Investment Decisions, Corporate Finance, And Restructuring: An Overview

Factors considered while making investment decisions

The Assignment assesses the knowledge in investment decisions and corporate finance at the global level and strategic approaches, risk, and needs for maintaining working capital. It also assesses the skills of capital structures, foreign exchange options, and corporate finance, restructuring. The assignment is divided into five tasks. Task 1 addresses the impact of the corporate strategy of investment decision. Task 2 addresses financial strategies and their application of different business sectors. Task 3 addresses foreign exchange market and organizational decisions. Task 4 addresses the importance of working capital to organizations. Lastly, Task 5 addresses finance options used by corporations. 

1.1 Our organisation Nadia Real Estate is a leading real estate brokering company located in Dubai. We offer services to home renters, landlords, home buyers, sellers, and investors. We are considering a new project of constructing a new homes in Dubai. Just like any other project, the decision is based on three factors; time horizon, return, and risks involved.

First, the time horizon, refer to the time it would take before an investment is liquidated. Besides, liquidation of an investment, time also influences asset allocation. For instance, an investment in the
real estate market should time a period between six to eight years before liquidation.

Second, the return that would be realized from the investment. People invest their money in a projected with an aim of earning more in the future. The return that comes with an investment should
be considered before a decision on whether or not to invest is made.

And third, the risk associated with the investment/ expected returns. Even though expected higher returns are associated with higher risks, such risks should be manageable (Brigham & Ehrhardt, 2014, p. 42)

2. Organizational Factors that are considered while making Investment decisions are:

• Management Outlook
• Competitor’s Strategy
• Opportunities created by technological change
• Non-economic factors such as productivity

Operational Factors that are considered while making Investment decisions are:

• Market forecast
• Fiscal Incentives
• Net Investment
• Net Cash Flows
• Opportunity Costs
• Working capital requirements 

 3.

Organizational factors	Assessment
Management Outlook	Whether the management focus on fast returns or longer-term gains, an investment will only succeed where the management is innovative, progressive and flexible to changes and decision making. It is difficult for an investment to succeed when the management is cost conscious and too rigid to change
Competitor’s Strategy	Nadia Company forced to make an investment decision when a competitor is investing in a similar. It is important to evaluate their investment policies and strategies to come up with a way of beating them. For example, we are forced to review our production efficiency when a competitor is buying new equipment and production tools.
Opportunities created by technological change	Technological changes have a direct influence on investment decisions. Technology improves investment efficiency although it comes with extra cost on the company. Therefore, the company should apply technology changes in determining the efficiency of a project.
Non-economic factors	A well-organized organisational operation improve socializing, motivation, reduce absenteeism and increased productivity. Although non-economic factors cannot be measured in monetary terms, efficiency and installation of new equipment would increase safety and reduce expenditure on injuries.
Operation factors	Assessment
Market forecast	Market forecast can be either short term or long term. An investment should be chosen depending on it is Attractiveness or not. Based on the market forecast a decision can be made on whether to invest or delay the investment.
Fiscal Incentives	A company can decide to take up an investment opportunity because of financial incentives associated with it. Likewise, fiscal incentives can be used to choose between two mutual exclusive projects. For instance, might set up a new plant in Free Zones to get tax incentives by foregoing one without tax incentives.
Net Investment and Net Cash flows are the financial returns associated with a project	Financial forecast is important in deciding on whether the project would add value and increase the shareholders’ wealth or not. It also help to estimate the sunk cost, opportunity cost and the incremental cash flows associated with the project.

1.2 Corporate strategies have direct influence on investment decisions, I will determine the different corporate used three corporates, which are Emirates Group, Jumeirah Group, and Dubai Airports. 

 2.

• Expansion strategy
• Diversification strategy
• Integration strategy
• Concentration strategy 

3. a) Emirates Group: In 2014 the company invested $6 billion in revamped products, staff, service, new craft, and entertainment systems.

b) Jumeirah Group: The hotel is planning a makeover investment between May and October 2018. The expansion investment is estimated to cost $ 450 million.

c) Dubai Airports: The Corporate announced its plan to invest $ 5.98 billion towards expanding its Al Maktoum and Dubai International Airports by 2020. The company is focussing on matching the competition posed by the Emirates Group.

Impact of Corporate Strategy on Investment Decisions

4. 

