DEBT OR EQUITY????

There are 2 ways for businesses to raise fund, which are debt financing and equity financing. Both two of them brings different benefits to organizations as well as different level of risks such as interest rate..

Debt financing is making a loan from Banks or issuing bonds both long term and short term and need to repay the loan and also the interest. Meanwhile, Equity financing includes retained earning and share. Retained earning means that instead of paying out as evidence for the shareholders, the company uses their earning as capital to reinvest. Besides, issuing share is capital comes from selling common stock or preferred stock to investors.

Using debt-financing sources to raise fund, companies may know in advance the sum of loan and also plus interest which must be paid (they were set at the beginning). Therefore, they may have a right strategy to be able to pay back the loan also make profit. The other advantage of debt financing is managers have the right to make decision. There is no dilution. When the lenders raise a fund for the business, they also give him the freedom to make decision during the period of running the business. The lender has no right in the future or direction of the business as long as the loan payments are made.

Tax deduction is the attractive and important advantages of debt financing because the principal and interest payment is considered as the business’s expense, we can consider paying loan and interest s a part of cost. As formulation:

Revenue – cost = profit.

The revenue does not change, costs increase so it makes the profit decreases. It means that the tax which the company must pay to the government decrease, too. Therefore, the sum of money can be deducted from the business income taxes.

However, in some case, with the limited capital from Bank, companies are unable to manage their activities. Another situation is the company is unable to pay back, or even become bankruptcy. It also suffer shareholders’ right because organization’s assets must be used to pay tax for government and loan for all debtors before paying to shareholders.

It is really a burden for the business when the business need to payback a part of the principal and interest monthly. Moreover, the business may be penalty when it pays back late or miss payment. Another weak point is the interest rate was fixed at the beginning. Therefore, organizations still have to pay the high rate interest  if the economic is in recession.

Another source of fund is equity. By using this source, companies do not need to care much about the burden of debt. In addition, if the company issue ordinary share, it does not need to pay the dividend on time to the investors if it still need capital (retained earning). Besides, equity financing is a good source for business. Not only not to worry much about the dateline to payback money, it also does not need to think about the obligations and penalties of the banks or other organizations when it cannot pay back money on time. More and more investors provide capital for the company, it synonym to the risk of the company will be shared to them, the members of the company do not need to take all the responsibilities.

However, raising money by equity financing also has some drawbacks, such as the dilution of the ownership interest and loosing of control. It means that the owner has to give a part of rights and profits to the investors because the investors have the right to vote and make decisions. However, if preference shares are issued, the investors do not have this right.

Another risk of equity financing is the change in investment of the investors. They may chance their decision to invest to another company. One of the factors that makes the investor change their decision is the failure to pay ordinary dividend from the company. The last weak point of equity financing is the complicated regulation to issue shares in the market share. It is not only to complex to issue the share, the company also need to use a large sum of money for flotation cost and pay back the dividend for the shareholders.            

Besides the two costs above, the company also has to pay tax for government, which was fixed, and not change. The company, which issues shares, has no benefits. If the before- tax profit is large, after subtracting the tax cost, the after- tax profit that is used to pay the dividend for the shareholders is large, too. In contrast, if the before- tax profit is small, it leads to the fact that the after- tax profit that is used to pay the dividend for the shareholders is small, too. So a corporate tax adjustment does not concern with the cost of shares.

SOCIAL RESPONSIBLE INVESTMENT: IS IT PROFITABLE?

Social responsible investment becomes a new trend in modern economy.

Responsible investing mentions about the companies, who consider factors of environment, society, governments and ethics while producing their products or services. The social responsible investment now is moving to the centre of institutional and private investors’ activities.

Number of organizations applied SRI increased remarkable especially in Europe. The responsible investment assets in EU increased average 42% between 2005 and 2007, meanwhile the growth in US was at the rate of 9%. Significantly, Canada seems to be the nation applied the SIR most widely with nearly 20% of assets under management in Canada.

So, social responsible investment: does it really bring profit to business???

First of all, it is necessary to mention about the demand of investors as they show more concern with environmental, social and governance issues, and they encourage a combination between business’s return and social responsibility. Investors seem to use their money to earn more profit while still contribute for a more sustainable world. And, SRI enables investors to choose investment, which are consistent with both their financial goals and personal values.

