国际金融案例Case

Case Bank for International Financial Management

(0) Objective of International Financial Management

Question: Stakeholder objectives using UK as a case

(a) 'The objective of financial management is to maximise the value of the firm.'

You are required to discuss how the achievement of this objective might be compromised by the conflicts which may arise between the various stakeholders in an organisation. (10 marks)

Answer: Stakeholder objectives

(a) If it is agreed to maximise the value of the firm, it is necessary to ask two fundamental questions:

•who is the firm?

•what do we mean by value?

In the United Kingdom the traditional view has been for the interests of a firm to equate with those of the current equity shareholders. But it is now recognised that this is much too narrow. The employees and lenders to a business certainly have a legitimate interest, probably also the government. Japanese influences on UK thinking would add a company's suppliers and customers as part of the stakeholders. Perhaps the general public also belong to the list.

Each of the members of the above list has different key objectives. For example employees might want their labour remuneration to be larger, while the shareholders want labour costs to be low so that higher profits can lead to higher dividends. Shareholders might be uninterested whether the company invests in 'unethical' areas of business such as armaments or cigarettes, as long as their investment is profitable, while certain sections of the public will discourage unethical products.

The value of an investment in terms of financial management theory is the present value of the cash returns available from the investment. However this varies from investor to investor depending on personal discount rate, tax position, period of investment, etc. For example the value of a share bought today and expected to be sold in five years time will be the present value of the five years dividends plus the present value of the expected net

realisable value at the end of the holding period. So the value of the same share will be different to different shareholders, and the job of the managers to maximise the total value becomes impossible.

A further problem arises in the conflict between short-term results and long-term viability. Managers might be on annual service contracts and therefore are motivated to report the highest possible short-term profits. This might involve cutting down on revenue

investment such as maintaining fixed assets, advertising, research costs, etc. Such a

policy is in the best interests of management, since they will be paid a bonus for reporting

good results, but is not in the long-term interests of the company.

Financial managers often deal with the above conflicts by adopting a satisficing approach rather than an optimising approach. They hope to please everyone by following

moderate policies which are not exclusively in the interests of one of the sectional stakeholders of the business.

Question: Five wealthy individuals

Five wealthy individuals have each put £200,000 at your disposal to invest for the next two

years. The funds can be invested in one or more of four specified projects and in the money market. The projects are not divisible and cannot be postponed. The investors require a minimum return of 24% over the two years.

Details of the possible investments are:

Return over Expected standard deviation

Initial cost two years of returns over two years

(£’000)(%) (%)

Project 1 600 22 7

Project 2 400 26 9

Project 3 600 28 15

Project 4 600 34 13

Money market minimum 100 18 5

Correlation coefficients of returns (over two years)

Between projects and Between projects and Between projects the market portfolio the money market

1 and

2 0.70 1 and market 0.68 1 and money market 0.40

1 and 3 0.6

2 2 and market 0.65 2 and money market 0.45

1 and 4 0.56 3 and market 0.75 3 and money market 0.55

2 and

3 0.65

4 and market 0.88 4 and money market 0.60

2 and 4 0.57

3 and

4 0.76

Between the money market

and the market portfolio 0.40