Stetson Company Case Study
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Introduction
Stetson Company has so far had a lot of financial challenges in some of its wings of operation such as the Fly Airways, Technology, and the Banking sectors. The occurrences of the issues such as the currency exchange rates, bidding process, risk management and the hedging options (Clark and Buffett, 2014). In this case, they prompted the finance department through the Directorate the department to come up with a report that comprehensively evaluates on these sectors as presented below.
Stetson Air
Free Cash Flow Methodology in Stetson Group Fly-Up Airways (FA)
Free Cash Flow, FCF is the available cash to the stakeholders when all the expenses, interests, taxes, capital expenditures and the present portion of the long-term debt have gone through the deduction from the revenues. FCF will be of value to the organization since it enhances the provision of an accurate financial picture of the company than the net income. Net income, in this case, is the accounting adjustments that at some may not have an impact on the Stetson’s health. For instance, Fly-up Airways may have a negative Free Cash Flow. The company may find it hard to continue doing business operations without borrowing from other financial institutions to sustain it. In addition, when the company experiences a downward trend in the cash flows, then it signifies that there will be stagnation in its growth (Wilson and Adler, 2013).
On the hand, the other value of the free cash flow to the Stetson Company is in the evaluation of the company’s financial ability in realizing its stated goals and then objectives to the stakeholders. In this case, the company that has positive cash flow, as in the case of Fly-up Airways of the Stetson Company, will attain the full financial strength in meeting its financial obligations.
The Revenues of FA = $325m
EBIT = 85m
The total working capital= $20m
Corporation tax is 30%
Debt to equity ratio = 70%/30%
In this scenario
Free Cash flow will be given by:
FCF=Sales Revenue – Operating Costs and Taxes – Required Investments in Operating Capital
=325 – 20
$305
Since FA has good free working capital, Stetson should continue with their plans of acquiring the company.
Evaluation on the Possible Defence Tactics That Might Be Adopted By Fly-Up Airways
Fly-Up Airways in the case of its failure in bidding process may adopt the below options to sustain the situation; Fly-Up Airways may go for the option of selling itself to the bigger companies through trade sales. As a result, the company, in this case, will act as a subsidiary buyer. Failure in the bidding process may also prompt the management of the Stetson Company to sell its assets, rather than the shares, to save the situation. As a result, a potential buyer may have the choice to choose from the most useful assets so as to save the company from further troubles (Wilson and Adler, 2013).
In the case, the Fly-Up Airways fails to find an appropriate buyer then it will go for the auction method of selling itself. In such situation, the company will strive itself so as to get the potential buyer with the highest bidding amount. All these processes, however, will have to take place through the stock exchange, as it is only the best way or place that a company can perform or initiate its acquisition well. In addition, many potential buyers are also available in the stock exchange market that, in this case, should provide for the options for the Fly-Up Airways in auctioning itself within the shortest time available.
In some cases, the Fly-Up Airways bidding process may receive the rejection. The company will, in this case, withdraw their offer further to reduce the chances of the bid becoming more and more hostile to the public. Cases of hostile bids have the tendency of generating conflicts of interests between the directors and the shareholders. For instance, in such bidding process, the directors may lose their jobs while the shareholders end up selling more shares than the previously announced figure for sale from the company.
The other option that the Fly-up Airways has in the case of the hostile reception of their bidding process is to avoid the use of the poison pills. Poison pills entail the schemes and the strategies involved in the issuance of more stock to the present holders, resulting in the dilution of the bidders share in the company. Such circumstances that may lead to the frustration of the bidding process should be avoided at all costs by the Fly-up Airways to evade the hostility in the bidding process (Wilson and Adler, 2013). Another option that the Fly-up Airways may adopt in the case of hostile bidding process is to look for friendlier potential purchasing companies. In addition, Fly-up Airways may also look for the white knight that together with the friendlier company may provide the option for quotation of higher prices of shares than the hostile bidder in the stock market (Wilson and Adler, 2013).
