One of the fundamental concepts of corporate finance is that "... the purpose of the firm is to create value for you, the owner. The firm must generate more cash flow than it uses. " (Ross, 2005, p. 18) The Coca-Cola Company is similar to Lester Electronics, Inc. , of our classroom scenario, in that it must weigh an enormous spending venture against the future increase in cash flow that spending venture may or may not bring. Ultimately, it is a vital decision for the executives to make when considering potential on a global scale.
For Lester, the decision is whether to acquire Shang-wa, or risk losing 45% of their revenue by allowing Shang-wa to dissipate. Coca-Cola's situation revolves around the Beijing Olympic Games. "Estimated at between $75 million and $90 million, the sponsorships underscore Coke's heavy bet on China. " (www. ajc. com) China already is Coke's fourth-largest market, with consumer spending on soft drinks more than doubling since 2001. Executives expect China eventually will surpass the United States as the company's top market.
The spending blitz, and heavy marketing, in China specifically for these games comes at a time when resources are scarce and expensive. "Coca-Cola Bottling (COKE) the No. 2 Coke distributor says it plans to cut 5%, or 350 workers, to help offset the rising costs of sweetener and diesel fuel. " (fortune. cnn. com) Yet, among the millions of dollars spent, the company remains profitable. "Coca-Cola Company (KO) posted earnings of $1. 01 per share, vs. 80 cents a year ago, as revenue rose 17%. The company is planning $400 to $500 million in annual savings from productivity initiatives by 2011.
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" (businessweek. com) This direct translation of growth, profit, and earnings, is returned to the shareholders of Coca-Cola as seen in the increase of stock price. The history of good decision making has proven beneficial for Coca-Cola, which would also stand with good reason that the marketing risk in China, for the Beijing Olympics, is with good reason. Eli Lily - Karen Green Normally a firm takes extra cash to pay out dividends or invest in a project and use the future extra cash as dividends. This all depends on the stockholders desire.
Stockholders intentions are to make money off of their investments. If reinvesting the dividends would produce higher return at the same rate, undoubtedly, the stockholder is going to reinvest (Ross, Westerfield ; Jaffe, 2004, p. 318). Eli Lilly practices this concept. Eli Lilly and Company is a leading pharmaceutical developer that produces products treat depression, schizophrenia, attention-deficit hyperactivity disorder, diabetes, osteoporosis and many other conditions (Eli Lilly and Company Limited, July, 2008) Eli Lilly and Company has been in collaboration with SGX Pharmaceuticals since 2003.
SGX Pharmaceuticals is a biotechnology company that focuses on drug discovery and development in the area of oncology. The agreement states that Lilly will acquire all the outstanding shares of SGX common stock. The purchase price is approximately $64. 0 million (Lilly to acquire SGX Pharmaceuticals, July 2008). The expected rate of return on the stock that Lilly purchased and the cost of capital to purchase SGX Pharmaceuticals have risks involved. Eli Lilly will pay $3 per share for SGX Pharmaceuticals, marking a premium of more than double SGX's closing price of $1. 37. Shares of Eli Lilly rose 4.9 percent, to close at $48. 46.
Shares of SGX quickly jumped to within range of the buyout price in after hours trading to $2. 87 (Eli Lilly to Acquire SGX Pharmaceuticals For $64 Million in Cash, 2008) Lowering the cost of capital through liquidation of stock is one suggestion offered by scholars to reduce risk. Stocks that are too expensive are less liquid than stocks that are traded at a cheaper price. Stocks that are not easily liquidated will reduce to return the stockholder receives. Stockholders demand a high expected return for their investment (Ross, Westerfield & Jaffe, 2004, p.335).
The factors to ascertain the liquidity of stocks vary. Corporations lower the trading cost of their stocks in order to lower the cost of capital. Michael Grey, the chief executive at Lilly says for companies like Eli Lilly and SGX Pharmaceuticals, to find investors is an arduous task and the acquisition was the best option for both companies (Somers, 2008). India Finance - Eduard Hristache The volatility in global currency markets has led several Indian companies to sue their banks for losses on foreign-exchange derivatives.