Investment Decisions	Corporate Strategy	Evaluation
Emirates Group In 2014 the company invested $6 billion in revamped products, staff, service, new craft, and entertainment systems.	The company is using both the  expansion and concentration Strategies	With the increasing competition in the airline industry, Emirates Group is focusing on cementing its position in the market as a market leader. It is focusing on expanding its airports and investing in new more luxurious airlines.
Jumeirah Group The hotel is planning a makeover investment between May and October 2018. The expansion investment is estimated to cost $ 450 million.	This will be an expansion strategy	The company is focusing on offering a fresh and memorable experience to its customers after the completion of the project. Jumeirah plans to expand to 425 guest bedrooms, retail areas, outdoor facilities, dining outlets, restaurants, lobby, and the public spaces.
Dubai Airports The Corporate announced its plan to invest $ 5.98 billion towards expanding its Al Maktoum and Dubai International Airports by 2020. The company is focusing on matching the competition posed by the Emirates Group.	This is an Integration/Expansion Strategy	The company is focusing on increasing its ability to serve customers by increasing its passenger capacity to 90 million a year this is based on an estimation that the number of international passengers visiting the UAE will increase by 7.2% in the next ten years.

	Cash Flow	Net Cash Flow
Year 0	$-25,000,000.00	$-25,000,000.00
Year 1	$10,000,000.00	$-15,000,000.00
Year 2	$10,000,000.00	$-5,000,000.00
Year 3	$10,000,000.00	$5,000,000.00

Payback Period: 2.5 years 

Net Present Value               

[Year1/(1 + R)1 + Year2/(1 + R)2 + Year3/(1 + R)3 + Year4/(1 + R)4 + Year5/(1 + R)5] − Cost of Investments

                = [10000000/(1+0.12)1 + 10000000/(1+0.12)2 + 10000000/(1+0.12)3 + 0/(1+0.12)4 + 0/(1+0.12)5] – 25000000

=             -981687.32 

Profitability Index (PI) = Present Value of Future Cash Flows / Initial Investment

                                         = 24018312.69 / 25000000

                                         = 0.9607 

An investment should be accepted if the payback back period is within the limits set by the company.

The Emirates Group has its limit at three years while the proposed project would take 2.5 years to realize the initial cash investment. The project should be accepted. 

The company accepts the project only if the NPV is positive.  When comparing two or more projects… selects the one with the highest NPV. Some projects with zero NPV would also be accepted if they are regulatory requirements or goodwill generating projects.

The proposed new project by Emirates Group has negative NPV (-981687.32) and should be rejected. 

Profitability Index (PI) is used to rank a proposed project by quantifying the value created from every unit of investment. A project should be accepted if the PI is greater than one and rejected if the PI is less than one.

The Emirates Group should rejected the investment because it has a PI of 0.9607 which is less than one. 

2.1 The different financial strategies used by organizations from different business sectors are: 

The financial strategies of the major 10 oil and gas companies, including BP :

• Debt through instruments such as bonds, and bank loans.
• Shareholders’ Equity
• Retained earnings
• Leasing used under royalties when purchasing the production land or equipment is too expensive to be afforded.

• Trade credit
• Short term loans  

 2.2 

Business Sector	Organization	Financial Strategy	Discussion  and Evaluation  of strategies
Restaurant and Hospitality Industry	Jumeirah Group	Franchising	Investors go for franchising as a franchising strategy where the cost of starting a new business is too expensive to afford. Franchising is a cost-effective way in which a new business acquire the right to operate from a franchisor after paying a small fee.
Airlines Industry	Emirates Group	Long-term loans	Long-term loans allow companies improve its flexibility. The loan also come a lower interest rate after collateral has been accepted. The loan also allow minimization of investors interference as compared to seeking private investors which would lead to redistribution  of control
			·

2.3

Sector	Organization	Financial Strategy	Appraisal  / Evaluation
Private Company	Dubai Emirates	Acquisitions	·   Allow sharing of managerial roles. ·   Increase talent base and skills. ·   Reduce commercial risks associated with investments. ·   Support organic growth and diversification because of the increased resources. ·   Acquisition also create a larger financial pool than before giving a business an opportunity to increase its investment portfolio (Pike & Neale, 2006, p. 83).
Charitable		·      Gifts and donations from individuals, charitable trusts, and companies. ·      Grants from foundations and charitable trusts	No tax obligation
Govt. Org		·      Taxes obtained from corporates. ·      Fines	No tax and expense obligations

Foreign exchange market has brought together decentralised investors globally.