Advantages of Cash Offer or Mixed Mode Financial
Cash offers have the advantages of providing the option minimal and closing costs that can take place within the period of implementing the contract. However, the contract should be acceptable to both involved parties in such situations. On the other hand, the seller enjoys the benefit of not waiting for the approval of the mortgage In this case, the agent will have no fear of the issue of the properly not earning its appraisal. The instance is that it is the banks that mostly do need the appraisals while not either the seller or the buyer. In addition, the agents from the Fly-up Airways will enjoy the benefit of the few contingencies that, in this case, enhance their closeness to earning their commissions (Beattie, Fearnley, and Hines, 2011).
Disadvantages of Cash Offer or Mixed Mode Financial Offer
Buyers need to be more cautious in their contracts the engage in so as to enable their protection from having the contingencies in the contract. In this situation work with their agents who will guide them on the suggestions relating to the appraisal issues and also how to carry out such appraisal issues effectively. For instance, the elements that the agent may address, in this case, are the; Termite Inspection, Well and Septic, Building Permits, School Districts, Wetlands and Lot size. The agent, in this case, has, to ensure further, that the buyer makes all the verifications on the contents of the contract. As a result, it enables him or her get familiarized with the requirements and the legalities of the contract at large (Beattie, Fearnley, and Hines, 2011). The seller, on the other hand, may find it also hard to do his or her verifications on the funds involved in the transaction process that entails the third parties. The agent may sometimes have too much pride in handling the transaction process. For instance, he or she (agent) may end up ignoring some contents of the contract, especially when handling his or her client during the transaction process (Lee, 2006).
Stetson Technology
The Significance of Exchange Controls for the Investment Decision
The decisions on the exchange control investments come with some laws or regulations that the government uses to regulate the foreign exchange of the country’s currency. For instance, the government may initiate the exchange controls on a single currency such as allowing for the convertibility of the currency into the country’s currency.
In addition, the control of the exchange rates helps the citizens of the country in making the right choices on the investment decisions or choices. For instance, the individual may be able to evaluate the inflation trends of different countries. As a result, he or she will choose the best nation with favorable inflation trends so as to avoid failure in his or her business (Lee, 2006).
Strategies of Dealing with Restricted Remittance
Remittances are the monies that migrants from home send to their mother countries. The funds are also of importance towards the growth and the development of these nations. Countries, however, have to come up with the strategies for ensuring that this money gets back home despite their citizens staying abroad (Beattie, Fearnley, and Hines, 2011). For instance, the two governments in place of the countries where these citizens stay should cooperate with each for the realization of its success. The governments may work together towards their tax and their foreign affairs departments in revealing the information details concerning the citizen’s earnings. Consequentially, the tax departments may use such information calculation the expected or the amount that these migrants should send back home. In this instance, it will also be possible to track the individuals who never subject themselves at all for taxation purposes.
Viability of Investment in Cambodia
Cash Flow Statements will assist the investment in Cambodia in expressing how the Stetson Company raised the cash or money and the expenses of the money during a given period. As a result, Cash Flow Statements, in this case, will measure the Stetson Company’s to manage its incoming expenses in the coming days or periods (Palepu, 2007). In most of the occasions, Stetson Company will be in a good shape when it will be able continuously to generate more cash than its expenditure. As a result, the Cash Flow Statements just as was identified before, will serve as a tool for evaluating the company’s financial health status. In addition, it will also determine the abilities of the company to meet the incoming bill and liabilities during its normal operations or transactions (Palepu, 2007). A business that has more cash runs their operations better. However, cases of low negative cash flow for a year may come from the poor financial strategies that the company may have towards its growth and development. As a result, the real issue here of positive development does not get its required attention. With regards the financial analysis, there is a need for the Stetson Company continues to evaluate on its cash flow tends to avoid meeting such bad omens in the financial sector of the company (Alexander, Britton and Jorissen, 2007).
