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Weekly Assignment – Write a two-page paper that explains how corporations

make investing decisions. In other words, corporations can reinvest in their own business, they could invest in other businesses, perhaps their suppliers or they can pay out dividends to their shareholders.  Use the Keiser cover page (in the Start Here menu) and a reference page and use at least three credible, scholarly references. Be sure to format the paper in APA 6th edition format. MBA 501 Course, you can uses your own sources but don't forget the references.

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Title: Database: GLOBAL REVOLUTION. By: Derby, Meredith, FN: Footwear News, 0162914X, 3/31/2008, Vol. 64, Issue 12 Business Source Complete GLOBAL REVOLUTION Section: news A PRIORITY FROM THE VERY BEGINNING, HUSH PUPPIES' OVERSEAS BUSINESS IS PUSHING INTO NEW EMERGING MARKETS, IN CHINA AND RUSSIA. Hush Puppies' international business is one of the brand's golden tickets. Accounting for a whopping 75 percent of Hush Puppies' revenues, the brand's overseas operations are hard to ignore. Total company revenues in 2007 rose 15 percent to $174.1 million (translating into 19 million pairs of shoes), according to Hush Puppies executives. And while it would not provide speci±c revenue forecasts for ±scal year 2008 and beyond, the company said it expects continued growth from its international business as it adds markets and sets its sights on emerging regions, such as China, India, Brazil and Russia. Hush Puppies' global business, which launched in 1959, has stretched to more than 135 countries represented by 40 international licensees, known as distributors or partners. Today, when many U.S.-based footwear companies are looking overseas for growth, Hush Puppies is sitting pretty with a mature international framework that sells its footwear, handbags, eyewear, apparel, plush toys, luggage, belts, shoe-care products and socks. But the company worked hard to get there. While "global" was hardly a footwear buzz word in the late 1950s, Hush Puppies' parent company, Wolverine World Wide, was already thinking outside the box. "There were progressive people at Wolverine who said, 'What we created is something special, and we can live beyond the U.S. market,'" said Mark Neal, president of Hush Puppies. "The people we started with internationally, they were entrepreneurs. They had a vision and a spirit about the product that they knew would work in their markets." That capitalism is evident today: Hush Puppies has a stable of 400 standalone concept shops around the world, in addition to 1,050 stores and shop-in-shops. K.E.S. LIBRARY Listen GLOBAL REVOLUTION: EBSCOhost http://web.b.ebscohost.com/ehost/detail/detail?vid=16&sid=eb862b. .. 1 of 3 12/3/16, 11:22 AM
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The brand's international structure, however, can be complicated. Whereas Hush Puppies owns the businesses in Europe and Canada, other international licensees invest in the brand, directly owning the businesses in their respective countries. Licensees are tasked with fnding retail Franchisees, securing placement in shop-in-shops and opening standalone retail stores - all with a guiding hand From Hush Puppies. And each quarter, the licensees give an undisclosed percentage oF revenue royalties to Wolverine World Wide. Each section oF the globe has an executive who oversees its regions. ±rancisco Perez, Hush Puppies VP oF international sales For Europe, covers 37 countries in Europe, the Middle East, AFrica and Russia via 14 licensees. ±or Perez, exciting territories For Hush Puppies expansion include northern AFrica, Jordan, Turkey, Morocco, Dubai and Egypt. But Russia, he said, has the most potential For Hush Puppies (as well as For Wolverine's other brands, Merrell and Caterpillar) because Footwear styling in that market has only just started to evolve. His goal is to have 800 shop-in-shops in Russia by 2012, as well as concept stores in Moscow and St. Petersburg. "One oF our challenges there is to create product that can be delivered and sold For the winter months," he said. "They need thicker soles, Fur and waterprooF leathers." Licensees regularly have a hand in the design oF Hush Puppies shoes. Brand partners can select styles From core Hush Puppies product developed by the frm's global design team, and also have the Freedom to create Footwear For their country's specifc tastes. Wolverine executives responsible For each country then approve the designs to make sure they match the Hush Puppies "core DNA." But that's changing, said ±rancisco Perez's brother, Guillermo Perez. He's in charge oF the business in Latin America, Mexico, Central America, Portugal and Spain and said that 30 years ago, licensees were even more involved in designing shoes to ft a regional market's needs. Now, due to stronger collections From the core Hush Puppies collection, it happens less Frequently. Still, he said, "Maybe pink polka dots are hot in Brazil, but nowhere else. But iF they ft our brand DNA and our licensees can make money and fll the need, they can do that." ±or his part, Guillermo Perez is most excited about the market in Brazil. "I'm looking For [licensees] who say they can put 10 stores in So Paulo," he said. "[Through retail] you're able to tell your own story in your own way with your own elements more consistently throughout the world. Today, our most successFul licensees around the world have a retail component." And today, Hush Puppies' non-shoe accessories