In the previous blogs, I talk about Equity Finance and related to it to Facebook share price in the stock market. The old blog is actually focusing on type of financing for corporate financing and the topic focus was debt or equity finance but i choose equity finance.
Capital structure is how company finance its assets through debt,equity or hybrid securities. It is not surprising that previous blog was related to capital structure because capital structure is the "type of financing for corporate finance". So in a sense corporate finance is actually a system or area dealing with sources of firm's financing. But last week topic does not talk about corporate finance but type of financing sources for it.
in this week blog i'm going to talk of how debt finance and equity finance impact optimal capital structure. Most companies preferred get sources through debts because it is cheaper, less risky, lenders require low rate of return than ordinary share, debt interest is reduced by tax paid and debt is suitable for issuing and transaction costs. But not matter how much profit you have or good financial year, companies still need to pay huge amount of debts which can be a burden even in a bad year. But debt decrease WACC and increase cost of equity as shareholder demands more in return. So debt has two folding side.
For financing through gearing, it can increase shareholder wealth but it is too risky because Ke outweigh the extra debt (Kd) and the WACC rises and share price and shareholder wealth falls. There will be financial risks and bankruptcy risks if the firm finance too much in equity.
But it depend on the capital structure of each company. Some companies like to finance using equity because of illiquid assets but other through debt. Market industry that focus on retails chain or supermarkets suitable for debt finance because equity will be risky for them. But companies in related to banks or any share player like to used equity to finance their profit by attracting investors or sell share or buy share. Like Facebook that sells high shares to finance the business, attract investors and pay off their debts.
Friday, 28 March 2014
Friday, 21 March 2014
Family business doesn't have problem in raising funds.
I define family business as one in which more than one family member either owns or works in the
business and there is intent to keep the business in the family. Family business focus on expanding their ownership level, succession and developing the business. Family business can be small firm owned by entrepreneurs or private firms. Family business are different from public companies as they do not funds by share but instead by families or friends or other family members. The size, age, profitability and experiences define if the family business belong to the private or public sectors.
Family business raise funds differently than public firms. They do not find capital using the shareholders' equity or stock market as they are very private about their family secrets, illusive and closed environments. Thus investors or shareholders have problem getting inside of the family business.
The capital source of family business are loans from friends or family or other informal ways. External source can be given depending the maturity of the business.
Based on my perspective, family business doesn't have any problem on getting funds to raise capital for their firm or profit. It is because there are a lots of family business company are very successful and produced profits. For example River Island that is a private company and still owned by the Lewis Family. This business has grown from just nine stores to 70 stores in 1985 and now over 300 stores in the UK, Republic of Ireland, Russia, Netherlands, Poland, Belgium, Middle East, Ukraise, Georgia, Armenia and Singapore. It's website has successfully ships goods to over 100 countries worldwide. River Island is one of the great examples of a private, family business and successful companies worldwide.
The birth of River Island is that the Lewis family formed the Lewis Trust Groups which one of the family member run the hotels, property and investment business while Bernard (the founder) in charge of the retail operations. Thanks to the source of funds and finance the business got from other type of business the family owned. The company able to expand into menswear in 1982 and then finally merged with Chelsea Girl to become one retail that focus on mens and women clothes under the brand name of River Island in 1988. In 2010, the introduced kids-wear.
As you can see from the examples above, family business proved not having difficulty finding funds to grow their business. They don't have to find financial sources only externally such as banks loans or wait the business to be mature. The family members provide the financial source by giving loans or support the business. It can be said that getting loans from family is less risky than banks.
business and there is intent to keep the business in the family. Family business focus on expanding their ownership level, succession and developing the business. Family business can be small firm owned by entrepreneurs or private firms. Family business are different from public companies as they do not funds by share but instead by families or friends or other family members. The size, age, profitability and experiences define if the family business belong to the private or public sectors.
Family business raise funds differently than public firms. They do not find capital using the shareholders' equity or stock market as they are very private about their family secrets, illusive and closed environments. Thus investors or shareholders have problem getting inside of the family business.
The capital source of family business are loans from friends or family or other informal ways. External source can be given depending the maturity of the business.
Based on my perspective, family business doesn't have any problem on getting funds to raise capital for their firm or profit. It is because there are a lots of family business company are very successful and produced profits. For example River Island that is a private company and still owned by the Lewis Family. This business has grown from just nine stores to 70 stores in 1985 and now over 300 stores in the UK, Republic of Ireland, Russia, Netherlands, Poland, Belgium, Middle East, Ukraise, Georgia, Armenia and Singapore. It's website has successfully ships goods to over 100 countries worldwide. River Island is one of the great examples of a private, family business and successful companies worldwide.