Potential Risk Exposures to a Company In Future
Potential Future Exposure is the expected maximum credit exposure for a given period with the consideration of the calculation of the level of confidence. As a result, PFE determines the counter party risks or the credit risks. The calculation of the Potential Future Exposure (PFE) entails the evaluation of the trades carried out with the possible market prices in the future, especially at the times of lifetime transactions (Beattie, Fearnley, and Hines, 2011). As a result, PFE may also assume the name sensitivity analysis of the risk with respect to the market prices. However, the expected maximum exposure is not the same as the maximum credit h exposure possible. As such, the maximum credit exposure defines the upper bound on the confidence interval for the possible future exposures (Alexander, Britton and Jorissen, 2007).
In most of the occasions, the credit managers remain focused on the present exposure evaluations such as the current market exposures and the outstanding receivables that, in this case, form part of the collateral management. However, the incoming problem here is that it emphasizes on the current but does not create the opportunity for the indication of the credit risks in the coming future (Clark and Buffett, 2014). Due to the losses that accrue from the credit risk, the instance, in this case, takes a bit long time to prosper into a more viable method of evaluating the potential exposure. In addition, the potential exposure is not the same as the present exposure since its existence is in the future. As a result, it gives a wide choice of the outcomes instead of the single point estimation case (Palepu, 2007).
Management of Risks
As much as the term goes with risk management, the objective of the Stetson Company is to eliminate the risk entirely from the company rather than just its management. However, risks are uncertainties that an individual or a company cannot do away with completely. Risks continue to occur and in most of the occasions they may prove hard to predict their time of occurrence (Kwok, 2005). However, Stetson Company may use the below strategies to manage the potential risks that may occur in the company; ensure that good risks and opportunities are identified, assessed, managed and reported. A
Aligning risk appetite and strategy enhance the embedding of risk management in decision-making, allocating resources to effectively and efficiently manage risks and ensuring efficient management of risks with the use of the best practices.
Stetson Bank
Stetson on Banking
Stetson’s Increased Exposure to Credit Risk As A Result Of the Borrowing Requirement
Stetson Company stands at high risks of exposure to the below categories of risk exposures; corporate, sovereign, Bank, Retail and Equity exposures.
Corporate Exposures
Corporate exposure defines the type of exposure that the Stetson Company will find itself in, in relation to the partnerships or the proprietorships that it will be doing business operations within the market structure. For instance, there is a need for a special guidance on the small or medium entity for the purpose of the avoidance of occurrence of this type of exposure (Clark and Buffett, 2014). As a result, corporate exposure exists in other further sub-classifications as given below that facilitate in the lending of the assets during the normal business operational activities (Smith, 2010). Object Finance that involves the funding of the physical assets in relevance to the expected cash flows from the rentals or leases on some of the identified assets in the company. Commodity Finance is the funding of the reserves, receivables or the inventories of the exchange traded commodities instead of the borrowings from the independent sources of finances (Beattie, Fearnley, and Hines, 2011). The income producing real estate that entails the financing of the real estate that is either rented or leased out by the debtor for the purposes of generating cash flow used to repay the exposure. High volatility commercial real estate that involves the funding of the commercial real estate so that to how a higher level of volatility of loss rates in comparison to some other forms carrying out lending (Elliott and Elliott, 2008)
Sovereign Exposures and Bank Exposures
Sovereign exposures define the loan given to a given country. Elements of this forms of the exposure are the central banks from different countries, public sector enterprises, multilateral developments that meet the threshold for the 0% mark for the risk weight through the standard guidelines approach (Hussey, 2011). Bank Exposures are the loans to banks or security firms through the regulatory capital requirement. Some domestic PSEs or MDBs fail to meet the threshold for the 0% mark of the risk weight through the standardized approach is also in the class of Bank Exposure of risks (Kirk, 2009).