can be Found in about 45 countries through 20 partners. According to Irene Lau, director oF apparel and accessories licensing, the brand is a natural to become a Full-²edged liFestyle brand. "We have truly a heritage that's built up, that's Fun. When [customers] see the Hush Puppies name on eyeglasses, they know the brand instantly. They connect with that being a quality product." Lau said China is one oF the brand's most exciting opportunities For non-shoe merchandise. Hush Puppies has been in the country with an apparel program since 2001, and its success is largely due to the brand's Footwear heritage. It's particularly gratiFying, Lau said, given how challenging it is to enter a market like China. "A lot oF people are rushing into [China], and it GLOBAL REVOLUTION: EBSCOhost http://web.b.ebscohost.com/ehost/detail/detail?vid=16&sid=eb862b. .. 2 of 3 12/3/16, 11:22 AM
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The Financial Review 42 (2007) 191--209 Hedging, Financing and Investment Decisions: A Simultaneous Equations Framework Chen-Miao Lin Clark Atlanta University Stephen D. Smith Georgia State University Abstract We empirically investigate the interactions among hedging, financing, and investment decisions. We argue that the way in which hedging affects a firm’s financing and investing decisions differs for firms with different growth opportunities. We find that high growth firms increase their investment, but not leverage, by hedging. However, we also find that firms with few investment opportunities use derivatives to increase their leverage. Keywords : hedging, risk management, capital expenditures, capital structure JEL Classifications : D84, G31, G32 Corresponding author: Department of Finance, School of Business Administration, Clark Atlanta University, 223 James P. Brawley Drive, SW, Atlanta, GA 30303-3083; Phone: + 1 404-880-8461; E-mail: [email protected] We thank an anonymous referee for helpful suggestions that have improved the paper. We are grateful to Cynthia Campbell (the editor), Gerald Gay, Omesh Kini, David Nachman, Richard Phillips, and participants at the Eastern Finance Association Meeting and Financial Management Association Meeting for helpful comments. C ° 2007, The Eastern Finance Association 191
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192 C.-M. Lin and S. D. Smith/The Financial Review 42 (2007) 191–209 1. Introduction According to the theory of Modigliani and Miller (1958, 1963), in a perfect capital market neither hedging nor financing decisions add value to shareholders since companies can always obtain external funds at the same cost as internal funds to finance their investment opportunities. Thus, in order for investors to care about these decisions by corporations, some market imperfections must exist. Most existing theories discuss imperfections that affect either investment and financing, investment and hedging, or financing and hedging. Underinvestment theo- ries proposed by Bessembinder (1991) and Froot, Scharfstein, and Stein (1993) argue that firms with greater growth opportunities should hedge more because of capital market imperfections. Tax shields associated with debt financing lead Stulz (1996), Ross (1996), and Leland (1998) to predict that hedging causes an increase in firm value by enabling firms to increase leverage. The debt capacity argument thus predicts a positive relationship between hedging and leverage. When looking at financing and investment, Myers (1977) demonstrates that firms with good investment opportuni- ties should carry less debt, because a high level of debt induces managers to forgo positive net present value (NPV) projects. However, the theoretical relationship between hedging, financing, and invest- ment decisions can be different from considering just two of three decisions in iso- lation. For example, Ross (1996) argues that hedging to increase leverage may not mitigate the underinvestment problem. If firms increase debt capacity after hedg- ing, the resulting higher leverage increases the agency cost of debt which, in turn, increases the incentive for underinvestment. Ross’s (1996) argument indicates that firms cannot hedge to increase investment and debt capacity simultaneously when hedging, leverage, and investment are jointly considered. Therefore, if firms cannot hedge to increase investment and debt capacity si- multaneously, which firms are more likely to hedge to increase investment and which firms are more likely to hedge to increase debt capacity? Ross’s (1996) argument implies that firms with high growth opportunities are more likely to hedge to mitigate the underinvestment problem and are less likely to increase debt capacity. For firms with few growth opportunities, Stulz (1996) suggests that a manager whose interests are aligned with those of shareholders is more likely to hedge to increase leverage in order to maximize shareholder wealth. Ross (1996) and Stulz (1996) thus indicate that firms with different growth opportunities have different purposes for hedging. We empirically investigate the interaction between hedging, financing, and in- vestment decisions for firms with different growth opportunities. We begin by es- timating models where each decision is considered in isolation, using fixed-effect models. We then estimate models for the hedging, financing, and investment deci- sions using simultaneous equations where we treat each decision as endogenous. We argue that a three-equation system is more consistent with the idea that the three decisions are made at the same time. Conducting cross-sectional regressions as well as tests for new users of derivatives, we find statistically significant interdependence between the hedging, financing, and investment choices. We also find evidence to
