ECONS ASS 1 - 2. How would each of the following actions to...

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2. How would each of the following actions to be expected to affect shareholder wealth? The main objective of management should be to maximise the wealth of the company’s shareholders. Shareholder wealth depends on the future stream of income and is affected by information on any factor that may affect the income stream. Such information may involve economic predictions, substitute technologies, movements in currency exchange rates, legal disputes, competitor’s moves, strategic investments, and so on. a) RJR Nabisco sells its Del Monte division for more than $ 1 billion Del Monte is struggling with heavy debt in the 1990s. The heavy debt load gave the company little flexibility and is detrimental to the shareholder’s long- term interest. The shareholders’ wealth continues to shrink as the debt continued to burden the company. To offset this large debt, Del Monte's owners, RJR Nabisco sought a purchaser for the company, coming close to closing a deal in the mid-1990s. Del Monte had agreed to a $1 billion takeover by Group Cabal, a group of investors led by Carlos Cabal, in 1994. This sale of division and recapitalization is believed to be very positive for shareholder value. Reducing a debt to equity ratio is useful in increasing the shareholder’s value. This is because the excessive risk perceptions lead to greater demands of returns, which can drive down investment value. b) Ford Motor company pays $2.5 billion for Jaguar There may be no literature showing that brand acquisitions will lead to abnormal returns. This finding is consistent with the notion that the buy-side market for brand assets is generally efficient, and it supports brand valuation approaches based on brand earnings
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multiples derived from prices paid in brand acquisitions. Shareholder value may increase for purchasing brands under some conditions, such as when the buying firm has strong marketing capabilities or the acquired brand brings new distribution resources to the buying firm and its shareholders. However, shareholder value may be harmed when the acquisitions are large in value compared with the firm’s overall value. In the case that left Ford to pay $2.5 billion for Jaguar, a legendary brand that had limped along through the 1980s as an independent after being mismanaged nearly to extinction by British Leyland, the shareholders confidence is generally low on the decision that Ford bet billion of dollars on an risky venture that might harm their interest. The reasons are, Jaguar had only two cars, and nothing in development but an ill-conceived sports car called F-type, and it has been unprofitable over the years. This has been proven when the outcome showed that Jaguar were horribly unprofitable for Ford Motor Company and finally Ford sold Jaguar to Tata Motors, because after an internal review they decided that keeping Jaguar was not a profitable venture. c)
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This note was uploaded on 04/28/2010 for the course GSM 5660 taught by Professor Ahmad during the Spring '10 term at Zhejiang University.

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ECONS ASS 1 - 2. How would each of the following actions to...

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