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Strategic Corporate Finance Assignment Sample

Introduction

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Share Prices are very important for any listed companies. This shows the amount of prestige that the company has in the market. There are a number of factors that determine the prices of shares in the market. Prices of share increases as well as decreases and is completely volatile in nature. The change in price will be studied in the report. Another important aspect of any company is their financial ratios. The financial ratios states the condition the companies are in. Various ratios will be discussed in the report as well. The report will also provide light on the financing strategies of a company. The company selected for the report is Alibaba.

Company overview

Alibaba Group is a multinational company in technology, having specialisation in the fields of technology, retail, e-commerce and internet. The company was founded by Jack Ma in the year 1999 and having its headquarters at Hangzhou, Zhejiang. They provide services in sales through web portals. They are awarded the fifth largest company in artificial intelligence. Current revenue reported by the company is CN¥717.289 billion and current net income reported is CN¥143.284 billion. According to the company, there is currently 251,462 employees working under them worldwide.

News events related to increase/ decrease in share price

Share prices change daily due to various activities in the market. Main reason affecting the share price is the supply and demand. When the demand of a share increases, it increases the price of the share and when the supply increases, the price gets reduced (Pathak and Gupta, 2018). There are various other factors like the covid-19 effect on the market. With the effect of covid-19 in the world, the business scenarios have drastically changed. Businesses were stopped as there were lockdowns in every parts of the world. The scenarios have changed a little but, the after effect are still on and will take few more years to recover fully. This has impacted the prices of shares as well. Three reasons for changes in share prices are provided.

A. Inflation and Deflation: During inflation, the price of shares goes up in the market as it increases the power of pricing for the companies. Inflation is a positive sign for the companies. On the contrary, during deflation the price of shares go down resulting in the loss in the power of pricing for the business. This is very harmful for the companies as they tend to loose share capital from the market.

B. Covid Scenario: The effects of Covid 19 has proved to be fatal for the businesses as well. With the increase in Covid, there were lockdowns worldwide any the businesses were not being able to operate properly. This has caused to the decrease in the share prices as well. With the current scenario, recovery has started and will completely recover in the coming years.

C. Demand and supply: This also affects the change in price of the shares of organisation. When there is an increase in demand and the supply is low, then there is an increase in price and vice versa. 

