Financial Management of JPMorgan Income and Growth PLC - Essay Example

? Financial Management: JPMorgan Income & Growth PLC al Affiliation: JPMorgan Income & Growth Investment Trust plc is, in essence, an investment trust. The primary objective of the company is to meet ultimate capital entitlement of its growing number of Income shareholders. In addition, the company has a long-term responsibility to ensure all Income shareholders get regular quarterly income. As part of its Capital investment objectives, JPMorgan Income & Growth Investment Trust plc provides Capital shareholders with prompt feedback on the capital growth (Dadrian 2006 p. 18). Both Income shareholders and Capital shareholders play exemplary role towards enhancing Capital growth and initiating strategies that would ensure the company realizes positive outcomes from its massive financial investments. The company has successfully invested in a relatively diverse portfolio comprising between 50 to 70 percent of all equities of the United Kingdom as well as a wide range of other assets. In order to accomplish its long-term financial investment goals, JPMorgan Income & Growth Investment Trust plc has extended the diversity of its Capital investments to include equities, assets, convertible bonds and bond funds (Dadrian 2006 p. 18). Despite the trading and logistical challenges of the UK stock exchange market, the company has managed to accumulate substantial investment, which are not only manifesting in the United Kingdom but also in other bordering economies. In particular, the company has increased its portfolio in direct equities base in the United Kingdom (Dillman 2006, p. 34). This has boosted the realization of the financial and investment goals of the corporation without compromising the individual ideas and preferences of its Income and Capital shareholders. Diversified assets have also been critical to expansion and accomplishment of the financial and investment objectives of the company. By January 2012, the company had increased its diversified asset base to considerable levels, which in turn has boosted the returns of Capital and Income shareholders and the general market share of JPMorgan Income & Growth Investment Trust (Dillman 2006, p. 34). The organization has to meet all its financial obligations amid stiff competition from other financial and investment companies. To attain long term financing, the firm has instigated a comprehensive plan with its primary aim being to identify the trustworthy and reliable sources of finance. Among the vital sources in its priority list are term loans, debenture, bonds, warrant, and lease. Term loans are loans from commercial banks and other financial institutions with clear repayment schedule along with a floating interest rate (Gupta 2005 p. 43). These loans are essential in realizing a major investment in the organization upon acquisition. Commercial banks offer short term as well as long-term loans to prospective clients. Since JPMorgan Income & Growth Investment Trust has had plans to meet its internal and external financial needs, term loans are hence inevitable. Acquisition of such loans would depend on the conveniences of the repayment schedule and the interest rates charged on such credit facilities. Bank loans have been instrumental to the major expansion of the company’s Capital and Asset base in the past few years (Gupta 2005 p. 43). In effect, the Income shareholders and Capital shareholders have managed to rip huge returns since the acquisition of these credit facilities of various commercial banks. However, repayment has emerged to one of the greatest challenges the company has to grapple with owing to the difficulties in the investment market. Thus, the company has initiated schemes with a view to ensure it diversified its long-term monetary ambitions are well spread across the board. Term loans have advantages and disadvantages to the company in equal measure. The main befit of these short term and long term loans is that they help the organization meet its growing financial and investment ambitions and desires especially in the UK stock market. Besides, they have predetermined or fixed interest rates usually narrowed down to monthly or quarterly repayment schedules (Gupta 2005 p. 43). Thus, the company has to make a decision on which loan best suits its financial needs and probably the bank that offers more attractive package. Intermediate loans (shot term loans) are always suitable in scenarios where the organization urgently need some financial backing for which it is willing to repay within a period of less than three years. Besides, such loans do not involve many restrictions such as collateral assurance and limits. This is the essence of going for short-term loans. However, intermediate loans would compromise the normal functioning of the organization in situations where the credit facility taken from the bank do not bear any tangible fruit during the first few years. It compels the organization to look for alternative means of sourcing funds to help repay the bank loan (Gupta 2005 p. 43). Long-term loans can run for duration of more than 10 years. However, it has additional requirements such as collateral and limits as far as additional financial commitment are concerned. Long-term loans are advantageous over intermediates as they give the organization ample time to reorganize and change around strategies and plans before ultimately starting to repay the loan. In general, term loans are a better option for many small and large businesses. In particular, the loans are suited for JPMorgan Income & Growth Investment Trust plc because its financial statements are sound. Besides, the company can comfortably make monthly payments, which are generally minimal, and the ultimate loan costs. These loans are fitting for investment companies such as JPMorgan because they have objectives to make major Capital improvements as well as large investments in capital (Gupta 2005 p. 43). The main disadvantage of term loans is that they require collateral along with arguably rigorous loan approval procedures. In addition, the organization must be ready to bear the cost because of severe depreciation in the value of money and the loan itself. Thus, the organization must consult widely before making the bold step to apply for