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MONEY W hy dividends help you to invest better BY SCHALK LO UW Portfolio manager at PSG Wealth I t takes a relatively small piece of dough to bake a fresh loaf of bread. For better results, leave the dough in the oven until it is fully proved and baked. If you become impatient, as I often do, and open the oven too soon, it will fall flat and might end up smaller than the original piece of dough. The patient baker takes the loaf out of the oven only after it has been properly baked. One of our greatest fears is that we may not have made sufficient provision for our needs after retirement. Much like baking bread, your protection lies in proper planning, the right “ingredients” and patience. Those who still have enough time and can afford a little more short- term volatility may consider shares that render high dividends. BUILD FUTURE INCOME Let’s say you have a portfolio of R2m from which you would need a monthly income of R6 300 (in today’s rand currency terms) after 10 years. By investing in the stock market at the current average dividend rate of 3.11%, you would earn around R5 200 per month. The actual dividend payments on the local stock market increased by nearly 4% more than inflation over the past 50 years. That means if you invest your R2m in the stock market and the dividend payments increase by 10% (expected inflation of 6%, plus 4%) per DIVIDEND PAYMENTS OVER THE PAST 50 YEARS SHOWED MUCH LESS FLUCTUATION t h a n th e SHARE PRICES THEMSELVES annum, you should have the required R6 300 per month after 10 years, and at a more tax-favourable rate (15% dividend tax vs. income tax rates). Looking at the JS E ’s A ll Share Index (Alsi), you will see that dividend payments over the past 50 years showed much less fluctuation than the share prices themselves, proving that you should focus on the long-term ability of the company to generate income, rather than short-term price fluctuation. VALUATION TOOL We have heard experts tell us the market is currently expensive. A number of reports and recommendations over the past year refer to the current average historical Price/Earnings (PE) ratio of 17.5 as an “extreme level” (see bottom left graph), and they may even be right over the short term. But compare the income from shares (dividend yield) relative to the money market: if you take a closer look at this ratio (see bottom right graph) you will see that the historical dividend rate paints a somewhat different picture. For the longer term investors seeking future income for their investments, the current “expensive” on a PE basis market shouldn’t cause the least bit of discouragement. YOUR OWN ANNUAL “INCREASE” Investors can buy directly into shares that have good dividend potential. Based on Bloomberg consensus, I have identified five shares that should enjoy good growth over the next few years, both in price and dividend yield: Billiton, FirstRand, Imperial, M TN and Sasol. These shares currently stand at an average historical dividend yield of 5.3%, very favourable not just when compared to other shares, but also the money market. Had you invested your R2m in equal parts in these five shares 10 years ago, your income would have been R47 800 in the first year. It would have grown to R383 100 at the end of the 10-year period (i.e. by 23.4% per annum). O f course, we cannot ignore that this included the market correction o f2008, where investors simply had to shut their eyes and “leave the bread in the oven”. If you want to experience the joy of freshly baked bread, leave the dough in the oven for the right period of time. It will prove itself. ■ [email protected] JSE ALSI &JSE ALSI PE SOURCE; PSG Old Oak, INET BFA FTSE/JSE ALLSHARE DIVIDEND YIELD RELATIVE TO SA CALL RATES 3 6 FINWEEK 3 SEPTEM BER 2015
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THE ACCOUNTING REVIEW American Accounting Association Vol. 89, No. 1 DOI: 10.2308/accr-50575 2014 pp. 331–365 Management Forecast Quality and Capital Investment Decisions Theodore H. Goodman Purdue University Monica Neamtiu The University of Arizona Nemit Shroff Massachusetts Institute of Technology Hal D. White University of Michigan ABSTRACT: Corporate investment decisions require managers to forecast expected future cash flows from potential investments. Although these forecasts are a critical component of successful investing, they are not directly observable by external stakeholders. In this study, we investigate whether the quality of managers’ externally reported earnings forecasts can be used to infer the quality of their corporate investment decisions. Relying on the intuition that managers draw on similar skills when generating external earnings forecasts and internal payoff forecasts for their investment decisions, we predict that managers with higher quality external earnings forecasts make better investment decisions. Consistent with our prediction, we find that forecasting quality is positively associated with the quality of both acquisition and capital expenditure decisions. Our evidence suggests that externally observed forecasting quality can be used to infer the quality of capital budgeting decisions within firms. Keywords: management earnings forecasts ; voluntary disclosure ; capital expenditure ; investment ; capital budgeting ; managerial ability ; forecasting ability . JEL Classifcations: D83 ; G31 ; M41 . Data Availability: Data are available from public sources identiFed in the paper. We appreciate helpful comments from John Harry Evans III (senior editor), Amy P. Hutton (editor), two anonymous referees, Beth Blankespoor, Lian Fen Lee, Roby Lehavy, Greg Miller, Karl Muller, Shyam Sunder, Bill Waller, Joe Weber, and workshop participants at Purdue University, Southern Methodist University, and The University of Arizona. Hal D. White gratefully acknowledges ±nancial support from Ernst & Young. Editor’s note: Accepted by Amy P. Hutton. Submitted: January 2012 Accepted: July 2013 Published Online: July 2013 331
