Market Value and Risk Management - Case Study Example

Answers to Questions D & E. d) how does Nokia finance (short and long term) its operations by using international capital markets. To understandhow Nokia finances its operations, let us have an understanding of the capital structure of the company. The capital structure of Nokia is a mix of the company’s long-term debt, short-term debt and common equity. Nokia finances its operation from debt coming from long term notes payable and short term debts used to finance working capital requirements and equity from the common stock of shareholders. In 2009, there has been a shift to 40% debt leverage from the previous years’ of conservative use of debt over equity. A 0.414 change has been observed in use of debt leverage in 2008 and 2009. For the rest of the years, from 20003 to 2006, debt has been low as this is the time of economic boom wherein sales of the company has been high, and cash flows from internal operations are used. In year 2000 to 2002, debt structure was 0.12, 0.09, and 0.04 respectively. (msn) See attached table. Chart below depicts capital structure of Nokia for 2009 Source: MSN (Value (in millions) International capital markets. Short term and long term operations. The short term obligations of Nokia are composed of its current liabilities that are debts from commercial institutions, while long term ones are a combination of long term obligations and equity. Capital transactions of Nokia takes place in the secondary market like stock exchanges. The company has been listed in the New York Stock Exchange on July 4, 1964, and at present has a share price of $12.76 (Yahoo Finance) e) How the market value of the firm is possibly affected by the strategies used in exchange rate risk management, expansion to new markets and international financing of operations. Effect of strategies used in expansion to new markets on the market value of the firm In 2004, Nokia Chairman announced through its Annual Report that demand for mobile phones has increased particularly in developing countries such as China, India, Russia, Latin America and Africa. He estimated that the number of subscribers of Nokia will reach 3 billion by 2010. (Nokia mission statement) In a study done by Ahonen, T. (2010) that recalled Nokia’s performance for a decade, that before 2000 the world has only about 500 million mobile phone subscribers, and out of this Nokia was able to sell 77 million. In 2009, a decade after, Nokia was able to ship a total of 2.87 billion mobile phones, and about 1.38 billion Nokia phones are in the pockets of the people today.(Ahonen, T.) The impact of this globalization to Nokia to the current market value is the increase of stockholders confidence to the company. Market value is the price at which sellers and buyers trade similar item at an open market (investopedia). The impact could be gauged through its growth and change behavior of the market as shown in historical chart prices done for five years. (Yahoo Finance) Nokia’s current share price is 9.47€ which is down from previous years’ level. The stock market share price is volatile and is subject to uncontrollable market forces that describes changes in prices. The chart recorded a high share price six months ago but has remained on an acceptable level within the range of 9.47€ b. effect of strategies used in international financing of operations to the market value of the firm Nokia used the dynamics of foreign investments to enhance market value of their firm. It has significantly affected the market value of the firm because of strategies used by Nokia in establishing subsidiaries in regions worldwide that has focused on technology advancement and customer approach level. According to Nokia’s Chairman, that they have to deal with the fast changing industry dynamics in a big global market which is important in value creation of market growth. As a result of foreign investment, sales of the company from 2004 to 2008 have gone up in the chart, and have increased market value of Nokia e. How did the strategies used in exchange risk management affect the market value of the firm The foreign exchange risk is defined as a risk of an investment’ value changing due to changes in currency exchange rate. (Investopedia) It usually affects businesses like Nokia that is engaged in export and making international investments. This takes place when the money must be converted to another currency to make that certain investment and any changes in the currency rate will cause the investment value to either increase or decrease when the investment is sold and converted back to its original currency. Nokia’s approach to risk management is to identify key risks that might stop Nokia in attaining its business goals. Nokia’s risk management approach is to manage opportunities and threats as well by analyzing and reviewing them. Key risk areas identified by Nokia cover strategic, operational, financial, hazard and fraud risks. (Nokia.com) The study covers only financial risk of foreign exchange. To manage financial risk of foreign exchange, Nokia gets involved in hedging transactions thru derivative contracts of forward and option contracts. How do these transactions affect the market value of the company? Business transactions are entered into to make a profit. Any profit or loss from this transaction adds or lessens the market value of a company. Nokia’s hedging transaction has given a gain in 2002 to 2007 and a negative gain in 2008. (qb & qc answers). The gain has added to the market value (MVA) of the company, while the loss lowers its value. Annex 1. Table 1. Nokia 10 year Summary of Balance Sheet Current Assets Current Liabilities Long Term Debt Shares Outstanding D/E Current ratio 9-Dec 35,738.00 22,650.00 4,432.00 3.7 Bil 0.4 1.577837 8-Dec 39,582.00 25,374.00 861 3.7 Bil 0.31 1.559943 7-Dec 37,599.00 22,826.00 203 3.8 Bil 0.07 1.647201 6-Dec 22,617.00 10,649.00 69 4.0 Bil 0.03 2.123861 5-Dec 22,452.00 10,143.00 21 4.2 Bil 0.03 2.213546 4-Dec 22,669.00 8,438.00 19 4.5 Bil 0.02 2.686537 3-Dec 23,920.00 8,772.00 20 4.7 Bil 0.03 2.726858 2-Dec 23,327.00 9,046.00 187 4.8 Bil 0.04 2.578709 1-Dec 22,427.00 10,222.00 207 4.7 Bil 0.09 2.193993 Dec-00 19,890.00 9,082.00 173 4.7 Bil 0.12 2.190046 Source: msn Money Central References Ahonen, T., 2010, What to call the past decade? Has to be the Nokia decade, heres why? Communities dominate brands, viewed 24 April 2010 from http://communities-dominate.blogs.com/brands/2010/01/what-to-call-the-past-decade-has-to-be-the-nokia-decade-heres-why.html Investopedia, (n.d.) Foreign Exchange definition, viewed 24 April 2010 from http://www.investopedia.com/terms/f/foreignexchangerisk.asp msn Money Central. Nokia Financial Statements, viewed 24April 2010 from http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?Symbol=NOK&lstStatement=Balance&stmtView=Ann Nokia.com.(n.d.), Risk management, viewed 24April 2020 fromhttp://www.nokia.com/corporate-responsibility/ethics/tools/risk-management “Noki mission statement”, viewed 24 April 2010 from http://www.docstoc.com/docs/1903541/nokia-mission-statement/ - . . Read More