The birth of River Island is that the Lewis family formed the Lewis Trust Groups which one of the family member run the hotels, property and investment business while Bernard (the founder) in charge of the retail operations. Thanks to the source of funds and finance the business got from other type of business the family owned. The company able to expand into menswear in 1982 and then finally merged with Chelsea Girl to become one retail that focus on mens and women clothes under the brand name of River Island in 1988. In 2010, the introduced kids-wear.
As you can see from the examples above, family business proved not having difficulty finding funds to grow their business. They don't have to find financial sources only externally such as banks loans or wait the business to be mature. The family members provide the financial source by giving loans or support the business. It can be said that getting loans from family is less risky than banks.
Friday, 14 March 2014
Crowdfunding: Kickstarter
In this week lecture, I learn about Crowd-funding and it's my first time i encounter this kind of topic. In general, crowd-funding is a type of service of an open call that let people make projects or seek financial resources in the form of donation or rewards form and/or voting rights in order to support the plan for specific reasons. Crowd-funding essentially through the internet so it is like customers of specific product category (music, bands, technology, dance, movies, etc) will joined a project that match their interest and pay/give money to this project. In return, the companies or people who start this project will give the donators a reward. Crowd-funding has two types of reward based platform which are Kickstarter and Indiegogo. Kickstarter is the most famous and common crowd-fundung platform for companies to get financial needs or funds of a project.
The recent examples of kickstarter project are the Veronica Mars Movie project. This project has reached around $5,700,000 millions and it's the all time highest funded project in FILM category with the most project backers in any project in Kickstarter history. The target goal was $2 million. Veronica Mars movie is showing on 14 March 2014. The backers who support or funds this film will get rewards in various forms such as t-shirt, dvds, posters, premiere screening, a role as the supporting characters, shooting scripts and watch online in Flixster or Ultraviolet. This movie was a tv show that only receive 3 millions viewers. The tv show ended in 2007 because the provider cancel it and so Veronica Mars stuck being a college girl. In this movie, Kristen Bell reprise her role again as Veronica and now Veronica is not a school girl anymore but finding works or you can say the movie is about the future life of Veronica.
With the help of Kickstarter, this project was able to be recognized and share it to fan movie. But truly what makes the movie reached $5 million and became the highest fund project was the customers or the loyal fans of this series. The important aspect of crowd-funding is "word mouth marketing" which mean that people (fans in this case) spread the news and share it to other people with similar interest. They can do it through social media such as Facebook, Twitter, Tumblr and many forms.
For those backers who have problem watching online with Flixster or Ultraviolet, Warner Bros (WB) will fully refund the price charged on another platform service or $10 refund of their Kickstarter pledge for digital download as their reward.
This is my first time encountering topic of crowd-funding and getting money using online donations. What i know so far to get money is in the form of loans or equity. There is advantages and disadvantages of doing online funds, issue equity and loans. Crowd-funding is one of great ways to finance money and reach project goals even though at times it can be risky or forfeit the bid. It brings many good opportunities such as the Veronica Mars project because getting money from studios or loans from bank will be expensive rather than getting funds online from widespread of fans. Also one of the best way to word mouth-mouth to fans in same category (music) or specific category (Harry Potter fans) in different part of the earth.
The recent examples of kickstarter project are the Veronica Mars Movie project. This project has reached around $5,700,000 millions and it's the all time highest funded project in FILM category with the most project backers in any project in Kickstarter history. The target goal was $2 million. Veronica Mars movie is showing on 14 March 2014. The backers who support or funds this film will get rewards in various forms such as t-shirt, dvds, posters, premiere screening, a role as the supporting characters, shooting scripts and watch online in Flixster or Ultraviolet. This movie was a tv show that only receive 3 millions viewers. The tv show ended in 2007 because the provider cancel it and so Veronica Mars stuck being a college girl. In this movie, Kristen Bell reprise her role again as Veronica and now Veronica is not a school girl anymore but finding works or you can say the movie is about the future life of Veronica.
With the help of Kickstarter, this project was able to be recognized and share it to fan movie. But truly what makes the movie reached $5 million and became the highest fund project was the customers or the loyal fans of this series. The important aspect of crowd-funding is "word mouth marketing" which mean that people (fans in this case) spread the news and share it to other people with similar interest. They can do it through social media such as Facebook, Twitter, Tumblr and many forms.
For those backers who have problem watching online with Flixster or Ultraviolet, Warner Bros (WB) will fully refund the price charged on another platform service or $10 refund of their Kickstarter pledge for digital download as their reward.
This is my first time encountering topic of crowd-funding and getting money using online donations. What i know so far to get money is in the form of loans or equity. There is advantages and disadvantages of doing online funds, issue equity and loans. Crowd-funding is one of great ways to finance money and reach project goals even though at times it can be risky or forfeit the bid. It brings many good opportunities such as the Veronica Mars project because getting money from studios or loans from bank will be expensive rather than getting funds online from widespread of fans. Also one of the best way to word mouth-mouth to fans in same category (music) or specific category (Harry Potter fans) in different part of the earth.
