How Much Do Financial Managers Make
How Much Do Financial Managers Make – Executive compensation packages Reward managers based on the long-term intrinsic value of the company’s stock Direct shareholder intervention Threat of layoffs Threat of takeover
Q 1: In the US, companies are subject to double taxation. In Singapore, dividends to shareholders in companies are not taxed. In this case, would there still be a tax disadvantage to setting up a company instead of a sole proprietorship in Singapore?
How Much Do Financial Managers Make
Income of US corporations: Double taxation: Corporate tax: EBT – tax (corporate) = net income Dividends paid out of net income are taxed on the personal income of the shareholder.
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Singapore: Corporate tax rate is 17%, Personal income tax: 0% – 20% There are no tax disadvantages in setting up a company if the effective tax rate of the firm (if on an individual basis) > 17% i. it is better to incorporate if the company makes very high profits.
The president of Southern Semiconductor Corporation (SSC) made this statement in the company’s annual report: “SSC’s primary objective is to increase the value of our common equity.” The newspaper also published the following news about SSC. Discuss how SSC shareholders might view each of these actions and how they might affect the share price. a) The company gave $1 million to the Birmingham, Alabama, headquarters of the symphony orchestra.
Corporate philanthropy: a more attractive community; easier to attract productive workforce However, immediate negative impact on net income; cost borne by shareholders Those who do not live in headquarters react negatively Share price may ↓
b) In an attempt to cut costs, the SSC plant discharged untreated industrial waste into a nearby river.
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Answer: There is no fixed answer (the emphasis is on financial measures for managing and implementing socially responsible business (CSR)) Does the company violate the law; even if it is, it cannot be prosecuted unless it is vigorously enforced. Consumer boycott costs (more relevant to consumer product companies) The cost saving effect (in itself) should cause the stock price to rise, however, the stock price may ultimately rise or fall depending on whether the costs of lawsuits/ future mitigation are high enough to compensate for cost reductions.
Discussion questions: many possible good angles Do companies have a responsibility to society as a whole: Corporate Social Responsibility (CSR) Financial objective for management: maximize shareholder wealth: but not at any cost.
c. The goal of financial management is to maximize the long-term value of shareholder claims. True or false? Correct
d. One reason a business may choose to operate as a corporation rather than a proprietorship or partnership is that it is generally easier for corporations to raise large amounts of capital. True Investors are usually unwilling to subject themselves to the unlimited liability of a proprietorship or partnership. They also like the ability to sell their shares easily. Companies make such advances and thus can raise larger amounts of capital.
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Q 5a: If a company’s board of directors wants management to maximize shareholder wealth, should CEO compensation be set as a fixed dollar amount, or should compensation depend on how well the company does? If it is to be performance-based, how should performance be measured? Answer Agency problem: the manager works in his own interest, not in the interest of the shareholders, who are the owners of the firm. There is no incentive for the manager to improve the company’s performance if he receives fixed compensation in $. Therefore, link the manager’s wealth to the company’s performance by compensating him based on the change in intrinsic value of the stock, which is related to the company’s long-term performance. Intrinsic value cannot be observed, therefore long-term stock returns are the next best option. 11
PV = 10/1 1 + 10/1 2 + 15/1 4 + 15/1 5 + 15/1 6 + 20/1 7 + 30/1 8 + 30/1 9 CF worksheet (2nd row , 2nd button from the left). 2ndCLR WORK (bottom row, left button “CE|C”) C0=0, C1=10, F1=2, C2=0, F2=1, C3=15, F3=3, C4=20, F4= 1 , C5=30, F5=
To compare investments with different compounding intervals *1: If CFs are semi-annual and interest is given as 8% p.a., semi-annually, then discount/compound interest is IPer= 8%/2 = 4% *2 : If CFs are semi-annually, and the interest is given as 12% per annum, quarterly. Calculate the discount/combined rate, Iper, as follows: (1 + IPer, 6m) = (1 + 12%/4) 2 IPer, 6m = 6% or equivalently (1 + IPer, 6m) 2 = (1 + 12 % /4) 4 IP, 6m = 6%
YEAR BEG BAL PMT INT PRIN END BAL 1 $1,000 $402 $100 $302 $2,698 402 70 332 366 3,366 402 36,366 0
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1 1+0 3 PMT = 402 Outstanding or Remaining Amount = PV of all outstanding PMT = PV of two remaining $402 = 402/1 + 402/1 2 = 698
Tuition discounted at time t = 5 Step 1: Determine the PV of 4 years of annual college costs. Find the tuition fees for each year, (5, 6, 7, 8) FVN= PV(1 + I )N PV in year 0 = $15,000 I = Inflation rate= 0.
