The Picked Company
I. Corporate Governance Analysis
Management and Ownership : separation
The Potential Conflict
ectors to shareholders: pursue the goal
Interact with Financial Markets
two basic types of securities Debt securities Equity securities
Institutional is the juridical person and other organizations who enjoy the rights of Stockholders. Here is something about Nestlé’s marginal investment. In an investment market, there are lots of concerned main trend products, but there also exists the products unconcerned with people by the effect of a variety of factors. In the special circumstances, the investment values of unconcerned products are not identified by the market, so its market price is always very low. And then with the effects in the increase of the main trend products’ price and other related factors,
the market raise the identify the marginal products; their price will increase a lot. Of course, the increase of the marginal products cannot do without the active backgrounds of whole markets. The most important thing is that its threshold is low so as to give the opportunity to creating wealth for the small investor. So, they have a way to realize the capital primary accumulation.
analysis to the factors that may affect value of investment, evaluate what changes it’s necessary to keep a good proportion.
Risk and Return
A firm holds one security should use expected return as the measure of the security’s risk. A firm holds a diversified portfolio cares about the contribution of each security to the expected return and the risk of the portfolio.
capital?Interest rate on government bond+β×Historical excess return on common
stock One source estimates that Nestlé equity beta in late 2010 was 0.62, implying well-below-average risk for the company’s share. Nestlé’s cost of equity?5.1%
?0.62×6.9%?9.4% Nestlé’s weighted-average cost of capital Kw?4.6%×31.0%?
potentially can be eliminated by diversification, so we can invest in different securities to reduce the unique risk. The portfolio risk can be reduced by diversification, which means the more kinds of securities there are, the lower risk there is. The expected return on a portfolio is simply a weighted average of the expected returns on t
were yielding a return of approximately 7.0 percent in December 2010, and the company’s marginal tax rate is about 35percent. Consequently, the after-tax cost
of debt to Nestlé was 4.6 percent[(1?35%)×7.0%].
IV. Measuring Investment Returns
Nestlé company acquire equity capital by issuing stocks?and get debt capital by
issuing bonds and loaning from the financial agencies ,such as the banks. By far the most popular yardstick of financial performance among investors and senior managers is the return on equity, defined as
Return on equity?Net income/Shareholders’ equity
There are three factors controlling ROE:
To look at the combined effect of margins and turns, Nestlé calculate the return on
Ratio Analysis of Nestlé
2008 2009 2010 Industry Median (2010) 16.6 8.0 7.8 1.0 2.5
Profitability Rations Return on equity(%) Return on assets(%) Profit margin(%) Asset turnover Asset to equity
28.1 7.9 6.6 1.2 3.6
24.4 8.0 6.7 1.2 3.1
19.7 6.4 6.5 1.0 3.1
Beginning with Nestlé’s return on equity, we see a steady decline from a high of 28.1 percent in 2008 to 19.7 percent in 2010, despite this negative trend, however, it is comfortably above the industry median of 16.6 percent.
V. Capital Structure Choices
Capital structure refers to the enterprises of various long-term funding sources and the ratio between the composition of the capital structure of financial management and practice in an extremely important issue, but also the core issue of corporate financing decisions.
There are four advantages of using equity capital.
of the company.
VI. Optimal Capital Structure
on the firm, because interest and principal payments are obligations. If these obligations are not met, the firm may risk some sort of financial distress. The ultimate distress is bankruptcy, where ownership of the firm’s assets is legally
transferred from the stockholder to the bondholders. These debt obligations are fundamentally different from stock obligations. While stockholders like and expect dividends, they are not legally entitled to dividends in the way bondholders are legally entitled to interest and principal payments. Corporate financing decision is finding the optimal capital structure, the so-called optimal capital structure is how to enable enterprises to achieve optimal capital structure, which is the lowest cost of capital, capital structure to maximize enterprise value. The best debt ratio of Nestlé is about 0.46?and the firm always maintains in this level basically. If not, we can adjust the amount of assets or the debt to maintain in this level.
-to-asset ratio for a firm maximizes its value. The optimal capital structure for a firm is one which offers a balance between the ideal debt-to-equity ranges and minimizes the firm's cost of capital. In theory, debt financing generally offers the lowest cost of capital due to its tax deductibility. However, it is rarely A firm's ratio of short and long-term debt should also be considered when examining its capital structure. Capital structure is most often referred to as a firm's debt-to-equity ratio, which provides insight into how risky a firm is for potential investors. Determining an optimal capital is a chief requirement of any firm’s corporate finance department.
Nestlé financial leverage can be calculated by its total liabilities dividing by total assets. It indicates what proportion of equity and debt the company is using to finance its assets. Debt ratio =total liabilities /total assets Sometimes only interest-bearing, long-term debt is used instead of total liabilities in the calculation. Also known as the Personal Debt/Equity Ratio, this ratio can be applied to personal financial statements as well as corporate ones. A high debt-to-assets ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. If a lot of debt is used to finance increased operations (high debt to equity),
the firm could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing. The debt-to-assets ratio also depends on the industry in which the company operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt ratio above 2,while personal computer companies have a debt ratio under 0.4. In a word, Nestlé has a reasonable debt ratio, which suggests its financial condition is healthy, the financial risk is low and the using of assets is great.
VII. Mechanics of Moving to the Optimal
In 2006?the Nestle company began to acquire outstanding shares under a publicly announced threeyear share repurchase plan , which expired on June 30,2009 . $22.3 billion of shares under this repurchase plan $6.0 billion in 2009 and $6.4 billion in 2010, share repurchases of $6-8
completed the divestiture of its Folgers coffee subsidiary . 38.7 million shares of maintains debt levels they consider appropriate after evaluating a number of factors, including cash flow expectations, cash requirements for ongoing operations, investment and financing plans and the overall cost of capital. $29.8 billion in 2009
VIII. Dividend Policy
per common share increased 10% to $1.8 per share in 2010. Total dividend payments to both common and preferred shareholders were $5.5 billion in 2010 and $5.0 billion in 2009. The increase in dividends per share, partially offset by a reduction in the number of shares outstanding. April 2010, the Board of Directors declared an increase in our quarterly dividend from $0.44 to $0.4818 per share on common stock. This represents a 9.5% increase compared to the prior quarterly dividend and is the 54th consecutive year that its dividend has increased.
IX. A Framework for Analyzing Dividends
1.The Nestle company well understand the belief that shareholders prefer equity appreciation to dividends . 2.Reason Because companies that assume a tax differential viewpoint are focused on share appreciation, they often have more funds available for growth and expansion than companies focused merely on increasing their dividends.
only one year’s earnings, it fails to capture the full impact of multiperiod decisions. Secondly, because ROE looks only at return while ignoring risk, it can be an inaccurate yardstick of financial performance. Finally, ROE measures the return on shareholders’ investment; however, the investment figure used is the book value of shareholders’ equity, not the market value.
policy that enables the company to f
marketable securities, and unused borrowing capacity as temporary liquidity buffersto provide financing in years when investment needs exceed internal sources.
debt, but only to the point where the
restrict access to financial markets, and reduce growth only as a last resort after all other alternatives have been exhausted.