In most cases, banks participate in the international finance market on behalf of the investors.

It is the responsibility of the forex to establish a relative value at which different currencies can be
used in the trade. The relative exchange value between different currencies is known as the
conversion rate (Chen, 2009, p. 54).

The mechanism of foreign exchange market refers to the techniques used in the foreign exchange market which enable all global currencies to be tied together using a common value known as the conversion rate. The mechanism of foreign exchange market are determined by spot exchange rate, forward exchange rate, cross exchange rate, direct quotation, indirect quotation, spread, and arbitrage process. 

The mechanism directly impact a company’s purchasing power, especially when investing in the foreign market. Likewise, the return from foreign investments are influenced by the exchange rates in the market (Chen, 2009, p. 56). The main function of forex is to ensure a smooth trade and transfer of purchasing power between two parties in different countries, minimize the investors’ exposure to exchange risks associated with foreign financial trades as well as facilitating access of credit between parties in different countries (Coyle, 2000, p. 63).

Financial Strategies Employed by Different Organizations

For example, if Emirates Airlines in UAE buys aircraft from the United States, it has to pay in US $ and not by AED. Without a market for foreign exchange, the conversion is not possible. 

Foreign exchange has high influence on business and organizational investment decisions. Corporates in the UAE have to import and pay for their goods and outsources services in different foreign currencies. Without the forex market, such conversions would not be possible.

Some of the influences forex market has on the operations of a company include:

1. Forex market influences the Change in value of currency caused by buying or selling of currency example US Dollars.

2. It also influence export and import of raw material, fixed goods parts, and outsourced services. Foreign exchanges can be facilitated by Central Bank or Large Commercial Banks.

3. Conversion rates and currency values also influence the international finance activities. 

3.2 The following are the risks involved in foreign exchange. 

It refers to the risk associated with the change in the exchange rate between the time an enterprise initiates a transaction and settles it. 

A firm has economic exposure (also known as forecast risk) to the degree that its market value is influenced by unexpected exchange rate fluctuations. 

A firm’s translation exposure is the extent to which its financial reporting is affected by exchange rate movements. 

A firm has contingent exposure when bidding for foreign projects or negotiating other contracts or foreign direct investments. 

2. I select the following business sector, to assess Major Impact of Forex Risks 

Sector	Major Impact of Forex Risks
Service Industry	Transaction exposure: The time of initiating a transaction and settling it differs and therefore exchange rate differences will have high impact when….
Oil and Gas Industry	Transaction exposure:  High Contingent exposure: The time difference of bidding for foreign projects and contract awarding and completion have huge impact on the total cost of the project……..
Building Materials Industry	Transaction exposure: High Building materials are exported from different countries and imported to different countries. The cost of raw materials used in production keep fluctuating. Likewise, with the fluctuation of currency values in different countries highly influence the building material industry.

3.3 To  assess the foreign exchange markets, if it a viable method for financing corporate restructuring, let us have a look at restructuring itself.

When a company restructures internally, the operations, processes, departments or ownership may change, enabling the business to become more integrated and profitable.

Costs of restructuring includes: reducing or eliminating product or service lines, canceling contracts, eliminating divisions, writing off assets, closing facilities and relocating employees OR entering a new market, adding products or services, training new employees, and buying property results in extra costs as well. 

2. Yes, foreign exchange market are viable for financing corporate restructuring. When a country is experiencing high-interest rate and devaluation of its currency, companies might seek loans from foreign countries where rate are low and the exchange rates are high. For instance, a company might seek a loan in a foreign currency like USD as a way of boosting its finances in the local market (Coyle, 2000, p. 71) 

Types of Foreign Exchange Risks and Impacts on Different Business Sectors

4.1 Nadia Real Estate is a leading real estate brokering company located in Dubai. We offer services to home renters, landlords, home buyers, sellers, and investors. 

2: Working capital needs to be managed to ensure :

That a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash. 

Organisations must hold funds, also known as working capital, to meet its day to day activities such as buying raw materials, paying wages and meeting anticipated events. For effective daily operations, a business should ensure that its current assets are higher to the current liabilities (Brigham, 2016, p. 41). 

3: Working capital can be managed through;

a) Managing inventory and procurement. An organizations must create an optimum inventory level to avoid cases of holding stock in excess or insufficiency at any given time. Excess inventory reduces the liquidity level of the business by lowering its working capital. On the other hand, holding insufficient inventory means loss of sales.

b) Effective management of account payables.

c) Improving the account receivables process.

d) Managing debtors by ensuring that debts are paid in time.

e) Making informed investment decisions (Cover, 2009, p. 51).   