So, in my point of view, applying the SRI brings not only the profit, but also other benefits to any organization. They are the high return, achievement of investors’ expectations as well as the reputation in the market. The higher level of satisfaction the organization brings to investors, the more fund that they will invest in the firm. On the other hand, building the organization with a responsible image, which associates its activities with society, also increases the firm’s value in customers’ eye. People will choose the business due to their trust reputation.

My idea seems to be supported by other Professors as they affirm a positive correlation between the social responsibility and financial performance. Authors owell, Hart and Young (2000) and Konar and Cohen (2001) suggest that firms that adapt strong global environmental standards have higher market values.

There is an example of News of the World (NoW), who damages its image with a social phone- hacking scandal. It is reported that more than 4,000 people were hacked by the NoW.

Action of the organization is totally illegal, against the law. Reputation of the firm consequently was suffered significantly as it must issue an apology for this “serious wrongdoing” in public channel. It also leads to the decline in sale of the organization, as it is not a trustworthy organization in customers’ eye anymore.

Through the situation of NoW, people can see the power of SRI in performance of any organizations. Following this new trend brings benefits to your business.

Credit crunch

Credit crunch started as a US mortgage problem and it rooted by the falling house price.

Between 1997 and 2006, American house price rose by 124%, while prices in Britain went up by 194% and in Spain is 180%. Average prices rose steadily during 5 years and peaked in mid 2006. Ignoring other risks, People had thought that housing price would increase forever. Banking was so rich and it made easier for people who did not have money to make a loan to buy houses in hand. That is the reason why Banker set up a low interest rate therefore all people, including the poor were afford to buy a house. “Lenders relaxed their standard and borrowers signed for loans that they couldn’t afford” (Zuckerman, 2007).

However, the fact is not as people expected. Sales of new homes are down 22% after 1 year. It makes the loans are more valuable rather than the property. Due to the credit crunch, market losses in 2008 more than $6 trillion, average house prices had fallen back to 170%, the Dow Johns is off by around 40% from its Oct. 8, 2007, home values continue to seek a floor (Roybal, 2008).

The overconfidence of Banking led to serious situation of credit cruch, with the huge losses of billions of Dollars in many giant organizations like Northern Rock, Bear Stearns or even the collapse of Lehman Brothers.

Lehman Brother had both residential and commercial mortgage risks, which lead to a negative performance of the firm in 2008. The firm reported a significant losses during the second quarter of 2008. Its shares fell by 45% on the 9^th September, 2008 and went bankruptcy on 15^th September.

To cope well with the crisis, the function of Central Banks is very essential to solve the mess. Two clear tasks for Central Banks are keep the financial system working smoothly by ensuring that the banking system has enough liquidity. If the system gets jammed, credit will become scarce and market interest rates will rise--and the economy may become jammed too. On the other hand, pumping in liquidity too eagerly may create moral hazard: if banks think that central banks will bail them out come what may, they will be more inclined to lend recklessly.

Central banks' second function is macroeconomic stabilization, setting interest rates to keep inflation in check without causing the economy to stop and start. Because a credit squeeze raises market interest rates, it will slow the economy down. On the other hand, if a central bank responds by cutting official interest rates too drastically, it may push up inflation, or cause expectations of future inflation to rise. The medium-term goal of price stability might be put at risk.

In seeking to resolve these dilemmas, central bankers have tried to keep their two tasks separate. That is a hard distinction to sustain. Although liquidity crises are short-term emergencies and macroeconomic stability is a medium-term goal, locked credit markets soon have wider economic effects (The Economist, 2007).

Merge and acquisition actually create value or not?

Merge and acquisition (M& A) is one part of the Foreign Direct Investment (FID), the topic I mentioned last week. Merging activity is the creation of a new organization out of two or more organizatons of more or less equal stature, pooling all resources. Meanwhile, acquisition is the activity of adding a small firm into the existing structure of a large organization.

Merge and acquisition becomes a trend with an increasing in number up to 74,000 acquisitions between 1996 and 2001. It is predicted to continuing increasing in future (Quittner, 2008). The deal bases on the market price, and can be risky, and usually aim to increase sales, cut costs.