Date

Price

Volume

Chg%

Sep-21

156.23

31.66M

-6.44%

Aug-21

166.99

658.99M

-14.45%

Jul-21

195.19

262.45M

-13.93%

Jun-21

226.78

277.27M

5.99%

May-21

213.96

362.05M

-7.36%

Apr-21

230.95

329.07M

1.86%

Mar-21

226.73

375.52M

-4.64%

Feb-21

237.76

302.44M

-6.33%

Jan-21

253.83

493.64M

9.07%

Dec-20

232.73

575.03M

-11.63%

Nov-20

263.36

585.46M

-13.56%

Oct-20

304.69

278.23M

3.64%

Sep-20

293.98

235.28M

2.42%

Aug-20

287.03

309.77M

14.35%

Jul-20

251.02

426.37M

16.37%

Jun-20

215.7

334.43M

4.01%

May-20

207.39

504.48M

2.33%

Apr-20

202.67

329.72M

4.21%

Mar-20

194.48

440.32M

-6.50%

Feb-20

208

329.65M

0.68%

Jan-20

206.59

304.42M

-2.60%

Dec-19

212.1

301.21M

6.05%

Nov-19

200

409.33M

13.21%

Oct-19

176.67

261.61M

5.64%

Sep-19

167.23

247.36M

-4.46%

Aug-19

175.03

405.89M

1.11%

Jul-19

173.11

356.34M

2.16%

Jun-19

169.45

431.89M

13.53%

May-19

149.26

511.79M

-19.57%

Apr-19

185.57

260.69M

1.71%

Mar-19

182.45

233.50M

-0.32%

Feb-19

183.03

223.66M

8.63%

Jan-19

168.49

361.43M

22.92%

Dec-18

137.07

344.56M

-14.79%

Nov-18

160.86

456.40M

13.06%

Oct-18

142.28

544.32M

-13.64%

Sep-18

164.76

433.33M

-5.86%

Aug-18

175.01

605.66M

-6.53%

Jul-18

187.23

321.80M

0.92%

Jun-18

185.53

408.90M

-6.30%

May-18

198.01

412.79M

10.91%

Apr-18

178.54

323.63M

-2.72%

Mar-18

183.54

382.83M

-1.40%

Feb-18

186.14

445.03M

-8.88%

Jan-18

204.29

445.13M

18.48%

Dec-17

172.43

416.25M

-2.63%

Nov-17

177.08

420.28M

-4.22%

Oct-17

184.89

337.71M

7.05%

Sep-17

172.71

363.94M

0.56%

Aug-17

171.74

473.14M

10.84%

Jul-17

154.95

273.54M

9.97%

Jun-17

140.9

553.04M

15.06%

May-17

122.46

277.89M

6.03%

Apr-17

115.5

172.12M

7.11%

Mar-17

107.83

205.44M

4.79%

Feb-17

102.9

160.50M

1.57%

Jan-17

101.31

239.22M

15.37%

Dec-16

87.81

218.13M

-6.60%

Nov-16

94.02

330.61M

-7.54%

Oct-16

101.69

240.13M

-3.88%

Table 1: Share price of Alibaba for the past 5 years with change

Graph 1: Line graph depicting change in share price



The table and graphs above shows a clear understanding of the change in the share prices of Alibaba over the last five years. Being one of the biggest companies in E-commerce, they have also failed to have a positive effect in the market. They faced issues during Covid times and even earlier when there were internal issues that were affecting the operations. It will take them few more years to completely recover from the situations they are currently in.

Financial Ratios and Analysis

A company’s financial standings are checked with the help of financial ratios. Numerous ratios are there to calculate the standings. Informations are collected from the financial statements like income statement, cash flow statement and balance sheet. Performance of the companies are checked with financial ratios. Complex conditions of the organisations can be understood through financial ratios making the work time saving and easy for the managements. Comparisons among different companies can be learned with financial ratios. Operations related to firms are understood well with this process. This shows that the financial ratios are important for firms to perform.

Ratios

Formulae

2021

2020

2019

Liquidity

Quick Ratio

= (current assets - inventories)/ current liabilities

1.63

1.85

1.26

Current Ratio

= current assets / current liabilities

1.70

1.91

1.30

Efficiency

Asset Turnover Ratio

= Revenue / Total Assets

0.42

0.39

0.39

Inventory Turnover Ratio

= cost of goods sold / inventory

15.06

18.82

23.91

Profitability

Gross Profit Ratio

= (Gross Profit / Net Sales) * 100

41.51

45.12

45.84

Net Profit Ratio

= (Net Profit / Net Sales) * 100

20.96

29.28

23.25

Leverage

Debt to Equity Ratio

= Total Debt / Total Equity

0.14

0.16

0.22

Debt to asset Ratio

= Total Debt / Total Assets

0.08

0.09

0.12

Debt Ratio

= Total Liabilities / Total Assets

0.44

0.42

0.48

Table 2: Ratio analysis of Alibaba for past 3 years

Table 2 gives a picture of financial ratios of Alibaba for the last three years. There are few good areas and areas of concern for the management as well. Four main ratios are taken into account for calculating the changes in the organisation. These will be discussed with the use of calculations that are performed from the financial statements. 

Liquidity ratio shows the amount of liquid fund present in the business. Over the last three years, quick ratio and current ratio of the company are in a good place. This shows that they have enough cash in their business to meet the liquidity. This is much needed for the business as the management gets support from the assets. This is very ideal for the business and the management of Alibaba.

Efficiency ratio is used to check whether the company has the ability to use their assets to produce income. Asset turnover ratio shows that they are in a good position use their assets for more income. For the last three years, this has increased in a proper manner and the managers of Alibaba will be satisfied with the results. Though the inventory turnover ratio gives positive pictures for Alibaba, still they have to perform well and increase their inventories so that they have ample stock in hand to meet the demand. There has been a fall in the percentage of inventory turnover in the past three years.

Profitability ratios help the organisations to check the percent of profits earned by them. Gross profit ratio and net profit ratio of Alibaba is a concern for them as it is going down every year. The company needs to reduce cost to increase the profit margin. This will affect them in long run if proper attention is not given. It is the necessity of the management to look into every aspect to increase the profit ratios. The three years’ trend shows that the line is downward and proper attention is to be provided.

Leverage ratios help the companies to check whether they have measurements of finance to meet the financial obligations. All the three ratios namely, debt to equity ratio, debt to asset ratio and debt ratio are in control. This suggests that people can invest in Alibaba and they are not risky. This shows the quality of the management that they have done best for the business and they can meet all the financial obligations at any time frame.

Financing Strategy

Balance Sheet of Alibaba (In Millions of CNY)

