estimating WACC? 

In this case, I only concern about cost of equity and cost of debt. There are many errors when estimating WACC. For example, Fernandez (2004) identified the common errors in a paper entitled “80 Common Errors in Company Valuation“.  I realize that most common errors come from calculating cost of equity. Why? Because the procedure for measuring cost of debt is quite simple and easy. The normal procedure only require a forecast of interest rates for the next few year, the proportion of various classes of debt and the corporate income tax rate (Moffett, 2009). However, it does not mean there is no error when estimating cost of debt. All is about forecasting the future. There is nothing reliable.

To calculate cost of equity, there are two models: Gordon Growth Model and Capital Asset Pricing Model (CAPM). The first error I think is using unsuitable model. For example, Gordon Growth Model is a purely quantitative model, does not take into account qualitative factors such as industry trends and management strategy and relies on a future constant dividends’ growth This drawback makes the model less flexible and suitable when applying in rapidly growing industries with less predictable dividend patterns, such as software or mobile phone. Gordon Growth Model is only useful to use in mature industry with stable and predictable dividend growth pattern like tobacco industry. Nowadays, with the growing rapidly of most industries and economies, Gordon Growth Model is less relevant. Instead of that, CAPM is alternative suitable one. Until now, it still exist the debate around the effectiveness of CAPM. The CAPM is widely known, studied by a large amount of analyst and executives. Most financial directors use it to assess their cost of capital and the reliability of project. However, it faced a lot of disfavour such as Harry Markowitz’s, James Montier’s and Eugene Fama’s studies (Financial times, 2007). In my opinion, nothing is such a perfect thing in such an imperfect world. So, let us choose the most suitable updated model in a particular circumstance.         

 Considering CAPM is the most effective model to estimate cost of equity and WACC. Nevertheless, applying a good theory and model does not mean company will calculate WACC correctly. It depends on how company applies the model into practices. As mention above,   Fernandez (2004) shows an amount of errors when estimating WACC :

·         Wrong risk -free rate used for the valuation

o   Using the historical average of the risk-free rate

o   Using the short-term Government rate

·         Wrong beta used for the valuation

o   Using the historical industry beta, or the average of the betas of similar companies

o   Using the wrong formulae for levering and unlevering the beta

·         Wrong market risk premium used for the valuation

o   The required market risk premium is equal to the historical equity premium.

o   The required market risk premium is equal to zero.

·          Wrong calculation of WACC

o   Wrong definition of WACC.

o   Debt to equity ratio used to calculate the WACC is different than the debt to equity ratio resulting from the valuation.

o   Using discount rates lower than the risk free rate.

o   Using the statutory tax rate, instead of the effective tax rate of the levered company

o   Valuing all the different businesses of a diversified company using the same WACC (same leverage and same Ke).

o   Considering that WACC / (1-T) is a reasonable return for the stakeholders of the company.

o   Using the wrong formula for the WACC when the value of debt is not equal to its book value

o   Calculating the WACC assuming a certain capital structure and deducting the outstanding debt from the enterprise value

o   Calculating the WACC using book values of debt and equity

In conclusion, there are a lot of errors and their effects that firm needs consider when calculate the WACC. However, it cannot avoid all of those errors because the time is continuous changing. Every data can become the past one every time. Company and the analyst can only determine the exactly results of project when it happened. Company can only reduce those things as much as possible. The suggestion is company’s WACC calculation should pass an acceptable test before applying. It is suggested to use “Corporate capital costs: a practitioner’s guide” of Justin Pettit (2005) in order to minimize the required rate of return. 

There is only thing that I consider the most is why never use the book value of equity and debt when estimating the capital structure weight for the WACC (Brigham Daves, 2010).

Switching stock market listing from one country to others. Is it easy for companies to list their shares on more than one exchange?

