Financial Prospectus of Samsung - Essay Example

The theory of investment covers the decision-making process when considering investing in various investment opportunities. It comprises of capital asset pricing model, portfolio theory, efficient market hypothesis, and arbitrage pricing theory. Common stockholders expect to be rewarded through the receipt of periodic cash dividends and/or an increasing or at least non-declining share value (Madura, 2006). The primary objective of financial management is to maximize the wealth of the company’s shareholders by achieving the possible value of the company. Fess and Warren (2004) observed that maximizing shareholders’ wealth is a complex task. This is because the financial manager cannot control the company’s stock price directly, but can only act in a way that is consistent with the shareholders’ desires. Economically, rational buyers and sellers of shares use the assessment of asset risk and return to determine its value. In a competitive market with many active participants, the interaction of demanders and suppliers of shares results in an equilibrium price or market value for its security. As new information becomes available, buyers and sellers are assumed to utilize such information, and through purchase and sales activities they create new market equilibrium prices.

Company profile
Samsung is an international company that deals in electronics and is one of the largest makers of semiconductors in the world. Some of the consumer devices that the company makes include digital still cameras, digital TVs, and DVD players. It also manufactures computers, printers, LCD panels, and color monitors. Most of its sales come from the pacific region. Samsung is also in the personal computer industry, which is very dynamic mainly because of changes in technology.
Financial management of the company
In a for-profit business, the goal of financial management is to make decisions that increase the stock value, or generally, increase the equity value. For the financial statement analysis of Samsung, the concern will mainly be on the company’s balance sheet. This financial statement states the company’s assets, liabilities, and stockholders’ equity at a particular date. This review is based on the company’s financial position as of 2011, 2010, and 2009.

A current ratio of 1.61 indicates that the company is capable of meeting its short-term obligations out of its current assets. This ratio, as noted by Fess and Warren (2004), implies that the company has superior financial health. Samsung’s Current Ratio has increased from 1.54 in 2010 to 1.61 in 2011. This indicates that there has been an improvement in the company’s ability to meet short-term liabilities.
A debt-equity ratio of 0.14 shows the degree to which the company has borrowed fixed-charge sources of capital in an attempt to finance its assets. The ratio shows an upward trend, which means the financial leverage of the company is improving.
The company should use an appropriate mix of debt and equity when making its financing decisions. The use of debt financing helps the company take advantage of tax deductibility since the interest expense paid on debt capital is an allowable expense for tax purposes.

As shown in the table, the net profit margin for Samsung is less than that for Dell. Its return on equity and the debt-equity ratio is also less than that of Dell and it is below the industry average.

Such an action would drive the price down, which assuming no change in the expected benefit, will cause the expected return to rising to the level of the required return. If the expected returns are above the required return, investors will buy the asset driving the price up and its expected return down to the point that is equal to the required return. Read More