International Finance and Financial Trade - Essay Example

Acquisition Student’s Name Institution Affiliation Introduction Cost of capital is an important factor in any firm. To acquire assets into the firm then it is necessary that most of the capital is financed from different sources. The amount of capital that is required to pay as an interest for this capital is what we refer as cost of capital. For those firms that are sensitive cost of capital is a concern for them they will try to ensure that cost of capital is kept as low as possible. Different methods can be used to ensure that this is achieved. Some firms may decide to participate in investment areas that have returns that are higher than the cost incurred to acquire this capital into the organization should be sustainable (Scott, 2005). Most of the firms have realized that cost of capital is an important factor when it comes with deductions made from accounting to determine the performance and reporting of a given city. Most of the employees in the financial sectors have realized that cost of capital calculations will mostly affect there bonuses. Most cases cost of capital will determine whether a given business will be closing down, sold, expanded or bought as it will determine the capability of carrying out its operations. For prudent commercial decisions to be taken then it is important to take into consideration capital costs. Most of the shareholders will always take a close look on how capital structure is arranged in the organization and decide on the next course of investment (Moran et al, 2003). In these paper we are going to discuss different factors that encouraged the merger between AB InBev and SABMiller. Among them was the capital structure and cost of capital between that informs the long term profitability between the two firms. To a great extent capital structure was one of the factors that informed decisions to ensure that merger took place. The merger has been said to be one of the best mergers that took place in the year 2016. Capital Structure & shareholders decisions The method that the capital will be acquired was of those factors that informed the merger that occurred between this two firms. The bid of acquiring SABMiller SAB.L in a record of $100 billion plus price was being made possible using a syndicated loan of $75 billion. This was the largest commercial loans that had been given in the history of the global loan markets. The financiers of these loan has been undertaken using the relationship banks that included; Bank of Tokyo-Mitsubishi UFJ, Barclays, Deutsche Bank, Bank of America Merrill Lynch, , BNP Paribas and Banco Santander. Also with the fact the ability of AB InBev to raise $75 billion loan in the market, there is an indication from the top banks that they are still ready to support those borrowers that are worth to have credit for their activities. The trend is positive despite the increased capital costs and also regulatory frameworks. This one of the positive factor that encouraged the shareholders to allow the merger to take place. The source of capital was one of the factors that lead to successful merger (Sherries, 2003). On reaching the agreement the capital compensation for the shareholders will be as follows. From the agreement, the shareholders of SABMiller will receive £44.00 in cash and also they will be receiving partial share alternative that will be having 0.483969 and an additional cash of £3.7788 for each share held in SABMiller. The compensation has been agreed with unanimously that there is need to ensure that merger takes place as most of the shareholders and directors were for the cash compensation to a greater extent (Jensen, 1976). The capital structure that was there in the firms was one of the things that made the mergers a success. The reason as to why this company makes a good prey is because of its strong brand that it has created for several years without changing. This means that the consumers accept the products from this company. By another company associating itself with it means that the market will expand and make the products that the other company will also be perceived to be of quality. Also the financial security by this company is strong which will result to a successful merger (Shuenn, 2006). When talking of capital structure we are trying to look into how finances of a given firm, the overall growth and operations this firm are achieved using the different sources of funds that are available to it. The firm can opt to get debt through issuance of bonds or taking long-term payable notes. On the other hand, it may opt to float equity which can be classified into common stocks, preferred stocks and retained earnings. The way a firm mixes the above mentioned types or sources of capital is what is referred to as capital structure. It is prudent that each and every firm should take careful consideration before deciding which is the best to source funds from (Fama & French, 1987). The capital structure of any given firm has a direct impact on the cost of capital. The acquisition has relied much on the equity that borrowing. This is an indication that the firm has got a very strong capital base. However, bearing in mind that the firm has a higher cost of capital that the return on investment, then it is prudent for the management to look at the possibility of doing a new mix that will lead to the reduction of cost of capital (John & Campbell, 1999). The firm has tried to use the optimal