Five Basic Corporate Finance Functions

Five Basic bodily Finance FunctionsIntroductionUBS AG is a diversified global fiscal rifle company, having its main head hind ends at Basel and Zurich, Switzerland. In June 1998, Union shore of Switzerland and Swiss desire Corporation (SBC) completed the fusion announced six months previously. Just devil years later, UBS acquired the US brok termge satisfying Paine Webber, greatly increasing the size and scope of its business. Then the calamityting firm even pop the seal on these achievements by proclaiming a single brand. In this light, UBS is both(prenominal) a new institution and new brand.In the picturesque Swiss region of Valposchiavo, for example, one UBS branch traces its origins as far back as 1747. The core components of todays UBS date back to the second half of the nineteenth century. At the same clock time, its recital extends many generations into the past, particularly in Switzerland, the US and the UK. UBS is stratified second worlds largest asset mon itorr of private wealth, and is the second-largest hope in Europe, in both food market neatisation and arrive atability. With its major presence in joined States UBS has its head sterns located in fresh York City Weehawken, Private riches Management in New Jersey and Stamford, Connecticut for Capital markets, UBSs has its retail offices without the U.S., and has its presence in more(prenominal) than 50 countries (www.ubs.com/1/e/ nearly/history.html).UBS was force to turn to the Goernment of Singapore for fresh sustenance later on incurring a enormous loss in 2007. later funding, Government of Singapore Investment Corporation became the largest sh arholder of UBS in 2007. UBS managers pledged to return bonuses after a dramatic loss in November 2008. New financial aid was expected from Swiss government after the UBS shareholders voted to recruit the shaken trust in UBS (www.ubs.com/1/e/about/history.html). point of reference Suisse found a new cross-town rival in the s tamp of UBS which has evolved on a similar path. Both of them originated from Switzerland indulging in commercialized and retail banking who purchased major investiture banks in joined States and both are being investigated by U.S. authorities soon for helping 17,000 Ameri jakes citizens to neutralise taxes. Based on the order by the Swiss Financial Markets supervisory Authority (FINMA), UBS on 18th February 2009, immediately has concur to provide the identities of and note in determineation of about 250 Ameri stick out clients to United States and also agreed to make up US$ 780 one million million million in the form of compensation and fines (www.ubs.com/1/e/about/history.html).Corporate FinanceModern companies need to raise pay from the neat market in order to invest in the sincere and intangible assets they need to earn profits. Their firstly priority is to ensure that they can source finance for both their short break away and their eagle-eyed run needs in the cl osely economical way possible. Corporate enthronization is by its constitution pretendy and often capital intensive (Ryan, 2007).In order to justify the use of other peoples money a firm needs to ensure that the investment decisions it makes, taking into account its address of capital, contribute to an over any increase in the value of the firm and hence its investors wealth. on base the trouble of sourcing finance at the cheapest cost, the firm has to make sure that all told the investment decisions it at a lower interposetakes are value adding. If they are not the firm leave not be able to justify its existence for very long and depart find itself out of business (Ryan, 2007).The ability to trade the financial claims of business ventures has been known about and practised for centuries. In the modern era the standardization of financial claims into homogenous trading units has transformed the way markets operate. Until the thirty- nighthing companies, for example, b orrowed money from banks but following the Wall Street Crash in the United States there was a sudden loss of assurance in the banking sector. As a result, companies started to practise what governments had been doing for some time and sidestepped the banks going forthwith to lenders and offering them securitized debt in the form of bonds (Ryan, 2007).Although modern financial intermediaries are admiration of efficiency, the role of traditional intermediaries such as banks as providers of debt capital to tummys has declined for decades. Instead, nonfinancial corporations collect increasingly turned to capital markets for external funding, principally because the speedily declining cost of information processing makes it much easier for large number of investors to engender and evaluate financial data for thousands of latent unified borrowers and issuers of roughhewn and favourite(a) germinate