Retail Exposures
Retail exposures include the loans that the Stetson Company makes to the individuals. For instance, the credit cards, overdrafts or the residential mortgages from some of the products for lending in the retail exposure categories. With the consideration of the maximum one million Euros, the exposures to small businesses that are under the management of the retail exposures are also in this category as well (Gibson, 2013). The management of the risk exposures due to retail business may not as such take place due to the influence of banks or on the individual basis for the purposes of evaluation of the potential risks to the business. However, it takes care of the exposures due to groupings that share the same characteristics (Fridson and Alvarez, 2011). As a result, retail exposures may further fall in; Residential mortgage, qualifying revolving exposure, other retail and equity Exposures.
Equity exposures are the direct interests in the assets and the incomes of a financial institution such as the case of the Stetson Company. In addition, it also entails the indirect interests such as the derivatives. An exposure will fall under the category of the Equity Exposure types (Lee, 2006). The return funds invested in the equities may only be attained by the sale or the liquidation of the person or who is responsible for the issuance of the equity
The Hedging Options Available To Stetson
In relation to the financial issues and management, hedgehog is the investment that the company undertakes with the primary objective of reducing or eliminating the risks in another possible investment for the company (Kirk, 2009). Stetson Company may use the below available options of hedging in its operations;
Perfect Hedge
The position that the Stetson Company will take to eliminate the risks of anther available option is the perfect hedge. However, the position will require full 100% negative correlation to the investment for hedging purpose that also in some instances is not easily available. Consequentially, there are either the imperfect or the near perfect hedges that, in this case, do occur at their best to the company (Palepu, 2007).
Equity Hedging
In this case, Stetson may go for its individual hedging of the long stock positions through the option of buying the protective options as long as there is the availability of options for trading the stock available. On the same note, hedging of the entire portfolios against the systematic market risks through the use of the index options may also take place (Ittelson, 2009).
Future Hedging
In this option, the trader has the choice of hedging the positions against the synthetic futures position. Stetson, in this case, may hedge the long futures position with the synthetic short future positions. On the same note, hedging of the short future positions may also take place against the synthetic long futures positions (Palepu, 2007).
Hedging Commodity Price Risk
In the case where the Company may be involved in the production of consumable raw materials, the company may remove the commodity price risk through hedging in the commodity’s future market. However, cases of the short hedges do lock the selling price of a commodity in plan for sale in the future (Ittelson, 2009).
Solution from the Data Given
Sometimes, parties may subject themselves to an agreement of making periodic payments mostly at the maturity of the swap
In the case of the above problem;
Swapped value=$2, 000, 0000
Libor+3 basis points=Libor+0.03%
FTSE=(100-92.75)=7.25%
In this case payment=a floating interest rate=libor+0.03% on 2,000,000
With a libor value of 6%p.a and a swap tenor of 180 days, the floating leg payer/equity receiver would owe:
(6%+0.03)*$2,000,000*180/360=6,030,000
As a result, this is the equity payer/floating leg receiver
At the same date, that is after 180 days, following the appreciation of FTSE by 7.25% from its level at trade commencement, Stetson would owe Harry 7.25%*$2,000,000=$145, 000. However, the FTSE at six month mark fell at 7.25% from the level of trade commencement. In this case, Stetson would owe hurry an additional 7.25%*$2,000,000=$145,000 because there is a negativity in the flow.
Assessment and Evaluation of the Specific Points Raised By Simon In Relation To Developments in the World Financial Markets.
The primary centre of focus of Simon in relation to the development of finance in the world financial markets is the issue of financial capitalism. For instance, financialization usually enhances the talks that primarily dwells on the financial capitalism that occurred at some time ago. During such times, the financial leverage tended to outdo the capital or the equity while the financial markets strived to outwit the dominance of the industrial economy the economics related to agriculture (Previts, Walton and Wolnizer, 2012).