Mar 31, 2021

Mar 31, 2020

Mar 31, 2019

Total Current Assets

6,43,360

4,62,923

2,70,273

Cash and Short Term Investments

4,83,445

3,63,215

2,03,165

Cash

-

-

Cash & Equivalents

3,21,262

3,30,503

1,89,976

Short Term Investments

1,62,183

32,712

13,189

Total Receivables, Net

56,923

43,625

29,920

Accounts Receivables - Trade, Net

37,450

30,815

21,216

Total Inventory

27,858

14,859

8,534

Prepaid Expenses

18,532

7,547

7,049

Other Current Assets, Total

56,602

33,677

21,605

Total Assets

16,90,218

13,12,985

9,65,076

Property/Plant/Equipment, Total - Net

2,19,452

1,38,047

92,030

Property/Plant/Equipment, Total - Gross

2,93,034

1,90,041

1,25,975

Accumulated Depreciation, Total

-73,582

-51,994

-33,945

Goodwill, Net

2,92,771

2,76,782

2,64,935

Intangibles, Net

70,833

60,947

68,276

Long Term Investments

4,37,410

3,50,961

2,41,544

Note Receivable - Long Term

344

-

-

Other Long Term Assets, Total

26,392

23,325

28,018

Other Assets, Total

-

-

Total Current Liabilities

3,77,358

2,41,872

2,07,669

Accounts Payable

5,926

4,875

4,570

Payable/Accrued

-

-

Accrued Expenses

1,82,199

1,19,706

92,418

Notes Payable/Short Term Debt

0

0

0

Current Port. of LT Debt/Capital Leases

13,437

5,154

22,466

Other Current liabilities, Total

1,75,796

1,12,137

88,215

Total Liabilities

7,44,075

5,48,481

4,66,000

Total Long Term Debt

1,35,716

1,20,276

1,11,834

Long Term Debt

1,35,716

1,20,276

1,11,834

Capital Lease Obligations

-

-

Deferred Income Tax

59,598

43,898

22,517

Minority Interest

1,37,491

1,15,147

1,16,326

Other Liabilities, Total

33,912

27,288

7,654

Total Equity

9,46,143

7,64,504

4,99,076

Redeemable Preferred Stock, Total

-

-

Preferred Stock - Non Redeemable, Net

8,673

9,103

6,819

Common Stock, Total

1

1

1

Additional Paid-In Capital

3,94,308

3,43,707

2,31,783

Retained Earnings (Accumulated Deficit)

5,62,271

4,12,387

2,62,857

Treasury Stock – Common

0

0

0

ESOP Debt Guarantee

-

-

Unrealized Gain (Loss)

-133

-256

257

Other Equity, Total

-18,977

-438

-2,641

Total Liabilities & Shareholders' Equity

16,90,218

13,12,985

9,65,076

Total Common Shares Outstanding

21,699.03

21,491.99

20,696.48

Total Preferred Shares Outstanding

-

-

Table 3: Balance sheet of Alibaba for last 3 years

The above table shows the balance sheet of Alibaba for the last three years. It is observed that they are properly placed and only few strategies of finance will help them to perform better in the market. Since they are e-commerce Company, they should try to reach people in every corner of the world. This can help them to increase their profitability. Digitally reaching people with all the online platforms will encourage them to perform better in the future. It is necessary for management of Alibaba to control costs properly. If not controlled, this can affect their profit, which can lead to loss for the company. To perform well in every aspect, it is a necessity that they control their cost. Proper management of liquidity will help them to use the liquid cash whenever required. They have good system of liquidity that can help them to plan the strategies of finance properly.

Conclusion

The report provides a clear understanding of the reasons backing the increase or decrease in the share prices of Alibaba. Five years’ share prices are used to analyse the fact. The overall report suggests that Alibaba has done well in finance that is observed from the financial ratios. No such risks are present in the operations of the business. The management has done well to keep every aspect in mind. They should give proper focus on the profits by decreasing the costing and increasing the inventories so that the market demand is met. Financial strategies are also provided so that they perform well in the future. Proper utilisation of resources will help them to perform better in future.

Part C (Optional)

Introduction

Dividend policy is used by different companies to structure the pay-out of dividend to the shareholders. This is an important part as the amount of dividend to be paid during a calendar year is set. This part of the report will provide an idea as to how to calculate share price with same dividend policy and with change in the policy of dividend. Dividend irrelevant theory will also be discussed here. This will give proper understanding to the readers of the use of Dividend irrelevant theory in the context of companies.

No change in dividend policy

Earnings per share in 2021 = HK$ 6

Return on share = 15

Hence, Share price = 15 * 6

= HK $ 90

Change in dividend policy

Earnings per share in 2021 = HK $ 6

Earnings to be retained = 60%

EPS to be given = HK $ 2.4

Return on Share = 15

Hence, Share Price = 15 * 2.4

= HK $ 36

Dividend Irrelevance Theory

Dividend irrelevant theory says that dividend components should not control the price of share of a company. This can affect in the price and share capital of the business. The policy of dividend should not be dependent on any aspect in a perfect capital market. This is rightly said as the dividend is paid as a reward to the shareholders for investing in the business. This should not be treated to calculate the share price (Budagaga, 2017). A change in the dividend policy can affect the share price if they are dependent on each other. It is necessary for the organisations to follow this theory as independent dividend will allow the company to perform well. It is necessary for the companies to keep some amount of profit as retained which can be useful during emergencies or for research of new things. Then, due to the dependency of the dividend policy the share prices can go down, which can lead to loss of share capital by the business. A decreased share price can also tempt the shareholders to sell the shares out of risk, which is not beneficial for the business as well. Rather, dividend should be separately calculated and given to the shareholders as a reward and not with the share price. Providing dividend to the shareholders help to boost their confidence. They tend to invest more in the business, which in turn increases the share capital as well (Murtaza et al., 2018). Taking dividend into account while calculating the share price affects the business in a huge way. It is necessary to reduce the impact of dividend so that the price of the share do not change.

