Tax Management and Exchange-rate Risk

Tax plays an important role in corporate management. Tax can influence on strategic planning, cash flow and investment. Tax is treated as cost. In order to maximize shareholder’s wealth, companies try to avoid or decrease tax burden. Meanwhile, by reduction of tax, company can obtain low cost and design a competitive price to obtain competitive advantage. To achieve this objective, multinational enterprises which have capability and expertise can utilize subsidiaries or joint ventures to re-structure, transactions, or transfer pricing.

The multinationals, Starbucks, Google and Amazon were explored by newspaper. Especially Starbucks’ profit in UK creates 3.1billion pounds in past three years. But it just contributes 8.6million taxes. People in UK are angry about Starbucks and appeal to resist Starbucks. They think Starbuck escape the responsibility for society. In order to deal with resist, Starbucks makes a commitment which it will pay 20 million pounds of incomes taxes, and this money has exceeded the legal payable taxes. Google and Amazon have same situation with Starbucks. They are all legal. Google takes advantage of its subsidiaries which locate in Ireland to obtain a low tax rate. Amazon utilizes its subsidiaries which located in tax haven Luxembourg. (BBC, 2013)

In these cases, personally, in order to obtain high profit and competitive advantage, companies are motived to avoid taxes by legal means. However, while financial managers catch low payment tax, the reputation is damaged. As Starbucks, people began to resist it. The company is regarded as irresponsibility for society. Meanwhile it is not an ethical behavior. In order to repair reputation, company has to pay more money. Thus tax is a complex problem. Companies should make a balance between their benefit and society responsibility.

Nowadays, more and more multinational companies appear. Within international trade, they face exchange-rate risk. There are three type risk which is transaction risk, translation risk and economic risk. Transaction risk is associated with imports or exports. The firm may have a commitment in a foreign currency and will have a variable value because of exchange-rate movements. Translation risk arises because financial data denominated in one currency are then expressed in terms of another currency. Income, expenses, assets and liabilities which is overseas have to be re-expressed in terms of home currency. In respect of economic risk, a firm’s economic value may decrease as a result of forex movements causing a loss in competitive strength. In order to decrease risk, companies can utilize hedge such as Netting, Matching, Futures Hedge, currency option hedge.

Recently, Japanese government reduce JPY Exchange Rate. JPY Exchange Rate has reduced 10% since on January 2013. (Financial Times, 2013) This measurements support increase of company competitive such as Toyota and Panasonic. This leads Japanese products have lower price than other countries. However, the price of import energy source will increase sharply. These companies who need to import source will increase their cost. If these companies does not use hedge, because of increase of exchange rate, they may suffer large loss. 

Raising corporate finance

It is important for companies to raise finance, because they need to develop and expand. In addition, by raising money companies can change their capital structure. Different size company raise money by different ways. In term of small and medium companies, they raise money by business angels, venture capital, venture capital trusts, enterprise investment scheme, government source and loan from bank and family. in term of large companies, they also raise capital by equity and debts. This blog focuses on that large company raise capital.

In respect of equity finance, large companies achieve it by issuing shares. There are some advantages. Firstly, there is no obligation to pay dividends. Secondly, companies do not repay the capital. However, there are some disadvantages. Firstly, issuing shares needs high cost. Secondly, entrepreneurs may loss control. Thirdly, taxable profit cannot be decreased. In respect of debt finance, it includes different loans, which are from bank and syndicated loans, and debt securities. In addition, larger and more creditworthy companies can raise money by international source such as Euromarkets. Meanwhile, an industrial corporation can raise money by project finance which does not be secured against parent company’s assets. Compared with equity finance, debt finance is less expensive. And entrepreneurs can keep control of their companies. Meanwhile, companies can reduce taxable profit. However, companies have to pay interests. And the loan is secured against assets owned by the business. This leads companies may loss assets. Therefore managers should choose suitable method to raise money.