According Simon, financialization is the economic systems that seek to aid in the reduction of all the values exchanged. The values may either be tangible, intangible, future or present promises of a financial instrument. Simon further postulates that the origin of the intent of financialization is to foster the reduction of any activity related to work product or service into an exchangeable financial tool such as the currency. As result, it would make it affordable for individuals in trading with the financial instruments in place (Smith, 2010).
Simon further added that workers through the financial tools such as mortgage may find it possible trade theses premises for future work, wages or homes. As a result, financialization takes care of all the insurance demands from such occasions (Wilson and Adler, 2013).
In the case of the above problem;
Swapped value=$2, 000, 0000
Libor+3 basis points=Libor+0.03%
FTSE=(100-92.75)=7.25%
In this case payment=a floating interest rate=libor+0.03% on 2,000,000
With a libor value of 6%p.a and a swap tenor of 180 days, the floating leg payer/equity receiver would owe:
(6%+0.03)*$2,000,000*180/360=6,030,000
As a result, this is the equity payer/floating leg receiver
At the same date, that is after 180 days, following the appreciation of FTSE by 7.25% from its level at trade commencement, Stetson would owe Harry 7.25%*$2,000,000=$145, 000. However, the FTSE at six month mark fell at 7.25% from the level of trade commencement. In this case, Stetson would owe hurry an additional 7.25%*$2,000,000=$145,000 because there is a negativity in the flow.
Conclusion
The report covers the Stetson Company financial issues. As a result, it gives the true picture of what the company needs to implement in collaborating with the department of finance. Consequentially, the effect of the findings if implemented will become a success to the operation of the company. For instance, the evaluation of the issues touching the currency exchange gives the preview to the company on what place or country to make a choice on for investments purposes. In addition, the issue of risks exposures presents a clear picture of what the threats the company is at during its operation and how to detect them in their occurrences. In so doing, the report further presents the way the manager or the company may manage such risks in the event of their occurrences. Last but not least, the paper also gives the way the Stetson Company react on the issue of hostile bidding process or scenarios. The paper reports majorly on the financial condition of the Stetson Company. As a result, the report, in this case, will serve as a valuable material to both the finance department and the company at large in the assessment of financial issues they face.
Bibliographies
Alexander, D., Britton, A. and Jorissen, A. 2007. International Financial Reporting and Analysis. London: Thomson Learning.
Beattie, V., Fearnley, S. and Hines, T. 2011. Reaching Key Financial Reporting decisions. Chichester, U.K.: John Wiley & Sons.
Clark, D. and Buffett, M. 2014. Warren Buffett and The Interpretation Of Financial Statements. New York: Scribner.
Elliott, B. and Elliott, J. 2008. Financial Accounting and Reporting. Harlow: Financial Times Prentice Hall.
Fridson, M. and Alvarez, F. 2011. Financial Statement Analysis. Hoboken, N.J.: John Wiley & Sons.
Gibson, C. 2013. Financial Reporting & Analysis. Mason, Ohio: South-Western.
Hussey, R. 2011. Fundamentals of International Financial Accounting And Reporting. Singapore: World Scientific.
Ittelson, T. 2009. Financial Statements. Franklin Lakes, NJ: Career Press. https://cmc.marmot.org/Record/.b19738274
Kirk, R. 2009. IFRS. Amsterdam: CIMA.
Kwok, B. 2005. Accounting Irregularities in Financial Statements. Aldershot, Hants, England: Gower.
Lee, T. 2006. Financial Reporting and Corporate Governance. Chichester, England: John Wiley & Sons.
Palepu, K. 2007. Business Analysis and Valuation. London: Thomson Learning.
Previts, G., Walton, P. and Wolnizer, P. 2012. A Global History of Accounting, Financial Reporting and Public Policy. Bingley: Emerald.
Smith, B. 2010. Introductory Financial Accounting and Reporting. Berkshire, England: McGraw-Hill.
Wilson, R. and Adler, R. 2013. Teaching IFRS Wilson Adler. Hoboken: Taylor and Francis.
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