Maximising The Purchasing Power Finance Essay

Maximizing the buying power may maximize the stockholder wealth that stockholders derive through capital additions and dividend payment over clip. In my sentiment, although houses frequently involve themselves in undertakings which do non ensue straight in net incomes, these undertakings do non belie the maximization end of stockholder wealth.

For illustration, in recent old ages, sponsorship activities were seen as an effectual selling ‘s tool and convey the superior influence compared to set uping the trade name consciousness through advertisement. However, utilizing efficaciously these activities is a large challenge for selling directors that is how to construct the sponsorship run at the right clip, right audience, utilizing the sensible cost, and specially constructing scheme and trade name corporation development.

The critical function of sponsorship activities is to heighten the repute and place of the company, which is the ground why many companies decide to put a immense sum of money for them. Before sponsorship activities, the patrons need to be certain that the events can be successful, and specially be aligned with the trade name and concern operation of the patrons. In general, sponsorship of featuring events is the most common and may run from international to local events. For illustration, Nikon sponsored AFC Asian qualifiers – the concluding unit of ammunition of the Asiatic qualifiers for 2014 FIFA World Cup Brazil, so Nikon will go an official patron. At each game, the Nikon logo is displayed around the pitch. Besides, at the lucifers, Nikon besides provides a service terminal which supports to official lensmans. In fact, this sponsorship can assist Nikon to increase their trade name ‘s image to everybody in the whole universe. Furthermore, in the instance of Coca-Cola, it has experienced to tie in with the Olympic Games since 1928. Now, the company continues its sponsorship in the London 2012 Olympic and Paralympic Games which are expected to welcome more than 6 1000000s people during the period clip of Olympic. Therefore, Coca-cola has a large opportunity to function around 23 million drinks to jocks, witnesss, and the Olympics ‘ staff. In add-on, the sponsorship brings a extremely interaction through making and edifice relationship with clients. For case, Sprint has started into sponsorship treaty for communicating activities of The Professional Golfers ‘ Association ( PGA ) of America. The company has built its hospitable image to clients through the show window, free usage of its merchandises, and an friendly environment.

In decision, the sponsorship activities ( e.g. sponsorship of featuring events or other amusements ) are a good manner to further the house ‘s trade name consciousness, every bit good as to assist identifying and taking advantages from their benefits. Hence, the houses will go more popular than the past and will accomplish a immense economic benefit from these activities, so the stockholder wealth will be maximised.

Question 2:

The net nowadays value ( NPV ) method and internal rate of return ( IRR ) method are seen as the most common tools to analyse whether a undertaking is deserving to put. In general, when a individual investing undertaking is calculated with conventional hard currency flows, these two methods are no struggle. However, in some particular instances, the investing undertakings prefer to take the NPV method.

Discounted hard currency flows is used to measure capital investing undertakings by the net nowadays value ( NPV ) method of investing assessment, and all undertakings with a positive NPV is accepted by the NPV determination regulation. Besides, the IRR method involves the price reduction rate ‘s computation which produces the NPV of nothing. In many state of affairss, the NPV method leads to the same determination as the IRR method, but there are some instances that these methods have different picks, and the investors prefer to take the NPV ‘s determination.

When reciprocally sole undertakings are compared, the NPV method can be preferred. Frequently, any company has many investing undertakings, nevertheless due to the reciprocally sole undertakings, merely one undertaking should be chosen. The right determination is to take the undertaking which has higher NPV than the others. When the undertaking with the highest NPV measures the absolute rise in the company ‘s value every bit good as stockholder wealth, IRR is merely a comparative step of return. For illustration, the figure 2.1 shows that a company considers two reciprocally sole undertakings ( A and B ) . The undertaking A has a higher IRR than the undertaking B, so utilizing the IRR regulation, it could take project A. However, the undertaking B has the greater NPV at the capital ‘s costs, and so there is a struggle between these methods to take the best undertaking. In this state of affairs, the NPV method is preferred.



NPV B intersection



Discount rate

Cost of captial


Undertaking A

Undertaking B

Figure 2.1

Next, the NPV method is besides preferred in which the undertaking ‘s hard currency flows are non conventional. An investing undertaking can hold more than one IRR if it has hard currency flows of different marks in back-to-back periods, so these hard currency flows are defined as non-conventional hard currency flows. If the IRR regulation is used, the multiple IRR ‘s being can ensue in incorrect determinations. In this instance, the NPV method can give the right advice for investors, and it has no trouble to suit the non-conventional hard currency flows. Furthermore, when the price reduction rate alterations during the undertaking ‘s life, the investors besides prefer to take the NPV ‘s determination. When the capital ‘s cost over the investing undertaking ‘s life has alterations, the NPV method has a ability to suit them easy. In add-on, in the state of affairs of reinvestment premises, the NPV method suggests that hard currency flows may be reinvested at the capital ‘s cost, whereas the IRR method suggests that hard currency flows are reinvested at the internal rate of return. The reinvestment premise is realistic when it is underlying the NPV method.