The purpose above totally was achieved in case of J. P. Morgan and Chase Manhattan Bank. Although the merge was not equal as it planned, it can not be denied the effective result as the company ranked second in size of assests among all American banks.

However, it is not always successful in every case of merge and acquisition. Author Quittner (2008) states that around 50% of acquisition  companies will have failed. A fail example is the case of Cocal-Cola and Proctor and Gamble, in which after 5 months of acquisition, Coca-Cola’s stock had dropped and Proctor and Gamble’s share price risen. Or the Daimler-Chrysler partnership lost the two firms $60 billion of market value

Another obvious example is America Online (AOL) merged with Time Warner at the value of $164 billion (Quinton, 2000). It is overoptimistic when the two organizations set an aggressive goal of 30% growth rate. In positive situation, Time Warner shareholders will get 1.5 shares of AOL for each share they own; at the end of January, the spread between Time Warner's price of $80 and the value of 1.5 AOL shares was about 7%. But if the deal collapses, Time Warner stock could fall more than 17% to its pre-deal price, while the growth investors who have fled AOL would presumably return, pushing it over $70, or more than 20% higher (Galarza, 2000).

In fact, it is recorded that AOL Time Warner worth $54 billion after the merge. A professional analyst Ethan McAfee questioned why AOL made that decision as “their investors buy the stock only because of its growth”.

So, I myself wonder whether merge and acquisition create value or not? Merge and acquisition brings benefits or drawbacks to firms?

According to a report by Schweiger (2002), trillions of dollars in deals have been struck and tens of millions of people have been affected. In the view of financial measures (profit or stock price) or non- financial measures (firm reputation), M&As creates no gain or even a slight loss in both stock price and profit (Schweiger, 2002). M&As also has a negative impact in employees. Thousands or eve tens of thousands people are being unemployed due to the M&As. Studies demonstrate the affects of M&As on employees’ health, stress, loyalty to their organization, productivity, absenteeism.

It is said that organizations must have a careful considerations before making decisions of M&As. There are some factors that managers may concern like the type of resources to be combined, the synergies sought, the extent of redundant resources, the degree of market uncertainty and the level of competition faced.

The impacts of foreign direct investment (FID) on the economic growth in Vietnam

Foreign Direct Investment (FDI) is an economic term describes an investment from foreign business. FDI brings benefits to both two sides. In aspect of multinational companies, it is a chance for them to expanse its market share as well as gain more profit. Governments also take advantage for the development of the country.

Vietnam now attracts a large number of foreign investments. It is a good chance to review the effectiveness of FDI to Vietnam’s performance.

Due to the effectiveness of the Law on Foreign Investment in 1987, Vietnam successfully attracted FDI inflows. At the end of year 2004, there are 6.164 FDI projects invested in Vietnam with the total of capital is approximately USD 59.8 billion.

According to figure provided by Ministry of Planning and Investment (2012), in 2012, the capital pledged for disbursement is USD 1 billion, equals 91% to the same period in 2011. Areas attract most of investment is Seafood Processing and manufacturing industry, increasing 994.29 million dollars, made up 80.8% total investment in the first two months of the year.

By February, 2012, FDI in Vietnam comes from 23 nations around the world. Japan is leading with USD 1.07 billion- 87.5% proportion of the investment. Taiwan is at the second position with 30.9 million USD.

FDI attraction now becomes a new trend in Vietnam. But, is it good or bad? What benefits does FDI actually bring to Vietnam?

Generally, according to a research by Nguyen Mai (2003), he affirmed the good effect of FDI on economic growth at national level. FDI companies contributed 13.3% to GDP, 35% to the industrial output, 23% to export, 25% to total state budget revenue He suggested Vietnam should continue expanding the market and seeking more new partners.

Alfaro (2003) pointed out that FDI has positive effect on the productivity in manufacturing industries, whereas its effects on growth of agricultural and mining sectors are negative. As mentioned above, vast of investment is for Seafood Processing and manufacturing industry, therefore, organizations can take all benefits from their activities.

