Question

What factors do you believe are most likely to impact senior management’s selection of one strategy (e.g., solo venture, M&A) to increase shareholder value over the alternatives? Be specific.

1. In your opinion, how might the conditions of the business (e.g., profitability) and the economy affect the choice the strategy?

Answer 1

The Shareholder Value Creation is a simple concept where the Shareholders who are the real owners and risk bearers get a return which is in excess of the cost of capital. If one considers it from the Investor's point of view then expected return on Equity or if one looks at it from the operational efficiency point of view then returns in excess of WACC.

actors affecting SVC

1. Operational:

• Managerial Remuneration - This is the remuneration paid to the Directors for managing the company and being trustees of the end risk bearers of the company, the equity shareholders. The directors are supposed to take the decisions for the wealth maximisation of the Shareholders. The research takes an in-depth look at, if the Managerial Remuneration in reality has any relation to the Shareholder Value created by them.

2. Macroeconomic:

• Interest - The interest rate in the economy determines the WACC as it impacts the expected retums on the Shares and the cost of Debt Capital. The popular finance here is an inverse relationship between the Interest rates in the economy and the share price. T

3.Financial: -

• Dividend Policy - Dividend is a major financial decision taken by the firms. It adds to the returns of the Investors and also shows the outlook of the management. a company shall distribute the profits as dividends if the returns from business are less than the opportunity cost (expected rate of return) of the shareholders and shall reinvest the profits in business if the returns from business are more than the opportunity cost (expected rate of return) of the shareholders.
• Capital Structure

4. Strategic

• M&A - The companies globally are stressing on increasing the market share, looking outwardly due to Globalisation. Recent Financial Crisis which caused Global Recession has also offered attractive valuations. The companies are using the inorganic way of growth, of Mergers & Acquisitions, rather than the organic method.
• Sharebuyback - Shares are bought back by the companies usually to have a positive impact on the Earnings per Share .There have been a good number companies that filed for Sharebuybacks in India but at ground level not all the companies exercised their permission to buy back the shares and not the entire quantity that was applied for.

Shareholder value can be implemented in the decision-making process, is it important for the top management to decide what value drivers are implemented in the process.

Implementing a new performance measurement measure such as economic profit or a new incentive scheme may be necessary, but will certainly not be sufficient to maximizing value

Important aspects of implementing shareholder value need to be understood by the management. A part of shareholder value approach deals with heavy focus on returns, risk and growth, and therefore, is it important to fully manage all of these aspects.