term loans. Debentures are another crucial source of funding for the organization and other financial institutions. Debentures are more effective than term loans in that JPMorgan and other investment firms would not require any collateral or physical assets to acquire them. The bottom line is simply an attainment of assurance that the organization applying for the credit facility is credit worthy and willing to comply with the set rules and regulations (Kvanvig & Plantinga 1996, p. 8). JPMorgan Income & Investment Trust plc is a reputable organization with a huge capital and shareholder base. Hence, it will rely so much on the debentures to attain the financial and investment obligations in both the short term and long-term periods. Moreover, the holders of a debenture enjoy fixed rate. Besides, it provides an assurance of a stable income as well as guaranteed payments no matter the complications or imminent faults the organization may experience. Debentures have considerable disadvantages, which perhaps make them least option for an organization such as JPMorgan. First, the cost of raising capital is always very high (Kvanvig & Plantinga 1996, p. 10). For instance, the organization must be willing and ready to foot the bill due to high stamp duty. Thus, it locks out many business organizations including individuals who may have interest to acquire debenture as part of their financial ambition to raise their private business entities. Debentures may also raise the advantage ratios of the company (Meislik & Horn 2010, p. 44). In effect, the company is facing the risk of bankruptcy. In addition, the organization enters into intricate agreements with the financial institutions. Such agreements or arrangements may compromise the organization’s liberty in terms of doing business. In particular, the business organization might tumble when making critical decisions on financial and investment matters. Under low inflationary conditions, fixed interest rates may be of great disadvantage to the organization (Meislik & Horn 2010, p. 44). Hence, the organization’s hands are held when it comes to making critical decisions as to the mode and pattern making repayments at time when the inflationary conditions are too low. Bonds are medium as well as long-term debt instruments. The organization might issue these bonds to raise money in local currency over a specified period. Under ordinary circumstances, an investor loan money to a business organization for a specified period. One of the advantages of bonds is that they have fixed rates hence the entity is able to comfortably make repayments as the repayment schedule is uniform and more convenient (Richelson & Richelson 2011, p. 34). JPMorgan has invested sufficiently in redeemable bonds, convertible bonds, and Euro bonds as primary sources of funding to meet its investment and financial obligations. A warrant or authorization document is another vital source of meeting financial needs. JPMorgan would invest heavily in warrants to acquire stocks of another company or companies. Another fundamental source of finance for the organization is Lease. The lease is a contractual agreement that allows the firm to occupy or utilize a property (Richelson & Richelson, 2011, p. 34). Other factors the organization might consider when deciding on the best source of its funding include: 1. Legal requirements There are no legal compulsion on the part of a company to distribute dividend. However, there certain conditions imposed by law regarding the way dividend are distributed. There are three rules relating to dividend payments. They are the net profit rule, the capital impairment rule and insolvency rule.  2. Firm's liquidity position Dividend payout is also affected by firm's liquidity position. In spite of sufficient retained earnings, the firm may not be able to pay cash dividend if the earnings are not held in cash. 3. Repayment need The firm uses several forms of debt financing to meet its investment needs. This debt must be repaid at the maturity. If the firm has to retain its profits for the purpose of repaying debt, the dividend payment capacity reduces. 4. Expected rate of return If a firm has relatively higher expected rate of return on the new investment, the firm prefers to retain the earnings for reinvestment rather than distributing cash dividend. 5. Stability of earning If a firm has relatively stable earnings, it is more likely to pay relatively larger dividend than a firm with relatively fluctuating earnings. 6. Desire of control When the needs for additional financing arise, the management of the firm may not prefer to issue additional common stock because of the fear of dilution in control on management (Dadrian, 2006 p. 18). Therefore, a firm prefers to retain more earnings to satisfy additional financing need, which reduces dividend payment capacity. 7. Access to the capital market If a firm has easy access to capital markets in raising additional financing, it does not require more retained earnings. So a firm's dividend payment capacity becomes high. 8. Shareholder's individual tax situation For a closely held company, stockholders prefer relatively lower cash dividend because of higher tax to be paid on dividend income. The stockholders in higher personal tax bracket prefer capital gain rather than dividend gains (Dadrian 2006 p. 18). References DADRIAN, V. N. (2006). Warrant for genocide: key elements of Turko-Armenian conflict. New Brunswick, NJ [u.a.], Transaction Publ. DILLMAN, R. J. (2006). The lease manual: a practical guide to negotiating office, retail, and industrial leases. Chicago, Ill, Section of Real Property, Probate and Trust Law, ABA. GUPTA, K. (2005). Contemporary auditing. New Delhi, Tata McGraw-Hill. KVANVIG, J. L., & PLANTINGA, A. (1996). Warrant in contemporary epistemology: essays in honor of Plantinga's theory of knowledge. Lanham, Md. [u.a.], Rowman & Littlefield. MEISLIK, I., & HORN, D. (2010). The commercial lease formbook: expert tools for drafting and negotiation. Chicago, Ill, American Bar Association, Section of Real Property Trust & Estate Law. MOBIUS, M. (2007). Debt markets: an introduction to the core concepts. Chichester, John Wiley. RICHELSON, H., & RICHELSON, S. (2011). Bonds the unbeaten path to secure investment growth. Hoboken, N.J., Bloomberg Press. Read More