capital structure ratios in its operation something that may be prudent but a lot of balancing is required to ensure that the financial healthy within the organization. Therefore, the firm should try to use the mixed capital structure in its approach so as to ensure that things are on track. The firm has used financial management policies that are both friendly to both investors and other stakeholders. They are trying balance between the maximizing the shareholders wealth and making the firm attractive for investment on it (AMC, 1996). However, all this factors should be balanced. It is prudent that informed decisions should be taken to protect the financial position of the firm is healthy and growth of the whole firm is achieved without affecting any stakeholder in the firm. Sound financial management decisions are those that are well forecasted and have been tested to ensure their worth to the firm. They should be those that are understandable and easy to implement within the organization. They should involve all the stakeholders in the organization. Market analysis should be done before the implementation of this decision. The merger has tried do all this however it need to some balancing regarding the capital structure (Cumberworth et al, 2000). Judgement ability for investors With the changing trend in the business world, the ways in which investments are being done has changed in a great deal. Globalization has made it difficult for investors to predict which types of invest are the best to get into. However, from time to time investors have been forced to do away with their old investments and seek new investments that are going to make then be relevant in the investment field and continue generating profits for themselves (Jensene, 1976). As one of the investors when it comes to investments there are points where I can forgo old investments and seek new investments that are going to be more profitable to me. This will however depend on the size of project that will be undertaken, the cash flows that are going to be generated from the project, also the degree of dependence of on the project and also the benefits that are going to be got out of this project (Brealey, 1983). When considering a new investment project I will look at the present value then consider the future value of the project. If the project will be found to be having a future value that is higher than the present value then I will be forced to forgo the old investment. Also, the profitability of the project is one of the things that may make me to forgo old investments and seek new ones. If the new investments are going to be highly productive than the old then it will be prudent to shift focus to the new investments. Consideration of the economic value of investments like time value of money, and the future values/ compound interests will be also an important factor ones it comes to choosing of projects (Exley & Smith, 2003). Cost of capital is a major factor in any firm. To acquire assets into the firm then it is necessary that most of the capital is financed from different sources. The amount of capital that is required to pay as an interest for this capital is what we refer as cost of capital. For those firms that are sensitive cost of capital is a concern for them they will try to ensure that cost of capital is kept as low as possible. Different methods can be used to ensure that this is achieved. Some firms may decide to participate in investment areas that have returns that are higher than the cost incurred to acquire this capital in order to sustain the cost of capital (Duffie, 1996). The merger has a good working capital management policies since most of its current working capital can be able to settle the debts that need to be settled. This is indicated by the fact the current assets are higher than the debts that firm holds. This is because working capital is determined by the current assets less the current liabilities (John & Campbell, 1999). From the trend, it can be concluded that in the recent years the firm has been able to service its short-term debts without problems. This makes the merger to be attractive to the investors as there will be no legal battles between the firm and debtors. With the fact that the working capital is positive, then it means that the firm will easily meet the short term expenses and have an opportunity of exploring new areas of investment that are going to be profitable to the company (Burrows, 1997). The firm will easily be able to take decisions since it will be flexible in the way it will handle its activities leading to profitability. The positive working capital management policy is healthy. It makes it one of the companies that are being looked into for investment since it has a good inventory management system, cash management system, short term financing policies and debt management system which are all a requirement for the growth of the firm (ACM, 1996). Reference Australian Manufacturing Council, 1996. Practicing Balance: Integrating Best Financial Practice into Your Business. Melbourne, Victoria. Brealey, R.A. & Myers, S. (1983). Principles of corporate finance, 8th edition (2005). McGraw Hill. Burrows, R.P. & Lang, J. (1997). Risk discount rates for actuarial appraisal values of life insurance companies. 7th AFIR International Colloquium, 1. Burrows, R.P. & Whitehead, G.H. (1987). The determination of life office appraisal values. 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