equity (Megginson and Smart, 2006).The Five Basic Corporate Finance functionsA lthough corporal finance is defined customaryly as the activities involved in managing silver flows (money) in a business environment, a more complete interpretation would emphasize that the practice of corporate finance involves five basic functions height capital to support companies operations and investment programs (the external financing function)Selecting the surmount projects in which to invest firms resources, based on each projects perceived encounter and expected return (the capital budgeting function)Managing firms internal cash flows, its working capital, and its aggregate of debt and equity financing, both to maximize the value of firms debt and equity claims and to ensure that companies can pay off its obligations when due (the financial management function)Developing company-wide lead power and corporate political science structures that force managers to behave ethically and make decisions that attain shareholders (the corporate governance function) andMa naging firms exposures to all types of risk, both insurable and uninsurable, to maintain and optimal risk-return trade-off and therefore maximize shareholder value (the risk-management function).(Source Megginson and Smart, 2006)External financingWhen corporations are young and small, they usually must raise equity capital privately, each from friends and family, or from professional investors such as venture capitalists. These professionals distinguish in making high-risk/high-return investments in rapidly growing entrepreneurial businesses. Once firms reach a certain size, they may dissolve to go public by conducting an initial public offering (IPO) of stock- carry oning shares to outside investors and listing the shares for trading on a stock exchange. After IPOs, companies have the alternative of raising cash by selling excess stock in the future (Megginson and Smart, 2006).Capital BudgetingThe capital budgeting function represents firms financial managers single most impo rtant activity, for two reasons. First, managers evaluate very large investments in the capital budgeting process. Second, companies can prosper in a competitive economy save be seeking out the most promising new products, processes, and services to deliver to customers. Companies such as Intel, General Electric, Shell, Samsung, and Toyota regularly make huge capital outlays. The capital budgeting process breaks down into three stepsIdentifying potential investmentsAnalysing the set of investment opportunities and identifying those that create shareholder value andImplementing and monitoring the investments(Source Megginson and Smart, 2006) pretend ManagementHistorically, risk management has identified the unpredictable act of nature risks (fire, flood, collision, and other property damage) to which firms was exposed and has used insurance products or self-insurance to manage those exposures. Todays risk-management function identifies, measures, and manages many more types of risk exposures, including predictable business risks. These exposures imply losses that could result from adverse interest rate movements, commodity bell changes, and currency value fluctuations. The techniques for managing such risks are among the most sophisticated of all corporate finance practices. The risk-management task attempts to quantify the sources and magnitudes of firms risk exposure and to decide whether to simply accept these risks or to manage them (Megginson and Smart, 2006).Corporate Governance modern corporate scandals-such as financial collapses at Enron, Arthur Andersen, WorldCom, and Parmalat- crystallizely show that undercoating good corporate governance systems is paramount. Governance systems determine who benefits most from company activities then they establish procedures to maximize firm value and to ensure that employees act ethically and responsibly. mature management does not develop in a vacuum. It results from corporate governance systems that hires a nd promotes qualified, honest people, and that motivate employees to achieve company goals through salary and other incentives (Megginson and Smart, 2006).Developing corporate governance systems present quite a quarrel in practice because conflicts inevitably arise among stockholders, managers, and other stakeholders interests. But seldom is it in the interest of any individual stockholder to spend the time and money needed to ensure that managers act appropriately. If individual stockholders conducted this type of oversight, they would personally bear all the costs of monitoring management, but would share the benefits with all other shareholders. This is a classic example of the collective action problem that arises in most relationship between stockholders and managers (Megginson and Smart, 