In my opinion, FDI also brings chance for the development of infrastructure as more 67 industrial zones had built in 2002 in order to provide appropriate infrastructure for investors. FDI also spans a range of other non- financial attributes such as the new technological innovation, jobs for employees, improvement in skills and designs…

However, FDI in Vietnam has one drawback, which is the weakness in Vietnam’s FDI policy regimes. The idea is supported by the author Freeman (2002) as he stated that importance of effective policy as it “reform and trade liberalization positively affect the business environment for the investors”. He also recommended Vietnam to strengthen the co- ordination and improvement.

In fact, it can not be denied the potentiality of Vietnam in FDI area. A recent report by Citygroup on the Wall Street Journal affirms the potentiality of Vietnam in 2012 although Vietnam’s market was suffered by the global crisis in 2008. City groups as well give a judgment a decreasing in Vietnam’s inflection below 9%, compared with 23% in the last year. The organization suggested investors to have a long- term view about the potentiality of Vietnam, with the development of society, as well as an improvement in Vietnam policies such as the reducing in procedures to foreign investors (Bao Linh, 2012). The Chief Operating Officer of the European External Action Service David O’Sullivan also confirms that there is no change in vestment from EU to Vietnam (Thanh Thu, 2012).

 Source:

http://vef.vn/2012-02-24-citigroup-da-den-luc-dau-tu-vao-viet-nam-

http://www.thesaigontimes.vn/Home/kinhdoanh/giaothuong/72417/Von-dau-tu-tu-EU-vao-Viet-Nam-du-bao-khong-bi-anh-huong.html

http://fia.mpi.gov.vn/News.aspx?ctl=newsdetail&p=&aID=1135

http://fia.mpi.gov.vn/News.aspx?ctl=newsdetail&p=&aID=1132

Currency exchange risks- What should we do to cope with?

International trade is the common trend toward the globalization of world economy. It brings many benefits to the firm.

European companies invested in Asia countries got many chances to gain more profit by reducing costs. First is the labor resource. Some low- developed countries like Nigeria, Laos, Cambodia has a huge source of labor, who are unemployed. They are willing to work for foreign companies to pay off their expenditures. On the other hand, land resource also is plentiful, provides good conditions to infrastructure aspect.

In contrast, developing countries like Vietnam, Thailand as well got benefits from this trend. By expanding market share to over the world, companies can approach more potential customers, get more opportunities to gain profit.

According to figures from the US Commerce Department, United State, the largest economy reported an increasing up to 2.5% in the third quarter of the year 2011, partly due to the international trade (BBC, 2012).

However, is international trade always good, always brings benefits to organizations?

Following theory, one issue raised is the risk from currency and tax.

First is the tax burden. With different policies, tax rate may differ from countries. For example, car manufacturer like Mercedes Benz needs to consider the real estate tax rate before deciding to build its factory, in which tax rate in Cambodia is 0%. In Thailand, a tax of 12.5% is levied on the appraised rental value of real property while real estate tax is imposed at a flat rate of 12% on annual rental income of the leased property in China. Because of different policies, real estate tax in Vietnam is more flexible, which is decided by the occupation of the real property (Tax rates, 2012). In my opinion, if real estate tax rate is the unique issue needed to concern, so investment in Cambodia seems to be the best choice.

Another risk organizations may meet while trading or selling goods across countries is currency exchange risks. The risk is divided into three categories.: transaction, translation and economic risks.

According to European Economy, transaction risks refer to the influence of exchange rate toward the value of committed cash flows (cash flow decided in the contract). Risks rise because of unfavorable foreign currency fluctuation.

Translation risk is about the impact of exchange rate fluctuations on the valuation of foreign assets or liabilities. The risk occurs due to the internal reason, when parent company translates figure of asset or liabilities of foreign subsidiaries. Fluctuation of exchange- rate day by day can have high influence to performance of the firm.

The last economic risk is the impact of exchange rate movement on company’s performance compared with its competitor due to the unfavorable changes of exchange rates in short or long term.

The exchange- rate brings many obstacles to businesses during its operation. Journal “Strong yen hits Japanese carmakers” by Jorn Madslien on 2^nd December, 2011 reported the situation of Japan.

car industry. The world’s largest carmaker Akio Toyota even stated that "The current exchange rate has really made it difficult to be profitable making cars in Japan,". He also intended to reconsider Toyota’s commitment to produce three million cars per year in Japan.