In decision, the net present value method can be seen as a technically superior compared to the internal rate of return method. There are many advantages that is provided by the NPV method of the investing assessment. In the reciprocally sole undertakings, it gives the right advice for investing undertakings. Besides, it helps to suit the non-conventional hard currency flows, to easy integrate the alterations in the price reduction rate, and the reinvestment premise underlying this method is realistic.

Question 3:

( 1 )

In general, finance should be included in the leaden costs of capital ( WACC ) computation if it is used chiefly for the long-run investings of a company, such as for capital budgeting. Therefore, WACC computation does non include short-run debt because this debt is connected with the short-run of funding instead than long-run assets. Short-run beginning of finance may include non-interest bearing liabilities ( e.g. accrued liabilities, trade payable ) , short-run interest-bearing debt ( e.g. notes collectible ) , etc. Hence, when gauging Stenigot ‘s WACC, the capital ‘s beginnings should be included such as long-run debt, common stock, and preferable stock ( if it is used ) .

( 2 )

Cost of equity, cost of preferable portions and cost of debt are component costs of a company ‘s capital. The stockholders concern chiefly about the hard currency flows which are available for paying dividends or for their reinvestment, so rate of returns and hard currency flows of the constituent costs should cipher on after-tax footing. Hence, dividends are paid, the involvement payment is made, and reinvestment is made based on an after-tax footing.

( 3 )

The capital ‘s cost can be calculated in two ways ( the norm and the fringy cost of capital ) . The mean cost of capital represents the historical fiscal determinations, and the fringy cost of capital is the following increase ‘s cost of capital raised by a company. If a company raises new capital in its fiscal direction, it uses cost of capital to do the new capital elevation determinations. Hence, the capital ‘s costs should be fringy costs instead than historical costs.


With the current monetary value of 12 % voucher, biannual payment, so Stenigot ‘s one-year involvement payment ( I ) of noncallable bonds is:

I = voucher payment – par value of the bonds == $ 60

Therefore, we have the computation of before-tax cost of debt:

Kd =

Where: I = $ 60, P = $ 1,000, NPD = $ 1,153.72, n = 30 old ages

Therefore, we have:

Kd/2 = = 0.05 = 5 %

Since this is a semi-annual, hence, multiply by 2 to happen the one-year before-tax cost of debt:

Kd = 5 % ? 2 = 10 %

The debt ‘s involvement payment is revenue enhancement deductible. Hence, we have the after-tax cost of debt, with 30 % of corporate revenue enhancement rate ( CT ) :

Kd ( after revenue enhancement ) = Kd – ( 1 – Connecticut ) = 10 % – ( 1 – 0.30 ) = 0.07 = 7 %

Then the Stenigot ‘s after-tax cost of debt is 7 % .

C. ( 1 )

Where the market monetary value of 10 % , $ 100 par value, and ageless preferable stock is $ 111.10, so we have the cost preferable portions:

Kps = = = = 0.09 = 9 % .

Hence, the Senigot ‘s cost of penchant portions is 9 % .

( 2 )

Based on the consequence above, the cost of preferable stock ( 9 % ) is lower than cost of debt ( 10 % ) , but 10 % is pre-tax cost of debt. Debt finance has tax-deductible involvement payments, and the penchant dicidends are non tax-deductible when they are a distribution of after revenue enhancement net incomes, therefore, the cost of preferable stock ( 9 % ) is lower than the pre-tax cost of debt but is higher than the after- revenue enhancement rate ( 7 % ) .

( 1 )

When a company gets net incomes from its activities, it has two picks that the company may administer the net incomes as dividend for the stockholders or may keep maintained net incomes for reinvestment activities. Retained net incomes have a capital ‘s cost equal to the equity ‘s cost, so that maintained earrings is seen as finance ‘s beginning with no cost. In fact, although the maintained net incomes do non hold serving costs, retained net incomes have an chance cost which is equal to the equity ‘s cost because if the net incomes were distributed to the stockholders they would hold earned a return equivalent to the equity ‘s cost.

( 2 )

Using CAPM attack, we have Senigot ‘s cost of common equity, with Rrf=7 % , ( Rm – Rrf ) =7 % , & A ; szlig ; j=1.3:

Rj = Rrf + & A ; szlig ; j- ( Rm – Rrf ) = 7 % + ( 1.3 – 7 % ) =16.1 %

Therefore, the cost of common equity is 16.1 % .

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