The financial globalization motivates companies list their stock abroad. There are several reasons for listing shares on more than one exchange. First reason is to raise capital. A cross-border listing can help a company target new shareholders. The second reason for listing on several exchanges is that it increases a stock's liquidity. Theirs shares become more accessible to global investors, allow investors decide sell or buy share in which market which markets. It will decrease the cost of capital. One of the reasons is to raise awareness of company. More people will know about the company if company lists on more than one market.

The cross listing is believed that it has a significantly positive impact on value of the cross-listed firm in the home market (Miller, 1999). For example, CRH, one of the Ireland’s biggest building material companies is to move its primary stock market listing from Dublin to London, while CRH shares will retain a secondary listing in Dublin.  Shares in the Irish-headquartered group rose 4 percent on the expectation that index funds would now buy its shares (Smyth, 2011).  Why CRH choose London stock exchange as primary exchange instead of Irish? Obviously, London stock exchange is the largest international equity market. The benefits and opportunities come from London stock exchange are more than from Dublin stock exchanges such as more well-known, more investors, more regulated market and etc.  CRH chief executive Myles Lee said: "We believe that these listing arrangements are in the best long-term interests of CRH and will increase the group's attractiveness to a wider international investor base’’. Of course, CEO of one company will say positive thing about organization. However, we cannot deny the positive impacts of listing on London stock exchange.  Furthermore, CRH tends to entry into benchmark FTSE 100 index. It would open a new opportunities for CRH when it becomes a FTSE 100 companies.

In another case, could companies list their shares abroad as expected? Greencore plc, food firm, cancels its listing on the Irish Stock Exchange and move to London stock exchange instead of keeping listing shares on Irish Stock Exchange. Why Greencore plc listed in London stock exchange stead of Irish stock exchange?  It is said that the major activities of Greencore such as its turnover, operating profits and producing assets are held in UK. Almost Group’s shares are now owned by overseas investors. In 2011, the company completed the acquisition of Uniq plc, which has further increased the proportion of its activity in the UK. Why doesn’t Greencore plc list on both London stock exchange and Irish stock exchange? Is it what company want? It is not easy as expected. In order to list on London stock exchange, company has to fulfil the requirement. In Greencore’s case, company has to reach a certain liquidity threshold on London stock exchange in order to listing on that exchange (Irish times, 2011). Unlike CRH, it already has amount of liquidity in London, almost Greencore’s liquidity is in Dublin. In order to listing shares on London stock exchange, Greencore has to move its stock from Dublin to London.

More opportunities more risks and threats there are. In both cases, the moving stock exchange will create more opportunities. On another hand, companies have to face more threats. Companies must comply with more restricted regulator requirement. For instance, company must meet transparency requirement, provide more released information. The cost of listing is also different. Companies must pay higher professional fees.

In conclusion, before listing in stock exchange or switch to greater exchange, company should take the consideration. London stock exchange provides a practical guild to listing which contains major self-questions. Those question help companies know whether they are already to list or not.      

Shareholder wealth maximization: Hutchison to buy Orange Austria

HONG KONG, Feb 3 (Reuters, 2012a) - Hutchison 3G has agreed to buy Orange Austria from France Telecom and Mid Europa Partners, the private equity group in a deal valued at 3 billion euros ($1.7 billion), adding to more than $31 billion of investments in overseas mobile-phone operations.

HUTCHISON WHAMPOA LIMITED
The acquisition is believed to maximize shareholders' value. Hutchison shares rose to the highest level in five months in Hong Kong trading on optimism the purchase may improve its ability to compete against market leaders Telekom Austria and Deutsche Telekom AG’s T-Mobile Austria (Bloomberg, 2012). Hutchison shares rose as much as 3.8 percent to HK$76.20 on the news, bucking a flat overall market (Reuter, 2012b)."In the telecom business there is a real co-relation between market share and profitability," Bertrand Bidaud of Gartner told the BBC. Hutch said the deal would make it Austria's third-biggest mobile phone operator, with 2.8 million customers and a 22 percent market share, and the two units had combined revenues of more than 700 million Euros in 2011.