April is results season for corporate India, and as the numbers for the past fiscal year trickle in, so do revelations about losses on foreign-exchange (forex) products. Due to forex, some Indian companies may end up with notional, marked-to-market losses of around Rs120bn-200bn (US$3bn-5bn) on forex derivatives. India's largest lender, the State Bank of India, said on April 22nd that its clients alone are likely to show marked-to-market losses of between Rs6bn and Rs7bn on such derivatives for the 2007/08 financial year.
The first warning came in late November 2007, when software company Hexaware Technologies announced that it would suffer some actual losses on forex derivative deals. However, as more companies have subsequently revealed their own forex derivative woes, it has become clear that the problem is widespread. Over the past two years, the Indian rupee has appreciated against the US dollar on the back of strong forex inflows and the weakness of the dollar, appreciating about 12% in fiscal 2007/08.
At first, the rise of the rupee caught many companies unawares: many IT companies, for example, were badly hit by the sharp depreciation in the dollar, due to inadequate hedging. Companies wanted to minimize the risks of currency fluctuations and make it easier to predict revenues and incomes. They therefore began actively to use forex hedging products. While hedging is a prudent risk-management strategy, the problem began when companies began expanding into exotic derivatives, which are complex and difficult to understand.
Most treasuries, particularly at small and medium-sized companies, may be ill-equipped to understand their intricacies and implications. In early 2007, for example, the rupee was appreciating against the dollar and seemed likely to continue to do so. Therefore banks sold contracts that gave exporters the right to sell their future dollar export earnings at a large premium to the then-prevailing spot rate. However, the banks also sold them exotic cross-currency derivatives that swapped dollar liabilities into low-interest-rate currencies such as the Swiss franc and the Japanese yen, chosen for their stability against the dollar.
These contracts exposed the companies to risk and gave them exposures that were much larger than their original export exposures. Companies were unconcerned, since they were actually making money on these instruments as long as the dollar remained relatively stable against these currencies. The real trouble began when revelations about the US sub-prime crisis and the resulting turmoil began to emerge and the dollar depreciated against previously stable currencies like the yen as well.
The volatility in the global currency markets left Indian companies with large marked-to-market losses on their derivative contracts. For smaller companies, the losses are large in relation to their own size. For example, in the quarter ended December 2007, Hexaware Technologies took actual losses of about Rs1bn on its forex contracts, reporting a net loss of Rs810m. That was a big hit for the company, considering that its total net profit for the previous fiscal year 2006/07 was about Rs1. 1bn. Omnicare - Karen Green Shareholders receive dividends at year end as a return on an investment.
The total dollar return on the shareholders investment is the sum of the dividend income and the capital gain or loss on the investment (Ross, Westerfield ; Jaffe, 2004). Omnicare, Inc. , is among the nation's leading providers of professional pharmacy, data management services for skilled nursing, assisted living and other institutional healthcare providers. They also offer services for hospice patients in homecare and other settings for the elderly. According to (FinancialWire), February 15, 2008, the board of directors at Omnicare, Inc.
declared a quarterly cash dividend of 2. 25 cents per share on its common stock. The dividend is payable March 21 to stockholders of record on March 6 (Omnicare Declares 2. 25 Cent Dividend, 2008). "Cash flow from operations for the quarter ended March 31, 2008 was $142. 3 million versus $174. 8 million in the comparable prior year quarter. Earnings before interest, income taxes, depreciation and amortization (EBITDA) for the first quarter of 2008, including the special items, was $113. 8 million versus $138. 4 million in the first quarter of 2007.
Excluding the special items, adjusted EBITDA in the 2008 quarter was $143. 7 million versus $160. 3 million in the 2007 quarter. " (Omnicare Reports First Quarter Results, 2008). On Thursday, March 27, 2008, Omnicare, Inc. opened up on the NYSE at $0. 35, a below average volume during early trading. The Board of Directors at Omnicare, Inc. authorized a new repurchase program to repurchase shares of Omnicare's outstanding common stock. As of February 29, 2008, is has been reported, Omnicare had 121. 7 million shares of common stock outstanding.
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