2006). camberruptcy and Corporate pay PatternsThe more debt a firm uses in its capital structure, the less in all probability the firm will be able to meet its debt service obligations, an d the more likely default will exit (Benning and Sarig, p.347). It is this default likelihood that introduces nonstarter costs into capital structure. As argued by Van Horne (p.268), the presence of loser costs is an important source of imperfection in the markets for corporate funds. down the stairs imperfect conditions, there are the administrative costs of bankruptcy, and assets may have to be liquidated at less than their economic values (Bekter, p. 56). It is also this determination that Myers (p.218) describes as the direct cost of bankruptcy. The implication of the presence of bankruptcy cost in financial leverage is manifested more by the fact that debt-financing generates risks. non only that, but it has been argued that for instance that every financing decision comes with some risk implications on the value of the firm (Glen and Pinto, 1994).The largest bankruptcy in U.S. history was finally coming to an end. On April 20, 2004, MCI, Inc. Emerged with an contract th at it had begun distributing securities and cash to its character referenceors according to a court-approved reorganization plan. MCIs chief executive policeman, Michael Capellas, heralded a new generator for his company, which had filed for bankruptcy court protection twenty-one months earlier-when the company was called WorldCom-after disclosing and $11 meg accounting fraud. At the time of its Chapter 11 filing, WorldCom had assets totalling nearly $104 one thousand million and debts of $32 gazillion (Megginson and Smart, 2006).WorldCom shocked the business world when the company announced in June 2002 that it had fraudulently overstated $3.9 one million million of expenses as capital expenditures, which had allowed it to book high profits during the telecom boom years of 1998-2001. WorldCom chief financial officer Scott Sullivan was fired the day the accounting fraud was disclosed, and his exit followed that of founder and long-time CEO, Bernine Ebbers, who had been squee ze out in April 2002. Over the next two years, more than $7 billion in additional accounting errors and frauds were uncovered,, bringing the total misstatements to $11 billion, and in a March 2004 restatement of its 2001 and 2002 financial results, the company wrote off over $74 billion in previously booked profits and good will (Megginson and Smart, 2006).Corporate Control TransactionsChanges in corporate control occur through several mechanisms, most notably via acquisitions. An acquisition is the purchase of additional resources by a business enterprise. These resources may come from the purchase of new assets, the purchase of some of the assets of another company, or the purchase of another entire business entity, which is known as a nuclear fusion. Merger is itself a general term applied to a transaction in which two or more business organizations combine into a single entity. Oftentimes, however, the term merger s reserved for a transaction in which one corporation takes ove r another upon the approval of both companies boards of directors and shareholders after a prosperous and mutually agreeable set of terms and conditions and a price are negotiated (Megginson and Smart, 2006).Statuary MergerA statutory merger is a form of target integration in which the merchant bank can absorb the targets resources at once with no remaining trace of the target as a sort entity. Many intrastate bank mergers are of this form.Subsidiary MergerConversely, an acquirer may wish to maintain the identity of the target as either a speciate subsidiary or division. A subsidiary merger is often the integration vehicle when there is brand value in the holler of the target, such as the case of PepsiCos merger with Pizza field hut in 1997. Sometimes, separate tracking or target shares are issued in the subsidiarys constitute. Sometimes, these shares are issued as new parkland shares in exchange for the targets park shares, as occurred when General Motors issued new Class E and Class H shares to acquire, respectively, Electronic Data Systems and Hughes Electronics during the 1980s. Alternatively, a new class of preferred stock may be issued by the bidding firm to replace the common shares of the target as well (Megginson and Smart, 2006).ConsolidationConsolidation is another combinatorial form used to effect a merger of two publically traded companies. Under this form, both the acquirer and target disappear as separate corporations and combine to form an entirely new corporation with new common stock (Megginson and Smart, 2006).Dealing with the CrisisThe merger of the Union situate of Switzerland and the Swiss Bank Corporation in June 1998 resulted in UBS evolution. The new