I think Hutchison's buying decision is a right decision at the right time. In the high competition in Austrian market, the best way to gain market share is fight against or consolidate competition, said Bertrand Bidaud (BBC News, 2012) . Hutchison used acquisition to increase its share. "It is definitely a positive for the future development as the acquisition cost can be lower in the current economic climate," said Conita Hung, head of equity research at Delta Asia Financial Group. "It is a good opportunity for those financially strong companies to buy assets in Europe, especially if they believe in the strong growth prospect," she said.

However, I wonder that is it really creates opportunity when Hutchison buy Orange Austrian in European debt crisis circumstance. European debt crisis affects the economic and demand of Austrian. The company could make profitability as its expected? Generally, the deal is believed to be a long-term profitability. "Overall, we do think the deal offers one of the few relatively visible paths to long-term sustained profitability for 3 Austria," Bank of America/Merrill Lynch said.

Not only shareholders but also customers, stakeholders, benefit from acquisition agreement. Orange Austria’s customers will benefit from 3 Austria’s superior high speed data network coverage and quality, while all of 3 Austria’s customers going forward will benefit from superior coverage, quality, innovation and service through the improved spectrum position, retail footprint and efficiencies that the combined businesses will generate (Hutchinson Press Releases, 2012). From my point of view, in this case it is not sure that Hutch corporate objective is stakeholders' capitalism, but absolutely shareholders wealth maximization.

FRANCE TELECOM
For France Telecom, the aim of sale is to exit low-growth mature markets and returning cash to shareholders (Reuters, 2012c). At the moment, the offer has negative effect on market share value of France telecom. Shareholder would suffer lower share value. However, it is not so bad. France Telecom decided to pay back cash to shareholders. Shareholders can determine continue invest in company or not. From my point of view, it would be long-term profitability. France telecom decided to close Austrian, lower growth market and concentrate on its core market or higher growth markets in Africa and the Middle East (Thomas & Jacob, 2012). It would improve the corporate value of organization. In future, it would benefit shareholder value. I conceive that France Telecom's decision is in order to maximize shareholders wealth.

REFERENCE

• BBC News (2012) 'Hutchison to buy Orange Austria as it seeks expansion' [Online]. Available at: http://www.bbc.co.uk/news/business-16866032 (Accessed: 3 Feb 2012)
• Bloomberg (2012) 'Li’s Hutchison to Buy Orange Austria in $1.7 Billion Deal' [Online]. Available at: http://www.businessweek.com/news/2012-02-03/li-s-hutchison-to-buy-orange-austria-in-1-7-billion-deal.html (Accessed: 3 Feb 2012).
• Hutchison Press Releases (2012) 'Hutchison 3G Austria announces the acquisition of Orange Austria from Mid Europa Partners and France Telecom combining the third and fourth player in theAustrian mobile telephony market' [Online]. Available at: http://www.hutchison-whampoa.com/upload_docs/2012/02/Telco/2353/2353_eng.pdf (Accessed: 3 Feb 2012).
• Reuters (2012a) 'Hutchison unit to buy Orange Austria for 1.3bln euros in EV -source', Guardian [Online]. Available at: http://www.guardian.co.uk/business/feedarticle/10074290 (Accessed: 3 Feb 2012).
• Reauters (2012b) 'UPDATE 4-Hutch to buy Orange Austria as Asia firms shop in Europe' [Online] Available at: http://www.reuters.com/article/2012/02/03/orangeaustria-hutchison-idUSL4E8D28Y920120203 (Accessed: 3 Feb 2012).
• Reuters (2012c) 'France Telecom close to deal to exit Austria' [Online]. Available at: http://www.reuters.com/article/2012/01/16/us-francetel-idUSTRE80F0PK20120116 (Accessed: 3 Feb 2012).
• Thomas, D. and Jacob, R. (2012) ' Hutchison seals deal to buy Orange Austria', Fianancial Times [Online]. Available at: http://www.ft.com/cms/s/0/281742ec-4dd4-11e1-b96c-00144feabdc0.html#axzz1lIkIJAum (Accessed: 3 Feb 2012).