Dividend Policy and Capital Structure: Coca-Cola Company - Case Study Example

Dividend Policy and Capital Structure: The Coca Cola Company Coca Cola is one of the internationally renowned companies that have existed for many years. Over time, the company has had the ability to improve with regard to its performance and the attribute to this comes from many angles. Investor Relations is one issue that ought to receive focus when understanding the functioning of the organization. With regard to these relations, the issue of dividends comes into focus. The Company’s dividend policy over the past decade has it that the amount of payments and the declaration of dividends are viable for approval by a small majority of the total shareholders of the company. This amount ought to be equal to 20% of the year that had preceded it (Coca Cola, 2014). Moreover, the earnings ought to accommodate the retained earnings and the shareholders of Series A voting in unison ought to come up with a cumulated earning that surpasses the 20% mark. Upon the recommendation of the board of directors, the company ought to ensure that the retained earnings are brought back into the company after the issuance of dividends and this is carried out through vigorous marketing. According to the company and the policy, there are several factors that come in when determining the amount of dividends to offer in a certain fiscal year. The financial condition of the company is one of them where there is the financial analysis and report offered at the end of a trading period and if the company income has improved, it has the ability to offer more dividends. Looking at the performance of the company over the past ten years, one understands that the financial state of the company has improved and this is from the ability of the company to develop and produce more products in the beverage category and thus offer customers a wider range of choice which has consequently earned the company new customers. Capital requirements are also vital in dividend determination as per the company policy as the company ought to understand the facilities and the amount of money that it requires after the issuance of dividends at particular prices. If the capital requirements of the company are high then it is appropriate to offer dividends at low rates to ensure that the company does not face a financial backdrop. However, if the capital requirements are high, the company can offer dividends at improved rates since this will not change the functioning of the company and consequently the company may acquire new markets from the move. Shareholder Wealth Maximization is the goal of every company and it is what leads to an increase in investors. Investors always ensure that they have an appropriate view of the performance of a company prior to making any investment and one of the areas where they review is the income generated by the shareholders and the percentage at which their investment have got back (Atrill & McLaney, 2010). The Coca Cola Company has made tremendous strides with regard to market functioning and this is seen from the increase in income and the large profit margin witnessed as every fiscal period passes. Shareholders benefit from such success and consequently generate a lot of wealth through various means Coca Cola Company is rather thriving in an environment that has a lot of active customers and thus one of the ways to achieve Shareholder Wealth Maximization. This is got from the manner in which it has managed to have a steady flow of sales per unit. This one of the aspects that keeps a business alive and conformation with the environment generally comes in as another positive chip. The breakeven point is recognized as the point in business where the revenue that the company makes is equivalent to the amount of expenses it incurs. In the stated business, the breakeven point is high. This is from the fact that the company had to sell whole 871000 units in an effort to have the small margin that exists. The margin between the revenue and the expenses is minimal at 30 for every unit and this sets in as a risk for making deficits to the company rather than the large profits that every business speculates. The business itself is in a proper category to buy even more raw materials; however, the amount of money it has made in the past three years is very small that it makes is not sufficient enough to make any large investment such as the introduction of new brands. Having seen the shallow margin that the business makes has implications for the business. These implications come in as both positive and negative regarding the time it takes (Barrow, 2011). If the business has short term goals, the small margins cannot come in handy in their fulfillment. However, in the accomplishment of long term goals for the business, this can work as cumulative amounts of money would get retained in the business after deduction of the general fixed costs that are the rent, staff costs, telephone and others. Going through the profitability of the Coca-Cola Company is another major aspect to bring in when identifying the actual stature of the business. Looking at the sales that the business makes, it is clear to state that the profitability of the business is in line with what a small business of the sort. This is from the fact that a business entity such as the wine shop managing to have 20 Euro profit margins per unit is great. When that amount of money is multiplied with the amount of units sold in a year, the total exceeds initial capital investment by far. Understanding the liquidity of the company is another feature that a company ought to consider when going about the profitability (Blackwell, 2008, 75). This is from the fact that for a business to keep on running, it is important to ensure that in case of anything the amount of money lost is not much. The business is well set in this from the previous fact stated regarding the amount of money that the business makes in a whole year. The beverage industry is one industry that is always up from the fact that it does not have seasons and is not affected by factors such as weather (Dyson, 2010). If the business continues operations for a couple of years which is a likely possibility, the liquidity of the company is assured in case of anything and the investors alongside everyone else can get the initial money put in. With regard to the efficiency of the company, the fact that there are hundreds of thousands of employees all around the world is a fact that has ensured efficiency within the business. However, it is important to note that it is not entirely important to have that number of assistants given the size of the business and its type. This is from the fact that a large business is usually in need of many employees to assist in the carrying out the numerous activities that the company has. In the prevailing economic environment there is the ability to accommodate both of the workers, however, if the situation gets to appoint where the breakeven point gets even hire, there will not exist any choice other than letting go of the least effective member. With the elimination of the company liabilities it gets to a position to perform more effectively