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Financing/Capital Structure Decisions Assignment

   

Added on  2020-07-22

13 Pages3840 Words52 Views
Financing/Capital Structure Decisions

TABLE OF CONTENTSINTRODUCTION...........................................................................................................................3Critically evaluating the usual assumption of corporate finance literature regarding company’sobjective pertaining to the maximization of shareholders wealth...............................................3Assessing external sources of finance available to the company................................................5Stating aspects that business unit needs to consider while choosing the type of finance............6Computation of WACC and practical problems regarding the same..........................................8CONCLUSION..............................................................................................................................10RECOMMENDATIONS...............................................................................................................10REFERENCES..............................................................................................................................12

INTRODUCTIONCapital structure presents the manner in which business unit has financed its overalloperations. In the context of business unit, financial structure implies for the combination ormixture of short & long term debt, common and preferred equity. Debt-equity measure is highlyprominent which in turn provides deeper insight about the riskiness of the company. Financialstructure that is followed by the company has greater impact on its profitability and overallsuccess. The present report is based in Digi Telecommunication, leading mobile service providerof Malaysia. Such business unit is listed on recognized stock exchange of Malaysia such asMYX and provides customers with products or services like cable television, telecommunication& mobile services. In this, report will provide deeper insight about the theoretical frameworkassociated with corporate finance. Besides this, it also depicts external financial sources that canbe used by the company for meeting financial requirements. Further, report will also shed lighton the WACC of Digi Telecommunications. Critically evaluating the usual assumption of corporate finance literature regarding company’sobjective pertaining to the maximization of shareholders wealth According to the views of Ofori‐Sasu, Abor and Osei (2017) maximization ofshareholders wealth is the main objectives of business unit while carry out activities as well asfunctions. On the basis of such principle and assumption the main focus of public corporation isto enhance or maximize return on equity share capital. Hence, managers and investors makefocus narrowly on shareholders wealth maximization. Further, Sharfman (2014) presented intheir study that SWM implies that manager should take decision in the best interest of firm’sstakeholders. Hence, stakeholders of the firm include all the individuals and groups thatsubstantially affect the value of it such as personnel, customers, suppliers etc. Considering thesame, on the critical note, Heminway (2017) said that firm’s value or shareholders wealth cannotbe maximized through unhappy customers, employees and poor products. Hence, according tostakeholders theory for SWM company needs to meet the interest of all the concernedauthorities. Takacs Haynes, Campbell and Hitt (2017) stated in their study that objective or principleregarding SWM is based on specific assumptions. In accordance with such objective company

should make efforts that maximizes or enhance the return to shareholders. In against to makinginvestment in equity shares, shareholders expect return in the form of capital gain and dividendfor the risk undertaken. Thus, as per such objective, the main motives of business unit are tominimize the risk which is facing by the shareholders. Sikka and Stittle (2017) criticized suchobjective on the basis the aspect that managers pay high level of attention to the wealthmaximization of shareholders. They entailed that investors are not only the stakeholders whohave an interest in firm’s operations. On the basis of such aspect, managers should developstrategy that contributes in the welfare of employees, customers and others (Is ShareholderValue Maximization the Right Objective, 2012). Changing legal structure and evolution of socialnorms encourages large sized business unit to explore the focus of their accountabilities. In otherwords, it can be mentioned that emphasis needs to be placed on other stakeholders as comparedto shareholders. On the other side, Poddar (2017) depicted that SWM is the primary objectives offirm behind carry out activities and functions. Moreover, shareholders are the one who investmoney in the operations so they considered as real owner. Thus, referring such aspect, it can besaid that firm’s motive in relation to enhancing the value of shareholders wealth is highlyappropriate.Patra and Dhar (2017) mentioned in the study that assumption of SWM is highlysignificant which in turn enables managers and boards to resolve conflicts associated with thelong-term benefit of everyone. For instance: If management invests money for enhancing thelevel of customer satisfaction then it provides opportunity to the shareholders to earn high returnon investment. In this way, first assumption pertaining to SWM helps in avoiding conflict takesplace between maximization of shareholders value and customer satisfaction. Kothari, Chanceand Ferris (2017) claimed that assumption of SWM is both unwise and ethically wrong. Findingsof such study presents that along with the shareholders, there are some other stakeholders whohave an interest in firm’s operations and affected from its success or failure. Such stakeholdersinclude suppliers, employees, customers and local communities etc. Firm and its managers haveaccountability to ensure that shareholders are generating suitable or higher return from theirinvestment. However, company also owes responsibility towards other stakeholders. Referringsuch aspect, it can be mentioned that SWM assumption is not highly appropriate.

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