Friday, 7 March 2014
Complication and benefits of Merger and Acquisition to Cerberus Capital and Safeways.
In general, when company merge and acquire other company it will either used cash or stock to do it. There are pros and cons of using cash and stock for doing merger and acquisition.
Though at first acquiring and merging with other companies using cash or stock sounds good and can improve the company's performance and market competitors, there are always risks and down side of it.
Cerberus Capital Management would acquire Safeway for $9.4 billion. This M&A was planned to help both companies cut cost and expand their product selections which enables them to compete with big box retailers, convenience stores and grocers.
"This combination will improve our ability to respond to increased competition and customers' changing needs." said Safeway Chief Executives Officer Robert Edwards.
Combining two supermarket chains create a total of 2,400 stores, almost double size of Safeway today and slightly little than its rival Kroger's roughly about 2,600 stores. The merged will create a quarter million employees, 27 distribution centers and 20 manufacturing plants across the country.
Safeway shareholders get a healthy payday out of the deal because the company will pay investors $40 per share which is 72 percent increase over Safeway's stock price a year ago. Also Safeway shareholders will get $32.50 per share in cash plus other distributions with a value of $3.65 per share.
This M&A brings a lot of potential benefits for both companies to compete in this tough supermarket and grocery retail competitions. Also this can help Cerberus Capital Management to distribute their brand further and cut cost because Safeway is the second largest US Mainstream Grocery Operator which can help Cerberus Capital, a private equity firm, to operate their business and improve their performance and create opportunities for them to attract investors. From this acquisition, Safeway's shareholders get higher earnings and shares. This is a good sign because these shareholders get benefits from the M&A process.
However there will be complication arises for this M&A such as Safeway or Cerberus's chain Albertsons have to closed their stores. Even though the Executives said there are no plans to closed down any stores but analyst said there will be many redundancy that stores sooner or later will inevitably close. This is true because purchasing $9.4 billion in cash is not an easy thing. Companies have to pay debts somehow even Sobeys has been ordered by Competition Bureau to sell its 23 stores to approve the $5.8 billion(which is lesser than Cerberus deal) purchase Safeway Canada grocer.
The advantages when firms used cash are:
- The parent's shareholder or the acquirer's shareholders maintain the same level of control over their company and subsidiaries.
- There is a simplicity and preciseness in the company's structure and environment which give a great chance of success
- The recipients can spread their investments
The disadvantages of cash are:
- Shareholder may be liable for capital gains tax (CGT)
- There will be stress or tension of acquirer's cash flow and difficulty of adjusting financial gearing
The advantages to target shareholders of receiving shares in the acquisition process are:
- capital gains tax can be postponed
- maintain an interest in the combined entity
- for the acquirer the advantages of offering shares is that there is no immediate outflow of cash
However the disadvantages of that are:
- the price earning ratio game can be played
- there will be dilution of existing shareholder's position
- capital structure of the firms can have bad effect from the changes
Though at first acquiring and merging with other companies using cash or stock sounds good and can improve the company's performance and market competitors, there are always risks and down side of it.
Cerberus Capital Management would acquire Safeway for $9.4 billion. This M&A was planned to help both companies cut cost and expand their product selections which enables them to compete with big box retailers, convenience stores and grocers.
"This combination will improve our ability to respond to increased competition and customers' changing needs." said Safeway Chief Executives Officer Robert Edwards.
Combining two supermarket chains create a total of 2,400 stores, almost double size of Safeway today and slightly little than its rival Kroger's roughly about 2,600 stores. The merged will create a quarter million employees, 27 distribution centers and 20 manufacturing plants across the country.
Safeway shareholders get a healthy payday out of the deal because the company will pay investors $40 per share which is 72 percent increase over Safeway's stock price a year ago. Also Safeway shareholders will get $32.50 per share in cash plus other distributions with a value of $3.65 per share.
This M&A brings a lot of potential benefits for both companies to compete in this tough supermarket and grocery retail competitions. Also this can help Cerberus Capital Management to distribute their brand further and cut cost because Safeway is the second largest US Mainstream Grocery Operator which can help Cerberus Capital, a private equity firm, to operate their business and improve their performance and create opportunities for them to attract investors. From this acquisition, Safeway's shareholders get higher earnings and shares. This is a good sign because these shareholders get benefits from the M&A process.
However there will be complication arises for this M&A such as Safeway or Cerberus's chain Albertsons have to closed their stores. Even though the Executives said there are no plans to closed down any stores but analyst said there will be many redundancy that stores sooner or later will inevitably close. This is true because purchasing $9.4 billion in cash is not an easy thing. Companies have to pay debts somehow even Sobeys has been ordered by Competition Bureau to sell its 23 stores to approve the $5.8 billion(which is lesser than Cerberus deal) purchase Safeway Canada grocer.
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