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I. INTRODUCTION C apital budgeting is one of the most fundamental and important responsibilities of Frm management. A key determinant of successful investment is management’s ability to forecast project payoffs, because forecasting plays a central role in investment valuation methods (e.g., net present value [NPV] calculations, forward-looking price/earnings multiple, or other discounted cash ±ow analyses). Although these forecasts are a critical component of Frm health, most forecasts are internal and thus not directly observable by external stakeholders. However, we expect that management’s forecasting ability used to generate internal project payoff forecasts may transfer to other managerial tasks that involve forecasting, such as providing external management earnings forecasts. ²or this speciFc type of managerial forecast, the properties are readily observable. Thus, these voluntarily disclosed earnings forecasts may be valuable to external stakeholders not only because they provide management’s expectations of next period earnings, but also because they reveal information about managers’ knowledge of the Frm’s economic environment and their ability to forecast future business prospects, a major component in the investment decision process ( Trueman 1986 ). This paper investigates whether the quality of voluntarily disclosed management forecasts can be used to predict the quality of managerial investment decisions. Although prior research views earnings guidance and capital budgeting as distinct tasks, we argue that both tasks depend on a common trait—forecasting ability. 1 ²or example, when conducting a corporate acquisition, managers often begin by making earnings forecasts to assess the intrinsic value of the potential target ( Eccles, Lanes, and Wilson 1999 ; Cullinan, Le Roux, and Weddigen 2004 ). Similarly, managers must predict future project payoffs when selecting among potential capital expenditure projects ( Graham and Harvey 2001 ). These forecasts require managers to understand the economic environment as well as their competitive position within the environment. This same understanding is needed when providing earnings guidance as well, because earnings are essentially the aggregate payoff from past investments. Thus, the quality of managers’ earnings forecasts is potentially an observable signal of their broader forecasting ability. Although forecasting future project payoffs is an important part of investment decision-making, a priori , it is unclear whether we can empirically Fnd a relation between external management forecasts and managerial investment decisions. ²irst, the quality of a manager’s external forecasts may not be a good measure of internal forecasting ability, since providing guidance could encourage managers to engage in earnings management, possibly through suboptimal investment decisions, so that their forecasts appear more accurate ( Kasznik 1999 ; Roychowdhury 2006 ). Second, the quality of external forecasts may measure only short-term earnings forecasting ability. Thus, it may not be associated with the long-term forecasting skills required for successful capital budgeting. To test our hypothesis, we examine the relation between management forecasting quality and the quality of subsequent investments using both investments in other companies (corporate acquisitions) and investments in Fxed assets (capital expenditures). 2 We begin by examining the 1 In this study, forecasting ability is comprised of management’s ability to: (1) collect high-quality information regarding both internal operations (e.g., cost reports, margins, and personnel) and the external environment (e.g., competition, industry trends, product demand); and (2) process and synthesize this information, which is a function of experience and innate talent, to develop accurate forecasts. We provide more detail in Section II. 2 We examine both types of investments because they offer unique advantages that complement each other. We examine acquisitions because they are large, high-proFle corporate events, with publicly available information, such as the exact investment date and speciFc investment characteristics that we can use in our analyses to provide more robust evidence. In contrast, much less information is publicly available about capital expenditure projects. However, as compared to acquisitions, capital expenditures are less complex investment transactions that do not involve external parties such as investment bankers. As such, forecasting ability and investment valuation may be more directly attributable to managers in a capital expenditure setting. We discuss the role of forecasting ability in both types of investment in Section II. 332 Goodman, Neamtiu, Shroff, and White The Accounting Review January 2014
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