New Look, which is a fashion company, prepares to enter into China and India. In china, new look plan to invest five to ten stores which needs from 10 million pounds to 20 million pounds. Meanwhile, its CEO Kristiansen said they will enter China alone, rather than by a joint venture. This is because Kristiansen has 13 years’ work experiences in China. On the other hand, the company plans to enter India with a joint venture partner.  In order to expend its international business, the company prepare to raise funds by debt including 750 million pounds of payment in kind notes. And it also plans to raise funds by bond markets. (Financial Times, 2013) in the case, New Look utilize debt finance because it can raise large amount of funds to expand its international business and capture developing market effectively. In addition, it has a low cost of raise funds. Meanwhile the managers can control the company. On its plan of entering India, it prepares to seek a joint venture partner. This might make conflicts with its partners in future, however, by this New Look could obtain Indian market experience and funds.

In my opinion, a company should mix equity finance and debts finance. In term of debt finance, it can utilize to develop a good project as the new look case. Meanwhile, I think a company should make suitable level of debts. If there are higher debts in a company, it may break cash flow in order to pay interests and capital. It will lead company bankrupt. If there are lower debts in a company, it may limit the speed of development and loss opportunity. In respect of equity finance, I think it is a good chose in long term. Although it has a high cost of issuing shares, in long term it will keep providing funds for company, if the company has good performance. However, I think it is a challenge for managers that how to balance debt and equity.

Stock Market

Stock markets are important today. For economy, it can improve use of domestic saving, construct a channel for saving to be utilized, and build privatisation reform. For savers, it provides an opportunity to investment and enables them to spread risk. For companies, it accesses to capital, provides opportunity to expand by acquisition and improve gearing, and transfers the risk. Thus stock market keep efficient is significant. Efficient market is divided by three forms. One of these is weak form which is share price reflect all past movements and these are irrelevant when predict future movements. Semi-strong form is that  reflect available information, also reflect  to new information. Strong form is that share price reflects all of the information.

Moutai Plc is a liquor company. On January 2013 the company’s wine include element which would damage people’s healthy was exposure by a website which is a famous stock market website. Because of this news, its share price reduced sharply. And at that time the news cannot sure whether it is true. The following days many medium started to focus this event. Meanwhile its share price kept decreasing. Finally the event was proved is true. And its share price decreased by 20%.  

In the case share price reflect information is immediate. However, at the beginning the news cannot proved whether it is true. The share price was influenced by the bad news. The outcome is true. But if the news was not true, The Company is poor. In addition, the person, who exposure the news and ran the famous website, ever did same thing for another company, and he is a short-seller. Thus if the information is utilized by someone who has some objectives, it will be hard to reflect the real company’s situation. It is not fair for public.

Shareholder value

Value-based management means that manager aim to maximize shareholder wealth and it is in long time. and the firm'strategy, processes, performance measurements and culture all are to service shareholder wealth maximization.

Last month, Blackberry issued its new products, which is blackberry Z10 and blackberry Q10. Q10 keeps blackberry famous skill of keyboard. But Z10 removes the keyboard. And Blackberry creates its new system of the products. The new products illustrate Blackberry starts to change their strategy which start to pay more attention to app. Meanwhile they also show that it wants to make a balance between business man and the public. In addition, the firm changes its name from RIM to Blackberry. Its CEO,Thorsten Heins, said he wanted to make blackberry give a new impression to its customers. For the past few years, shares of the Blackberry-maker have plunged 77%, because iphone and Android invaded the market , blackberry's several product delayed and poor management.As the result of these, in 2012 CEO,Mike Lazaridis resigned by investors protesting.

In this case, since manager have poor management and do not plan good strategy which does not reform products timely, CEO had to resign. It made a large lose for investors. This can be link to manager should service shareholder wealth maximization. And It is also a way to evaluate manager's performance.Nowadays, incumbent CEO decided to adjust structure of organization, formulate new strategy and change company's image. These can be linked to firm's strategy and organizational capabilities support to maximize shareholder wealth. In addition, the firm start to invest new operating system of products which is similar to Android and Iphone. This can be linked to value action pentagon which includes raising investment in positive spread units.