Important Management Functions - Assignment Example

1) (a) Roles and Responsibilities of Chairman of Board of Directors (BOD The chairmans role includes managing the boards business and acting as itsfacilitator and guide. This would involve: managing the business of the Board and preside over its meetings; setting Board meeting agendas, taking full account of the issues and the concerns of all Board members; ensuring that members of the Board receive accurate, timely and clear information, in particular about the Company’s performance, to enable effective performance of their duties; monitoring progress towards the timely and effective achievement and implementation of the objectives, policies and strategies set by the Board and of other decisions taken by or on behalf of the Board; facilitating the effective contribution of non- executive directors and ensure constructive relationships and open communication, both between non- executive directors and executive directors and between the Board and investors; ensuring that members of the Board understand the views of major shareholders and other key stakeholders; promoting the highest standards of corporate governance; managing the Board’s time to ensure that sufficient time is allowed for discussion of complex or contentious matters; ensuring that new directors receive an induction programme that is tailored and comprehensive; monitoring and addressing the development needs of individual directors and of the Board as a whole and ensure that the performance of individual directors and of the Board and its committees are evaluated at least once a year; establishing a constructive relationship with the Chief Executive Officer , providing support and guidance while respecting executive responsibility Leading the ongoing monitoring and annual evaluation of the performance of the Chief Executive Officer. (b) Benefits of separating the roles of chairman and chief executive: The Chairman is a non executive director while the CEO serves as an employee of the company. The benefits of separating their roles are as follows: Separating the roles of chairman and CEO mainly helps in distributing the balance of power and responsibilities. Board is the primary internal control mechanism for aligning the different interests of shareholders and top management. When an individual serves simultaneously as chairman and CEO, the Board’s control over him will be weakened. This does not happen when the roles are separated. The role of Chairman includes managing the business of the Board and monitoring its progress. Non-segregation of duties of Chairman and CEO would reduce the monitoring effectiveness over the management of the company. Opportunistic executives may take advantage of their combined role as Chairman and CEO in order to personally benefit at the expense of the shareholders. The chances of such injustice would reduce to an extent if the roles are separated. However, segregation of roles of Chairman and CEO could give rise to certain issues such as: When the roles are segregated, conflicts between the Chairman and CEO may become common if there is lack of goal congruence. Having a single leader instead of two helps promote effective action by the CEO speeding up response to external events faced by the company. Separation of roles could lead to delays in such response. (2) (i) Theoretical Ex-Right Price (TERP): TERP = [(Number of rights required to buy one new share X Market price before rights issue) + Subscription price] / (Number of rights required to buy one new share + 1) = [(4 x 20) + 15] / (4+1) = £19 Number of shares to be issued in the rights issue = £100 million / £15 = 6,666,667 shares (ii) Value at which the rights are likely to be traded: Value of rights = (Market price of common stock – Subscription Price) / (Number of rights required to purchase one of the new shares of common stock) = (20 – 15) / 4 = £ 1.25 (iii) Evaluation of the three options: Option 1: Profit that can be earned by Apple Insurance Plc if it takes up the rights: (a) Theoretical ex-right price per share £19 (b) Total Number of shares held by Apple Insurance Plc 100,000 (c) Number of shares subscribed for under rights issue (b / 4) 25,000 Theoretical ex-right price of rights shares (a x c) £475,000 Less: Cost to subscribe for rights shares (c x £15) £375,000 Profit £100,000 Option 2: Profit on selling the rights = 25,000 x £ 1.25 = £31,250 Option 3: Profit on not taking any action = 25,000 x (£20 – £15) = £125,000 It would be advisable for Apple Insurance Plc to choose option 3 since the profit it would earn under option 3 is the highest. (iv) The main reason for any company to issue its rights shares at a discount is to make the offer relatively attractive to shareholders and encourage them either to take up their rights or sell them so the share issue is “fully subscribed”. The price discount also acts as a safeguard should the market price of the companys shares fall before the issue is completed. The existing shareholders or purchaser of rights would still be interested in subscribing for the shares so far as the subscription price remains lower than the market price of the shares. A company would prefer to use rights issue as a source of finance because the chances of the shares being fully subscribed under rights issue is higher when compared to shares being freshly issued in the market. (3) (a) Circumstances under which a financial manager may need to value a company: i. One of the most common reasons for valuing a business is for sale/purchase purpose. Valuation acts as a starting point for negotiations during such transaction. ii. Valuation would be required to resolve bankruptcy related matters. iii. Valuing a business can also help motivate staff and provide them incentive. For example, it can be extended to share valuations for entry into an employee share option scheme. iv. Regular valuations provide measurement criteria for management in order to help them evaluate how the business is performing. (b) Distinction between organic (internal) growth methods of business expansion and Mergers and Acquisition (external): A firm can grow in two ways: either by merging with or acquiring other firms (external growth), or by increasing its own assets or output through the reinvestment of its cash flows in existing businesses (internal growth). Organic (Internal) growth refers to business expansion or the growth rate that a company can achieve by increasing its output, sales or both. It involves utilization of internal resources of the company. On the other hand, profits from takeovers, mergers and acquisitions are not generated within the company. It involves acquisition of or merger with resources of another business. Organic growth is growth that comes from a companys existing businesses, as opposed to external growth that comes from buying new businesses. Organic growth includes growth over a period that results from investment in businesses the company owned at the beginning of the period, but excludes the boost to growth resulting from acquisitions, and the decline from sales and closures of whole businesses. Organic growth represents the true growth for the core of the company. It is a good indicator of how well management has used its internal resources to expand profits. Organic growth also identifies whether managers have used their skills to improve the business. Both types of growth strategies are regularly used simultaneously, and have advantages and drawbacks. External growth creates synergies and market power, but it can also destroy value if the management reinvests the firm’s resources or free cash flows in inefficient projects for their own personal interest. On the other hand, internal growth provides more corporate control, encourages internal entrepreneurship, and protects organisational culture, but it often is a slower way of growth compared to Mergers and Acquisitions since it requires the development of new resources internally. (c) Computation of value of shares of Owens plc to Steel plc: £ (in millions) £ (in millions) Assets: Land & Buildings 23.00 Plant & Machinery 10.50 Fixtures & Fittings 1.20 Motor Vehicles 3.00 Stocks 8.50 Debtors 8.55 Prepayments 1.50 Total Assets 56.25 Less: Liabilities Creditors 4.40 Taxation 1.00 Bank Overdraft 0.60 12% Debentures 5.00 Deferred Tax 1.00 Total Liabilities 12.00 (a) Net Assets 44.25 (b) Number of Outstanding Shares (in millions) 9.80 Value per share (£) [a / b] 4.51 Therefore, the value to Steel plc of each ordinary share in Owens plc would be £4.51 Read More