Ramblings about Corporate Finance

Dividends 101 Prior to this week's lecture, I assumed shareholders would prefer to have dividends than not. As the owners of the company, they would expect idle cash to be returned, in order to ensure capital is allocated efficiently. As the lecture progressed, there was a thought-provoking question posed; would shareholders prefer dividends or the company to invest in positive NPV projects. My thoughts here were different to before, such that I expected companies to invest in all positive NPV projects available in order to maximize the future earnings potential.  My initial thoughts aligned to the 'Dividend irrelevance theory'. This theory was created by Modigliani and Miller in 1961 and it stated that share prices are determined by investment decisions. Investing in all positive NPV projects should be the only consideration when looking to maximise the company value. This indicates that dividends are the residual cash after investing in these projects. Because of

Leverage – A double edged sword My upbringing has always taught me to live within my means and that debt is inherently bad because of the drastic consequences its mismanagement can have. This is of little surprise having been brought up during the worst Financial Crisis, and subsequent recession, for almost a century. However, throughout University and my placement year, this notion has subsided somewhat. I now recognise debt’s importance; at an individual’s level, the access to credit plays a huge role in prosperity, whether that’s to fund a mortgage or to become an entrepreneur or for other things. Therefore, I am now of the opinion that debt with  responsible individuals  in the  right quantities  can be beneficial for those individuals and society as a whole.  In looking at debt from a corporate perspective, it can be beneficial because it is often cheaper than equity financing. However, it is also riskier because of the legal obligation to repay interest, irrespective of f

What is the goal of a firm? Before I divulge my thoughts on the documentary "RBS: Inside the Bank that ran out of money", I feel it is worthwhile to provide an insight into why I believe the goal of the firm should be to maximise shareholder wealth, as this will provide the basis for the documentary discussion. People may associate Adam Smith's 1776 'Wealth of Nations' book with a free market economy and limited government intervention. They would be correct to do so, however that is not the reason for its mention. Rather, it is the notion of enlightened self-interest, which Smith outlines in a rather convoluted way; "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." The connotation this has is that only by selling products consumers want, do firms make money. Therefore inadvertently, by looking out for oneself and focusing on profit, other stakeholder g

Are the markets inefficient? It was over 3 years ago during Principles and Theories of Finance where the concept of market efficiency was first introduced to me. Learning about that in first year was overwhelming and it was difficult to comprehend the importance of the efficient market hypothesis (EMH) to the Global financial markets. However, now in final year, I have a much greater appreciation for the EMH and understand it is one of the foundation blocks of modern finance and there are many developments in finance which rely on the assumption of market efficiency - one of which I will be conducting for my dissertation, the event study methodology. I may have considered it perhaps sacrilege to question its authenticity during first year, but now I have developed far more scepticism and criticality of these seemingly-perennial theories. So, what is the EMH? Its roots lay in the work of Maurice Kendal which outlined that share price movements follow a random walk, such that future

So often do these programmes start with a family-owned business making a loss, yet having aspirations of grandeur. Obstinate founders still at the helm whose lack of communication with their workforce jeopardises morale. They understand change is needed, but frequently lack the ingenuity to undertake it & expect it to be done for them. Perhaps I have my own biases from watching similar programmes, but episode 1 of Lord Digby Jones’ new troubleshooter was no different. Hereford Furniture are a family-owned business manufacturing wooden furniture, supplementing this with imports from China and retailing these goods in 3 outlets – a jack of all trades but master of none. Mike Muxworthy, the 59 year-old co-director, founded the business and intended for his company to be a household name when he retires – not likely if it continues in the loss-making manner it’s currently run. This is why Digby was brought in, to try to transform the mindset and company itself. I spy wit