4.2 My organization is Nadia Real Estate  

2: Working capital management cannot be applied in solely when addressing risks such as liquidity.

When a company plans a strategic approach against liquidity crisis, operational a strategic considerations should be taken as well.

Using working capital management to solve liquidity risks can only succeed in the short run but backfire in the long run when other factors are not considered (Allison, 2012, p. 89).
Working capital management systems and methods are aimed at assisting a company to enhance its liquidity ratios. However, the systems can also lead to negative results. Having excess working capital at hand limits a company’s ability to grow. Likewise, a system that encourage late payment to suppliers might increase chance of bankruptcy (Pike & Neale, 2006, p.54). 

3: The reasons of failure of the systems to monitor working capital management are: 

• Poor Receivables Management
• Bad relations with suppliers/ bankers
• Lack of effective Provision for bad debts
• Too much inventory – overstocking 

a) Using working capital to meet personal obligations such as drawings or for certain big unexpected expenditures like fines, legal fees, compensations etc. often makes fund crisis and might lead to Negative working capital.

b) Short at Activity cycle, that is, purchasing raw material, goods, paying wages and pay other expenditures but it takes time to convert finished goods into liquid cash.

c) Recession & Losses: – Company perform to finance its activities but when convert to sales at situation of recession which Leads to Bad debt or losses.

4.3 The main criticism for systems and method used in working capital management is based on limitation for growth. The systems tend to focus of increasing the working capital controlled by an organizational while assuming the ability to grow and increase shareholders’ wealth. Excessive strong wealth management systems hinder the growth strategies and competitiveness of businesses in the market (Pike & Neale, 2006, p. 75).

Methods to plan working Capital	Critique Methods
By managing Cash	Highly useful in ensuring that sufficient cash is available for business operations and to ensure availability of funds to make payments due.
By managing Inventory	Useful because it ensures that the organization can manage its inventory effectively. Helps the company to set a limit on the amount of inventory that can be held at any given time.
By managing Accounts Receivables	Effective management of accounts receivables helps a company to increase cash flows, improve flexibility of the company, and increasing financial flexibility and health.

5.1

Finance Options for Restructuring	Assessment of  the finance options
Merger & Consolidation	One company combines its business with another, merge the capital and resources. Mergers & Consolidation takes place through; ·         One situation where one entity ceases to exist and another retains its name. ·         Another situation where two entities merge to form another entity ·         Combining the resources of both entities ·         Through equity ownership in the new entity. ·         Where there are synergy in resources, markets or product offerings.
Equity Carve out	Equity Carve out allows the Creation a new company by selling the stake belonging to a minor company through IPO.

 3: 

Finance Options for Restructuring	Risks involved
Merger & Acquisitions	If the Market value of shares of the second party, during the formulation stage, rises, then that is a risk to the first party, in terms of its share value in the actual merger. Many have observed culture clashes and they are the most common reason for the failure of mergers and acquisitions. Employees are the core strength of an organisation and if there is no integration among them the organisation is destined to fall apart. Hence, one should check the compatibility of the two companies before the merger. Legal Risks – There are many laws and regulations that companies need to comply with during mergers and acquisitions. Failure to do so can lead to legal actions by governing bodies. They should also comply with wage and hour laws relating to termination of employees. Prior knowledge of the litigation is vital.  The knowledge of involvement of the other firm is vital as it can affect the profitability of the firm.
Equity Carve out	Repositioning of equity within the company Like purchasing outstanding shares, creating new classes of stock, or going public ……

 5.3

Organizations	Finance Option(s) selected	Critique the success
Coca-Cola	Merger and acquisition with its bottlers in UAE	In 2014, The Coca-Cola Company merged and acquired several bottling companies in an attempt to reduce its supply chain cost, improve efficiencies and improve profitability. The Financial Strategy 11 company estimated that its stock price would grow to $43 after restructuring. Instead of achieving the intended objectives, the company did not register significant increase in its financial performance.
Airline New Zealand	Take over	The Airline New Zealand paid one share of its stock and $55 in cash for each share of Capital and the share should then be invested into the Australian market in an attempt to protect itself from bankruptcy. However, the company is continued to register negative financial performance.

References List

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