Assignment on Corporate Finance (Pdf)
Added on 2020-10-22
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CORPORATE FINANCE PART A
TABLE OF CONTENTSINTRODUCTION...........................................................................................................................1CAPITAL STRUCTURE................................................................................................................1Dividend payment affect share price...........................................................................................3Calculation of WACC.................................................................................................................7CONCLUSION..............................................................................................................................14REFERENCES..............................................................................................................................15APPENDIX....................................................................................................................................17
INTRODUCTIONCorporate finance is referred as branch of finance which directly deals for sources offunding, capital structure of particular corporations and actions which manager undertakes forraising value of firm to the shareholders along with tool and analysis which is used for analysisfor allocating financial resources. The capital structure is referred as proportion along withcombination of equity share capital, debentures, preference share capital, long term loans andretained earnings. In simple words, it finances overall operation and growth with application ofdifferent sources of funds. Debt originates in form of issuing bond or long term notes payablewhere equity is classified as preferred stock, retained earnings or common stock. The presentreport is about FedEx Corporation between 2013-2018 along with remarkable changes in last 5years as it is dramatically financed through debt. This report has evaluated WACC along withobtaining optimal capital structure with reference to FedEx Corporations.CAPITAL STRUCTURE(Listed in Appendix)Illustration 1: Capital structure of FedEx Corporations1
Illustration 2: Share price of FedEx CorporationsAccording to Fernandez, (2010), corporate finance is particular area of finance which isdealing from financial decisions where corporation make and tools where analysis is used formaking these specific decisions. It provides valuation of firm which is irrelevant to company'scapital structure where firm is highly leveraged and has presence of component of lower debtwithout bearing on market value. Instead of this, market value of firm is highly dependent oncompany's operating margin. This approach has assumption of no taxes but in this scenario, it isfar from truth. This theory had recognised benefits of tax accrued through payment of interest.The interest paid on fund borrowed is tax deductible. On the contrary, Chowdhury andChowdhury, (2010) has argued that it is not similar with case where dividend paid on equity. Insimple words, the actual cost of debt is less comparatively to nominal cost of debt due to taxbenefits.As per views of Chowdhury and Chowdhury, (2010), trade off theory has advocated thatorganization could capitalize its need with debt along with cost of distress such as cost ofbankruptcy has exceeded benefits of tax values. Henceforth, increased debts has offeredthreshold value with aggregate to company. Hinton and Lewis‐Fernández, (2011) has stated thatthis approach with context to corporate taxes as it performs acknowledge tax savings and infersalteration in debt equity ratio which has impacted Weighted Average Cost of Capital.In the above scenario, there is extraction of stock price along with their capital structureof year 2013 to 2018 where its correlation is articulated as 0.7 which indicates strong positivelinear relationship through a firm linear rule. According to Grüninger and Kind, (2013), financial2
leverage is direct proportion to cost of equity with increment in debt component, higher risk hasbeen perceived with equity shareholders for organization. In order to this, shareholders expecthuge return with increment in cost of equity. In this context, key distinction with assumptionthat debt shareholders have upper hand with claim on concerned earnings and cost of debtreduces.Dividend payment affect share priceAccording to author Baker, Kilincarslanand Arsal (2018), specialist of share marketwould mark down price as multiple factors impact stock prices. In the same series, supply anddemand contributes major role in fall and rise of stock prices. There are various otherperspectives which plays vital role when organization pays dividend and on the contrary, stocktrading with absence of rights to a dividend is worth less comparatively to similar tradingcompany with dividend. With context to Miler and Modigliani theory, it has been stated thatdividends have signalling impact. The investor and potential investor has forecasted company'smargin which is influences with dividend rate. According to the view of Blanchard and et.al., (2018) stated that dividends are havingsignalling impact in the mind of customers. Thus, it is crucial that enterprise needs to distributedividend among the shareholders or investors. In addition to Kim, Luo and Xie, (2018) statedthat high dividend payments can be considered as positive indication of profitability byshareholders. The information about dividends payments helps to define the scenario of entity. Incontrary to Kohler, Guschanski and Stockhammer, (2018) stated that as the dividend of firm getdisclosed it works as to enhance share prices in market. On the basis of announcement ofdividend, shareholders, investors, and potential investor can assume the position of enterprise incontext of profitability. As per the view of Magnusson and Enebrand, (2018) it can be stated thatthe enhancement in payment of dividend indicate positive sign for entity as it aids to raisegoodwill and reputation in the mind of customer and it has also beneficial as price of share getsincreased. With context of Baker, Kilincarslan and Arsal, (2018) it can be stated that at timewhen entity cuts the payment of dividend to customers then it shows the negative effect onreputation of firm and it also spoils the image of firm in the mind of customers. Thus, prices ofshare can also get reduced. As per the view of He and et.al., (2019) it can be stated that thedecision in related with dividend is one of crucial in financial decision of the corporate firm.Thus, the firm which are dividend paying have more amount of liquidity in market in order to3
measure the stock and liquidity. According to the view of Ferris, (2018) it can be stated that thefirm who is having high amount of profitability and entities with low profits have significantprosperity in order to pay dividends. In addition to it, there are number of factors that areaffecting firm shareholders return such are as financial leverage, tax rate, assets performance,contribution of employees and technical know etc. In contrary to Blanchard and et.al., (2018)stated that prices of shares continually fluctuate in every second. Thus, number of firm belief thatright prices must be the present value of all the future dividends. In contrary to Kim, Luo andXie, (2018) stated that the prices of share usually rises before the entity announce its dividends.Herein, it can be stated that number of factors are there that can affect the stock prices. In thismanner, supply and demand are tow factor that plays major role in rise and fall of stock prices.Thus, dividend policy has number of detrimental factors as return on equity, price of shares andearning per share etc. As per the view of Kohler, Guschanski and Stockhammer, (2018) statedthat dividends can have significant impact over price of underlying stock in variety of manner. As per the view of Sharif, Purohit and Pillai (2015), dividend decision is one of the importancefinancial decision of for a corporation. The firms paying the dividend are having more liquidmarket one their stock and the strokes are measured to positivity. This directly effect theprofitably of the business of the dividend payer. The cumulative excess returns are significantand positive for those firms which pay dividends for more than 30 days form the data ofannouncements of the dividends, this reflects how that even with declaration of the dividend thepieces of the shards gets a boost up. The profit momentum of the firms paying dividend is lowerthan the forms which are non paying the dividends. There is direct and positive relation betweenthe dividends, retained earnings, earning per share and stock prices of an organisation. This isbecause the dividend payout directly reflect the performance of the business. However, theauthor Belousova and et.al., (2016), present a point of view that the question is still unsolvedover the matter that weather the dividend police of a business directly effects its shareholderswealth or not. The authors stated that profits is one of the main economic driver for anorganisation and it presents two dimension one is that to retain the profits and to invest it inexpansion and growth of the business. Other is that to retain a small amount and distribute themaximum part to the shareholders as dividend. To distribute the dividend to the shareholderssymbolizes the strength of the organisation and gives information about the prospect of theorganisation in context of its developments and grasping more values in the industry. This4
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