and consequently supporting the concept of Shareholder Wealth Maximization. In an effort to ensure that the liquidity, gearing and the profitability remains constant, it is important for the management of the business to ensure that bookkeeping is always done and in a daily basis. This is effective as it ensures that everything in terms of stock and finances are accounted for. Many large companies calculate their finances at the end of the month. Calculating on a daily basis and summing up the amounts is one step that should assist the company in its running. A profit is the actual goal of every business and is defined as the financial advantage that an individual or a business attains after the selling price of a commodity exceeds the one they purchased at (Gowthorpe, 2011). The matching principle is one that necessitates a company to compare the revenues that it has made with the expenses in an effort to get the exact profitability over a certain period. Cash flow is defines as the transfer of finances either to a company or out of it. From this, the amount of profit is calculated by subtracting the contemporary closing cash from the previous sessions closing cash which is taken to the bank from the business. In the business, it is important to recognize that there is the flexibility of getting complements that are responsible for earning the business an even huger amount of profit. One of the complements that the company can incorporate is providing a discount which comes as an additional amount of beverages and the size of stock. This would attract even a larger amount of customers as compared to other businesses in the same industry. When calculating this as an economy of scale, it is recognized that the profitability of the business can even get higher from this as a result of more wine getting sold. There is also the substitute for Coca Cola that is normally Pepsi which regularly go at a cheaper price. This can come in as an advantage for cases when the economy doesn’t support the sale of whisky. There are many risk factors that may affect the demand and the supply of the beverage in the industry. One of the factors that can affect the demand made by suppliers is a change in the income. The business relies heavily on the salaries of the customers from the fact that the commodity is not a basic necessity but is rather a luxury. A decrease in the marginal income that people make might have them cut down their drinking habits. A factor that may affect the supply of the wine is the market condition. A point may reach that the amount of wine distributed is a lot and this is a factor that may have the customers ask for a decrease in price. This might go on to a point that the suppliers fail to get any benefits. The suppliers may then decide to withhold the supply until a point when the customers require the commodity so much that they would purchase it at any set price. A constriction and extension in the demand is a point where all factors can affect the dividend of the commodity except the price because in such a situation, the price does not change. Having the price constant regardless of these condition assures shareholders of the presence and security of their money and thus do not have a problem with the functioning of the company. The amount to which the price of a particular market commodity affects the company’s income curve is the elasticity. Understanding the elasticity of the market is vital to the business from the fact that it is one of the major determiners of the number of customers that purchase the commodity. Elasticity matters with regard to the need that these consumers have of the commodity (Sutherland & Canwell, 2014). For a business that majors in the supply of basic needs such as salt, the elasticity of the price both negatively and positively has minimal effect on the consumer behavior seeing as salt is a necessity, however, for the case of soda, this might not always apply. This has been a hindrance to the entry of new investors into the company but strategies are in place to resolve this. Changes in income within the economy as stated is one of the major risk factors that affect the amount of commodities that a certain business sells it has come clear as a demonstration that soda is a luxury and thus the importance of having in check the customers that one has. However, a major advantage that the company may have with regard to this is the fact that soda drinkers are well established people and glitches in their income generations do not affect the sale of the beverage very much as opposed to Pepsi consumers. There are very many market imperfections that may come in to affect the business. One of this is with regard to religion. There are some religions that are known to condemn the consumption of soda. There is also high task rates imposed on soda shops as compared to other similar shops (Meckin, 2007). This is due to the notion that these shops make more money and there are different people that state that the company incorporates ingredients that have the ability to harm people. However, the company has engaged in research where it has assured the customers of the health quality of its products (Gillespie, 2010). This has worked effectively to ensure that the shareholders have improved confidence in the products and thus they inject more finance in the company to assist it maintain market dominance. Having gone through the various thoughts on the business and picturing, calculating and understanding the estimated figures, it is clear to state that the business has very high probability of succeeding. This is from the liquidity and profitability sighted for the business. Having all the market analysis also comes in as a major factor despite the negligible market barriers sighted in the research. The Shareholder Wealth Maximization of the Coca Cola Company is very high provided the given scenarios and the market conditions for the company. If the company continues with the trend, it will have the ability to overcome the few negative aspects stated and continue enjoying market leadership. Bibliography Atrill, P.& McLaney, E. 2010. Accounting and finance for non-specialists 8th Ed. New York: PrenticeHall. The 7th edition is also available as an electronic resource. Barrow, C. 2011. Financial management for the small business 5th Ed. Chicago: Kogan Page. The electronic version is also available. Blackwell, E. 2008 How to prepare a business plan, 5th Ed. Chicago: Kogan Page Black, G. 2008 Introduction to accounting and finance, 2nd Ed. New York: FT Prentice Hall. Dyson, J. R. 2010. Coca Cola Company: Business and Corporate Finance. 8th Ed. New York: FT Prentice Hall. Gowthorpe, C. 2011. Business Finance for non-specialists 3rd Ed. New York: Cengage Learning. Sutherland, J., Canwell, D. 2014. Key concepts in accounting and finance. New York: Palgrave Macmillan Meckin, D. 2007 Naked finance: Business finance pure and simple. London: Nicholas Brealey Publishing. Also available as electronic resource. Gillespie, A. 2010. Business Economics. London: Oxford University Press. CocaCola Femsa. 2014. Investor Relations. Web http://www.coca-colafemsa.com/femsa/web/conteudo_en.asp?idioma=1&conta=44&tipo=27629 Read More