Question

You are sitting in a coffeeshop and you overhear a conversation between what appears to be a concerned Chief Executive Officer (CEO), Larry, and his Chief Financial Officer (CFO), Phillip. Larry became concerned after Phillip made the following comment… ‘When you look at this project, relative to our competitors, we are heavily invested – this project will make or break us. Luckily, we have sunk some equity in it now, but really the mix just matches the levels of what you would expect in this market. But I am a bit concerned going forward. Last year’s net income was a bit off, and it’s becoming apparent that we may not even meet the revised expectations… so we are a bit tight on cash. Unfortunately, I think we must push dividends out two more periods until this project starts generating some income. I was hoping that we could have delivered dividends in this next period, but this is not looking possible anymore. I have no doubt I need to go see Bob from the bank (NAB) to tie us over until we can get some income in from this investment – we basically need a loan to keep this project going because our other two products are losing market share and will likely shrink further over the next two periods.’

a) Based on the evidence in Phillips comments, explain the reasons why the CEO (Larry) would be concerned for stakeholder welfare. (Answer in approx. 450 words)

b) Discuss any two, of the three key decisions a Financial Manager would need to optimise if she were to successfully maximise shareholder value. (Answer in approx. 450 words)

Answer 1

Hi there,

Here is my view on the Case study asked about stakeholders welfare and Wealth maximization.

1. Following are the reasons why the CEO (Larry) would be concerned for stakeholder welfare.

Stakeholders must play a central role in setting up priorities and objectives of water and sanitation initiatives in order to ensure relevance and appropriateness. It is important that all stakeholders are involved in the development of projects and not just direct beneficiaries of an initiative.

When planning a strategy (see this category on Decision Making section) on which stakeholders to involve into the decision making process and how to communicate, cooperate and associate with them, it is worthwhile to find out more about the stakeholder characteristics.

This will later on help to attribute roles and responsibilities to different stakeholders so that the implementation is successful and so that no conflicts arise between the stakeholders.

Firstly, the degree of importance of the stakeholders is analysed, i.e., the degree how much somebody is concerned by an initiative.Importance means the priority given to satisfying stakeholders’ needs and interests from being involved in the design of the project and in the project itself in order for it to be successful. In other words, this is about how important or essential is it that certain stakeholders are involved .

Secondly, influence and power of a stakeholder can affect the success or failure of an initiative. Power refers to the ability of the stakeholder to affect the implementation of a project due to his or her strength or force . Power can be important in terms of supporting as well as in terms of constraining an initiative. For the success of an initiative, it is very important know whether (and how) a stakeholder can take action, how he/she can be involved, and how much capacity he/she has to contribute. Concerning failures, it is important know the possible (negative) influence a stakeholder has to constrain or even stop an initiative.

In the given case, after overhearing on conversation of Chief Executive Officer (CEO), Larry and Chief Financial Officer (CFO), Phillip it would be appreciable with the words of CEO (Larry) on the Interest of the Stakeholders as they are the main pillars of the business organsation ithin which the whole entity is being works upon.

As he(Lary) seems worried on the Phillip statement over the Dividend Defferment as the business is out of funds(Cash) which makes the Stakeholders to be unsatisfied with business performance as well as probably may withdrew the funds from the Business which ultimately reduces the relative share of the market of the organisation.

2. key decisions a Financial Manager would need to optimise to successfully maximise shareholder value:

In the context of the referred case study ,being the CFO(Lary) has to be concerned on the Stakeholders welfare and organisation proposal towards the project implemantation as follows .

1. Make strategic decisions that maximize expected value, even at the expense of lowering near-term earnings.

Most companies evaluate and compare strategic decisions in terms of the estimated impact on reported earnings when they should be measuring against the expected incremental value of future cash flows instead. Expected value is the weighted average value for a range of plausible scenarios. (To calculate it, multiply the value added for each scenario by the probability that that scenario will materialize, then sum up the results.) A sound strategic analysis by a company’s operating units should produce informed responses to three questions: First, how do alternative strategies affect value? Second, which strategy is most likely to create the greatest value? Third, for the selected strategy, how sensitive is the value of the most likely scenario to potential shifts in competitive dynamics and assumptions about technology life cycles, the regulatory environment, and other relevant variables?

2.Carry only assets that maximize value:

The principle takes value creation to a new level because it guides the choice of business model that value-conscious companies will adopt. There are two parts to this principle.

First, value-oriented companies regularly monitor whether there are buyers willing to pay a meaningful premium over the estimated cash flow value to the company for its business units, brands, real estate, and other detachable assets. Such an analysis is clearly a political minefield for businesses that are performing relatively well against projections or competitors but are clearly more valuable in the hands of others. Yet failure to exploit such opportunities can seriously compromise shareholder value.

Second, companies can reduce the capital they employ and increase value in two ways: by focusing on high value-added activities (such as research, design, and marketing) where they enjoy a comparative advantage and by outsourcing low value-added activities (like manufacturing) when these activities can be reliably performed by others at lower cost. Examples that come to mind include Apple Computer, whose iPod is designed in Cupertino, California, and manufactured in Taiwan, and hotel companies such as Hilton Hospitality and Marriott International, which manage hotels without owning them. And then there’s Dell’s well-chronicled direct-to-customer, custom PC assembly business model, which minimizes the capital the company needs to invest in a sales force and distribution, as well as the need to carry inventories and invest in manufacturing facilities.