Case 32. Structuring Corporate Financial Policy Diagnosis of Problems and Evaluation of Strategies. I. Goal:. To understand how to diagnosis of problems and evaluate strategies. II. Steps. 1. Identifying corporate financial policy: Elements of its design
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Case 32. Structuring Corporate Financial Policy Diagnosis of Problems and Evaluation of Strategies
1. Identifying corporate financial policy: Elements of its design
A. Concept of Corporate Financial Policy
- Financial policy: a set of broad guideline or preferred style to guide the raising of capital and distribution of value
B. 7 elements revealing underlying financial policy
1. Mix of Classes of Capital
Ex) Debt & Equity / Common Stocks & Retained Earnings
Ex) A Pecking order of Financing : Profit
-> Debt -> Equity
2. Maturity Structure
- Firm’s judgment about future financing opportunities and taking risk
- Neutral: Maturity of Asset = Maturity of Liability
- Managers’ bet about refinancing and interest rate risks
3. Coupon and Dividend Payment
- Managers’ bets
- Level of Exposure to Exchange Rate Risks
- Capital Sources
- Financial Innovation
6. External Control
- Fear & Expectation
These elements become a basis for developing a broad, detailed picture of firm’s financial policies
C. Comparative Illustration
Eli’ s and Genentech’ s Example:
II. Framework for Diagnosing Financial Policy Opportunities and Problems.
- It is based on the perspective of competitors, investors and senior corporate managers
1) Investor View: Does financial policy create value?
- Maximizing shareholder’s wealth
- Minimizing risks
2) Competitor View: Does the financial policy create competitive advantage?
- Competitors’ F/S is an indicator or benchmark.
3) Internal View: Does the financial policy sustain the vision of senior management?
- Funds the growth goals and dividend payouts of the firm without severely diluting the firm’s current equity owners
Investor View: Value Creation +
Competitor View: Competitive Advantage +
Internal View: Survival
Financial Structure: Mix, Maturity, Basis, Currency, Exotica, External Control, Distribution
III. Analyzing Financial Policy (FP) From the Investors’ Viewpoint
1) Is the FP Increasing the firm value?
1) Why it matters?
3) Plausible quantitative measures
V. Diagnosing Financial Policy From an Internal Perspective.
Financial flexibility =
excess cash + (debt at minimum rating – current debt outstanding)
- How to measure the debt at minimum rating?
(1) Select a target minimum debt rating acceptable to the firm.
(2) Determine the book value debt/equity mix consistent with the minimum rating
(3) Determine the book value of debt consistent with (2).
Financial flexibility indicates the financial reserves on which the firm can call to exploit unusual surprising opportunities.
Compare the growth rate from the model to the targeted growth rate dictated by the plan.
VI. What is best?
A way of identifying the tradeoffs among “good” and “bads”