Many discussions risen to discuss the solution for the problem, in range of business itself or even globally. The term “hedge” is used to replace for dealing with the currency exchange risks.

In range of organizations, solutions could be:

-       Insisting: foreign customers commit to pay contract in company’s home currency.

-       Intra- organizational currency is set by multinational companies.

-       Forward market (includes wide range of currencies) or futures (includes limited range of currencies) hedge: currency exchange is chosen at a fixed time in future.

-       Etc…

In range of global, global currency is now discussing. Economics editor Stephanie Flanders from BBC News listed out some facts.

“The US overtook Britain as the largest economy in the 1870s, but the dollar didn't truly displace sterling as the world's anchor currency until the 1930s”.

Or, “In the 1970s, Germany and Japan resisted a larger role for the D-mark and the yen for similar reasons. And in the lead up to the 2008 crisis, China had exactly the same reasons for holding back on the internationalisation of the yuan”.

(BBC News, 2012)

With many inadequate, that could be the reason why United Kingdom’s Government decides to use its own currency Pound, instead of using Euro currency as other European countries.

So, what is the solution for the problem?

Should Government find more solutions or just do nothing, and simply take the risks, hoping for favourable foreign exchange rates??

Facebook OPI: Good news or bad news?

Capital is a necessary element for any business for its continuous operation. A business may raise money by selling share. That is the way that Facebook- the world’s largest social networking site has already used. Achievement of the organization is clear with totals 845 million members. They have shared more than 100 petabytes (100 quadrillion bytes) of photos and videos with Facebook a day.

Therefore, Facebook filed paper an initial public offering (OPI) to raise $5 billion is the hottest event. The event as well opens a new phase for the organization history.

It is said that Facebook is a successful business with the total revenue up to $3.7 billion and $1 billion profit last year. The data is much higher than Google- another famous network site was when it debuted on public market.

Many people are filled with the aspiration to the success of the organization. I- Spy, which used to send nearly all of its clients' marketing budgets in Google's direction, is now putting about 10% on Facebook, and expects that to grow. Jim Brigden, I-Spy's CEO, also showed his belief in the success of the firm.

Lawrence Summers, the former secretary of the Treasury thought “it is a major sign of maturation”. He recognized that would be Mark Zuckerberg’s remarkable achievement as Zuckerberg just built a global institution in a very short time.

Facebook’s IPO could not be the biggest IPO in America history but it is definitely the biggest ones in Internet and technology’s history, said by David Kirkpatrick, author of "The Facebook Effect."

However, Facebook IPO- is it really a good news???

There are some obstacles available for Facebook’s Board of Management while doing OPI.

Firstly, regulation under SEC requires the firm to provide fully information about certain financial position. It means the firm cannot keep its finances private anymore. “By going public, Facebook loses some of is mystery and cool, having to declare profits and losses and answer to shareholders every quarter”.

On the other hand, with the target to raise $5 billion and the company’ stock market valuation is in the expectation $75 billion to $100 billions, it means “that only 5 to 7 percent of the company’s shares will be available to public investors”. I think that it will be a challenge for the firm to create an amazing, incredibly change, especially in short time.

Additionally, with previous achievements, the public has the rights to expect more in the performance of the firm.

Company was reported with doubled $1.6 billion revenue as well as $500 million net income. It is a nice result but parties like Wall Street still want to see another thing different.

“Can Facebook continue to grow its fast? That is the question”, said Michael A. Yoshikami, chief executive of wealth management firm YCMNET Advisor.

What is Facebook going to do for sustainability and growth?

There are two main activities for Facebook to earn profit. One of them is advertising. Trip Chowdhry, an analyst at Global Equities stated that “much of its potential advertising revenue is dependent on the frequency of sharing”. However, IPOs are not always successful. Look back the history, case of Zillow is an example, in which the company priced its IPO at $20 per share, with the stock ending its first day at $35.77. Another case is Pandora offered its shares at $16 when it went public in June. Now, the stock trades around $13.

Deciding to become a public company, Facebook must put more effort to gain more profit.

It is calculated that, although Facebook IPO is an interesting topic, it still cannot excite people due to its threat.