Exam Questions - Assignment Example

EXAM QUESTIONS Section B Question 3 Corporate financial information environment represents a list of areas where the corporate entity derives it financial strength. This environment is the basis from which analysts evaluate a company and decide whether the company is a going concern or worth endorsing to an investor to consider buying its share or selling (Harrington, 1993). The environment constitutes the following elements; capital budgeting, where the corporate entity evaluates al the projects that it wishes to undertake and uses a method of evaluation like Net present Value (NPV) or Internal Rate of Return (IRR) among other projects appraisal techniques. This is done to rank the projects using the projected cash flows while considering the amount of capital at its disposal (Tirole, 2010). Secondly, the corporate environment can have risk management as part of its information source (Chew, 2013). Companies are risk takers and therefore appraisal entails looking at the company’s risk exposure and the loss that may rise in case the risk crystallizes in the long run. Risk management information is of significance to an analyst as it shows management’s attitude towards risk, how audacious they are, and what measures they have put in place to manage the risks. In addition, corporate governance should also be considered when analyzing a corporate’s information environment. Corporate governance information gives an overview of how the entity is controlled and how decision making is undertaken in the entity before action is taken (Tricker, 2012). An entity should have a corporate governance structure that indicates the distribution of duties and responsibilities of different players of the entity and also the rules and regulations that given how the different players relate. These rules should also highlight the procedures to be followed in making decisions that influence the company affairs. This environment should also provide information relating to how the company manages its working capital. The working capital management is of significance to the day to day running of a corporate entity. Working capital management entails a check on the relationship between current assets of an entity and the current liabilities (Bhattacharya, 2009). The current assets value; inventory, cash and receivables, should exceed the value of current liabilities; payables and overdraft facilities provided by the financial institutions to the company. Finally, the dividend policy of the company should be looked at to establish the rate at which dividend is paid and the regularity of paying the dividends, whether is from the firm’s earnings or otherwise. The company’s corporate financial information environment does not provide the information as is required to fully enable the users of such information to make rational and informed decision about the company’s performance into the future. What the company does is to pick what the market analysts have been able to forecast and then work towards meeting those targets as opposed to formulating their own estimations and projections based on the financial statement trends and then working towards meeting those projections in the end of the financial period. This is evidenced by the lack of earnings guidance by the company which could be used by the analysts as a basis for formulating their own forecasts for the company’s performance. This lack of earnings guidance by the XConnect has resulted in a lower earnings response coefficient for the company compared to the industry average and the earnings response has been declining over the last years. Also, this lack of earnings guidance has led analysts of the company’s performance to formulate projections that have been differing with huge margins that should not be the case. This is evidenced by the increase in the bid-ask spread and the dispersion of analysts’ earnings forecasts over the last two years. In addition, the fact that the shares of the company have been under heavy accumulation by the financial institutions lends credence to the lack of information that could stimulate demand by the other players in the capital markets of the company’s shares. The company has to re-evaluate its corporate financial information environment and identify what other elements to include in order to increase the amount of financial information at the disposal of the capital markets and the players in the capital markets (Matos, 2001). XRisk recommend the following be included in the corporate financial information environment of XConnect. First, the company should provide its full year results to the public and the capital market (Gibson, 2010). The release of such financial information that is audited, to increase their credibility, will enable investors to use them as a means of forecasting what the future might look like for the company’s performance and enable them make rational decisions concerning purchase of the company’s shares and in the end reduce the bulk that is under financial institutions. Secondly, the company should make known to the players in the financial sector its dividend policy and how frequently it pays dividends per financial period. Release of such information will give users a rate to work with. The rate of dividend and the frequency with which they pay dividends will be a major decision point for current and potential investors to choose whether to dispose, retain or buy the company’s stake. Thirdly, the company should make projections of the company’s performance and these projections on all relevant areas as the statement of financial income, projected cash flows of the company and changes in equity in the future should all be made public (Joel G Siegel, 2007). Though some of the information might be misleading when the company fears for the investors reaction, the company should take a step further to explain the variables they have considered that will enable them achieve what they have forecasted. This is what is termed earnings guidance (Gell, 2012). Analysts will use the earnings guidance as a basis of also making predictions of changes in XConnect’s stock prices, which will reduce the dispersion of analysts’ earnings forecasts for the company that has been the case in the past. Fourthly, the company should provide their capital structure to the public and the capital markets (Baker, 2011). Provision of such information will show how geared the company is and therefore what agency costs the shareholders will be taking up as they subscribe to the company’s shares. The level of leverage is important to investors as it shows the most preferred capital source for the company. Finally, the company could give information regarding the technological innovation and advancements that it is undertaking to make it a market leader or to counteract the competition in the market. Being a telecoms firm, the innovations in the mobile phone industry have been on the increase especially with the smart phone and tablet markets. Therefore, when such information is made public, there will be demand stimulation and such anticipated demand is what drives stock prices up and so does the earnings. Several assumptions have been made in this report. First, the company is required to provide audited financial information of the company’s performance to the shareholders and the capital markets. Secondly, analysts use the financial statement as the foundation of their analysis and prediction of the future stock prices of the company. Lastly, the dividend policy of publicly listed firms, are known to the investors and the capital markets. Question 4 Cable Corp has instituted a number of corporate governance techniques which unfortunately are inadequate for a company of its stature. It has positions of chairman and chief executive as is required but the positions have been bestowed on one person. The dual class shareholding (Minow, 2011) also is a thorn in the flesh of Cable Corp because it places too much voting power in one person at the expense of two thirds plus shareholders who share different views from those of