FV 5 = 15000(1+0) 5 = 19144 FV 6 = 15000(1+0) 6 = 20101. FV 7 = 15000(1+0) 7 = 21106 FV 8 = 15000(1+0) 8 = 2.
Discount them at t =5 using investment interest (6%) and add them up. PV 5 = 19144 + 20101/(1. 06) + 21106/(1) 2 + 22161/(1) 3 PV 5 = 75, 500 (at time t = 5)
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Step 2: FV 5 of initial $7,500 = 7,500(1) 5 =10,036 Step 3: Amount missing at time 5: 75,500 – 10,037 = 65 Step 4: FV of annuity of 5 PMT required given …… PMT = $10. Answer: Father must make 5 annual payments of $10,955.
Answer: The father must make 6 annual payments of $9. Alternative: to see the 6 payments as ordinary annuity payments, take time = – which starts “Time”, then the 6 payments are the ordinary annuity cash flows and the FVAN will be at the time of the last payment, which is t = 6 5 Weighted Average Cost of Capital (WACC ) represents a firm’s average cost of capital after taxes from all sources, including common stock, preferred stock, bonds, and other forms of debt. WACC is the average interest rate a company expects to pay to finance its assets.
WACC is a common way of determining the required rate of return (RRR) because it expresses, in a single number, the rate of return that both bondholders and shareholders require to invest capital in a company. A firm’s WACC is likely to be higher if the stock is relatively volatile or if the debt is considered risky because investors will demand higher returns.
WACC and its formula are useful to analysts, investors, and corporate management—all use it for different purposes. In corporate finance, it is important to determine a company’s cost of capital for several reasons. For example, WACC is the discount rate a company uses to estimate its net present value.
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WACC is also important when analyzing the potential benefits of taking over projects or buying another business. For example, if a company believes that a merger will generate a higher return than the cost of capital, it is probably a good choice for the company. If management expects a lower return than what their investors expect, capital will be put to better use.
As most companies operate with borrowed funds, the cost of capital becomes an important parameter in assessing the company’s potential for net profitability. WACC measures a company’s cost of borrowing money. The WACC formula uses both a company’s debt and equity in its calculation.
In most cases, a lower WACC indicates a healthy business that can attract investors at a lower price. Conversely, a higher WACC usually coincides with businesses that are considered riskier and should compensate investors with higher returns.
If a company raises funds from only one source – for example common stock – it will be relatively easy to calculate the cost of capital. If investors expected a 10% return for buying stock, the company’s cost of equity would be the same as the cost of equity: 10%.
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The same would be the case if the company used only debt financing. For example, if a company paid an average yield of 5% on its outstanding bonds, its cost of debt would be 5%. This is also the cost of capital.
Many companies generate capital from a combination of debt and equity (such as equity financing). In order to express the cost of capital in a single number, it is necessary to weight the cost of debt and equity proportionally, based on how much financing was obtained through each source.
WACC = ( E V × R e ) + ( D V × R d × ( 1 − T c ) ) where: E = Market value of firm’s equity D = Market value of firm’s debt V = E + D R e = Costofequity R d = Cost of debt T c = Corporate tax rate begin &text = left ( frac times Re right ) + left (
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