A change in the dividend policy should not increase or decrease the price of a share. This affects the business in the long run, where there can be positive and negative impact on the company. To reduce the direct impact, dividend should be kept free. If the company wishes to pay dividend then they can do so by giving it separately. The ratio of dividend can be calculated from the share held by shareholders. But using them to control the prices can harm the market as well. Small companies with lower profit margins can never give dividends. In that case, thir share prices can fall if the dividend policy is not independent. They can face huge loss in the market. Thus, it can be said that the dividend irrelevant theory is very much important for the organisations to follow and allow dividend to be independent helping all the companies to get benefited. Providing dividend to the investors allows the companies to show that they have strong financial statement. This is a good way to attract the investors as they can see the improvements in the company (Bezawada and Tati, 2017). Thus, keeping a proper balance sheet is also necessary to give dividend. It is necessary for companies to retain percentage of earnings so that the money can be used for various activities. These help in boosting the performance of the compny. Thus, finally it can be commented that best solutions can be achieved if the dividend that is to be paid to the investors is kept independent and not as a factor to increase or decrease the price of shares. This would help companies of all types to perform well in the market and boost their economy in a proper way. Hence, it can be stated that using dividend irrelevant theory by the organisations can be fruitful for the market as well.

Conclusion

The report consists of both positive and negative effects of Dividend irrelevance theory in context to dividend pay-out. It is understood from the reviews that dividend pay-out should not determine the price of the shares. Both calculations are provided to check the change in share price with the effect of dividend policy. It is also proved that the use of dividend irrelevant theory can help to boost the performance of the business.

References

Alibaba Group (2021). Available at: https://alibabagroup.com/en/about/overview (Accessed: 16 September 2021).

Alibaba.com (BABA) Balance Sheet - Investing.com India (2021). Available at: https://in.investing.com/equities/alibaba-balance-sheet (Accessed: 16 September 2021).

Alibaba.com (BABA) Cash Flow - Investing.com India (2021). Available at: https://in.investing.com/equities/alibaba-cash-flow (Accessed: 16 September 2021).

 Alibaba.com (BABA) Historical Prices - Investing.com India (2021). Available at: https://in.investing.com/equities/alibaba-historical-data?end_date=1631730600&interval_sec=monthly&st_date=1473964200 (Accessed: 16 September 2021).

Alibaba.com (BABA) Income Statement - Investing.com India (2021). Available at: https://in.investing.com/equities/alibaba-income-statement (Accessed: 16 September 2021).

Amini, S., Buchner, A., Cai, C.X. and Mohamed, A., 2020. Why do firms manage their stock price levels?. Journal of International Financial Markets, Institutions and Money, 67, p.101220.

Bezawada, B. and Tati, R.K., 2017. Dividend policy and firm valuation—A study of Indian electrical equipment manufacturing industry. Theoretical Economics Letters, 7(05), p.1233.

Budagaga, A., 2017. Dividend payment and its impact on the value of firms listed on Istanbul stock exchange: A residual income approach. International Journal of Economics and Financial Issues, 7(2), p.370.

Halim, L.W., Halim, R.C. and Permana, I.S., 2021. Analysis of Financial Statements PT. Hanjaya Mandala Sampoerna TBK. Nusantara Science and Technology Proceedings, pp.303-308.

Haralayya, B., 2021. Ratio Analysis at NSSK, Bidar. Iconic Research And Engineering Journals, 4(12), pp.170-182.

Limbong, C.H., Simanjorang, E.F., Harahap, N.J. and Nasution, Z., 2021. FINANCIAL RATIO ANALYSIS AT PT ADARO ENERGY Tbk BASED ON THE 2017–2020 FINANCIAL STATEMENTS. Indonesian Interdisciplinary Journal of Sharia Economics (IIJSE), 4(1), pp.77-86.

Murtaza, M., Iqbal, M.M., Ullah, Z., Rasheed, H. and Basit, A., 2018. An analytical review of dividend policy theories. Journal of Advanced Research in Business and Management Studies, 11(1), pp.62-76.

Pathak, H.P. and Gupta, S., 2018. Rights Offering and Its Effect on Share Price Movement: A Study of Commercial Banks. Journal of Nepalese Business Studies, 11(1), pp.1-13.

 

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