Mr. Miller and family who combined, have a 44% voting power. Also, the board of directors constitutes ten out of the sixteen independent outside directors. The huge number of directors who are external cannot be in a position to understand what is taking place internally and as a result, the internal control scandal was perpetrated without the knowledge of a majority of board of directors of the company. This eroded public confidence in the company which has to be redeemed through a raft of measures. These measures are as explained below. First, the dual class shareholding should be eliminated through the selling of Mr. Miller’s family shares to the public to only remain with one particular class of shares. Selling these shares will reduce the amount of control that the family has over the affairs of the company (United States. Securities and Exchange Commission. Office of the Chief Economist, 1987). Secondly, the position of chairperson and chief executive of the company should be separated and given to two separate individuals to separate the roles and the control over decision making process (Plaatjies, 2013). The chairperson will be controlling the board’s activities while the chief executive will be controlling the operations of the company while ensuring that the objectives and goals of the company are being implemented. The chief executive will be answerable to the board of directors which is chaired by the chairperson. This will bring checks and balances, which is vital in reclaim the public trust that the company has lost. Thirdly, the remuneration of the directors sitting in the board should be incentive based (Coyle, 2004). Where the incentive mechanism is adopted by the company in rewarding the directors at the end of every period, the performance of the company will improve for the better since the directors would toil to ensure the company follows all the policies and procedures and any deviation from the forecasts handled as it arises. This will also enable the directors to be actively involved in running the affairs of the company and as such make decisions that will acceptable by all stakeholders both internal and external. Fourthly, the company should balance the number of directors from both sides; the independent outside directors and the directors from within the company (Hurlock, 2012). Thus, Balancing the number ensures that the views of all stakeholders are put into consideration and even incorporated in the policies formulated and the decisions that the board will ultimately make with regard to the direction the company will take at a particular moment and even in future decisions. Lastly the company should ensure that they observe the ethics that have been set and maintain a level of integrity that is above reproach (Richter, 2007). Ethics will be maintained through the education of employees of the company on what is expected of them and how they should play their roles to ensure that they are in tandem with the code of conduct set. Integrity will be mostly evaluated from the product perspective. If the quality is good and the products provide the benefits as indicated by the company through their promotional messages, then the whole company will be viewed as one that gives their word and actually performs according to the promises. Given the business and financial information environment of Cable Corp, a number of things can be done to help improve the company’s corporate governance. First, the company should separate the positions of chairman and chief executive by appointing two different people to occupy those positions. Such a move will enable the responsible persons to concentrate on their roles and distribute control over the execution of decisions (Cadbury, 2002). The chairman will control the board of directors while the chief executive will control the running of Cable Corp operations. Secondly, there should be separation of ownership from control by the company. The majority shareholders should not be the ones controlling the operations of the company; the chief executive position. Instead, the position should be given to a professional with experience in leadership and the families play a role in the control through appointment to directorship of the company. They can influence company policy and decision making but not implementation and execution of the decisions made. Thirdly, the corporate social responsibility of the company should be enhances as a way of giving back to the society and as a means of boosting the company’s image to the society (Mullerat, 2011). Involvement in societal activities like developing facilities where programming lessons can be taught or partnering with institutions that teach network programming as part of their curriculum will enable society to appreciate their input and even help the company redeem its image, after the internal control scandal that eroded their good reputation. Fourth, the company should include all the stakeholders in its decision making process by having the board comprise a balance of directors from both the internal and independent outside sources. The balance, which is not the case currently, will ensure that all the players concerns are represented in the board, which is the ultimate decision maker, thereby reducing any potential conflict that may arise from the stakeholders. Fifth, the company should aspire to disclose all the relevant information to the public, both financial and otherwise (Solomon, 2011). Disclosure of such information will keep the stakeholders and the millions of customers around the world updated on the affairs of the company and thus enable them to decide whether to continue with the company or liquidate their ownership. Disclosure of financial information is a requirement by the law which the company should follow to avoid conflicts with the government or any regulatory bodies. In addition, the company should respect the rights of the shareholders and in certain cases assist the shareholders in the shareholders in exercising their rights (Mantysaari, 2006). This kind of assistance will make the shareholders feel appreciated as their input is sought even in areas where the shareholders lack knowledge of their contribution. Lastly, the company should involve independent monitors like auditors to evaluate their statements of financial information and other areas of concern as a way of ensuring that the procedures as laid down by international standards are followed and that the executive and other employees follow company policy in the execution of their duties and responsibilities (Adelopo, 2013). The assumption of this report is that; one the board of directors, main purpose is to protect the interests of the shareholders. In addition to that, the regulators require the public listed companies to provide financial statements to the shareholders and finally the ownership and management of the company’s affairs should be separated (Stumpf, 2005). In conclusion, it is evident that corporate governance is important for the maintenance of a good reputation with the stakeholders. Therefore, for a company to succeed in ensuring good corporate governance directors should be selected from all stakeholder groups, the roles of the chief executive and chairperson separated and information disclosed to the stakeholders as is required by the law. Bibliography Adelopo, D. I. 2013. Auditor Independence: Auditing, Corporate Governance and Market Confidence. Gower Publishing Ltd. Baker, H. K. 2011. Capital Structure and Corporate Financing Decisions: Theory, Evidence, and Practice. John Wiley & Sons. Bhattacharya, H. 2009. Working capital Management: Strategies and Techniques. Phi Learning Pvt. Ltd. Cadbury, S. A. 2002. Corporate Governance and Chairmanship: A Personal View. Oxford University. Chew, D. H. 2013. Corporate Risk Management. Columbia University Press. Coyle, B. 2004. Risk Awareness and Corporate Governance. Global Professional Publishing. Gell, S. 2012. Determinants of Earnings Forecast Error, Earnings Forecast Revision and earnings Forecast Accuracy. 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