company was named originally as Union Bank of Switzerland, but officials chose to call it as UBS as the name was clashing with United Bank Switzerland a subsidiary part of the United Bank Limited, Switzerland. United Bank of Switzerland is no longer known for its name as it do its brand name UBS like 3M. The carried over logotype from SBC, which stands for confidence, security and discretion has remained with UBS.With its acquisitions of Dillon Read in New York and S. G. Warburg in London, SBC had investment banking business all over the world before the merger. Due to the long Capital Management crisis, in October 1998, the first chairman of the merged bank resigned which affected the Union Bank of Switzerland. After the acquisition of Paine Webber conference Inc. by UBS in 2000, it became the largest private clients wealth management company in the world. A CHF 3.265 trillion assets was invested in wealth management businesses, including the U.S. As the company began to operate as one large firm, all the business group of UBS were rebranded under the UNBS name on the 9th June 2003. All major companies bought by Union Bank of Switzerland like UBS Paine Webber, UBS Warburg, UBS Asset Management and others were just called UBS. With the retirement of t he Paine Webber brand UBS took a US$1 billion drop for the loss of good will associated with as a result of the rebranding (www.ubs.com/1/e/about/history.html).In a report released on 01st April 2008, 15 billion Swiss francs (US$15.1 billion) in a new capital was seeked by Swiss bank UBS AG as it expected to post net losses of 12 billion Swiss francs (US$12.1 billion) for the first quarter of 2008. Approximately US$19 billion on U.S. real estate and related credit positions were expected to write-down as UBS was hit by U.S. Subprime mortgage crisis and losses. Fitch Ratings and Standard Poors, and dour are cut down the long term credit evaluation of UBS in April 2008 to AA and Aa1 respectively. A new capital of CHF 6 billion through mandatory convertible notes was announced by UBS which they had on the 16th October 2008, and was place with Swiss Confederation. Transfer reason of approximately USD 60 billion currently illiquid securities and various assets from UBS to a separate fund entity were made between the Swiss National Bank (SNB) and UBS (www.ubs.com/1/e/about/history.html).The third quarter Group net profit was announced by UBS on quaternate November which was in line with their 16th October pre announcement, CHF 296 million standing with net profit attributable to UBS shareholders. A further CHF 4.8 billion of write-downs and losses on risk positions affected that quarter in gain on tax credit of over CHF 900 million and own credit of CHF 2.2 million. In an announcement made on the 12th November 2008, UBS said that from 2009 there will be no more than one-third of any cash bonus paid out in year it is earned with the rest held in reserve. Top executives will have to hold 75% of any vested shares incentives would also vest after three years on shares with share bonus accounts subject to genus Malus charges. US$6 billion of equity was put into the new liberal bank entity by UBS in November 2008 a benefit option was unploughed only if the value o f its assets were to recover. UBS structure guaranteed clarity for UBS investors by making an unqualified sale, which was indicated as a neat package by the New York propagation (www.ubs.com/1/e/about/history.html).The head of the Swiss National Bank (SNB) and Chairman Jean-Pierre Roth on Friday the 30th January 2009 was quoted on Reuters as saying that the two best capitalised banks in the world are UBS and Credit Suisse. In an announcement made on the 09th February 2009 by UBS, said that it lost nearly 20 billion Swiss francs (US$17.2 billion) in 2008, which is the single-year biggest loss in the history of Switzerland. The allegiance to each of the UBS business divisions and strategy were corroborate by UBS Board of Directors and the Group Executive Board on the 10th February 2009. Investigations relating to UBS U.S. cross-border business are getting resolved by entering into a deferred prosecution agreement with the US Department of Justice and a Consent Order with the US S ecurities and shift Commission. US$380 million represents disgorgement of profits from its cross-border business out of US$780 million which UBS agreed to pay. And the remaining represents the tax amount of United States which UBS failed to recover to the accounts. The interest, penalties and restitution for unpaid taxes are included in the figures. UBS also entered into an agreement with the Securities and Exchange Commission as part of the deal in which it agreed to the charges of having acted as an unregistered broker-dealer and investment adviser for Americans (www.ubs.com/1/e/about/history.html).Initiative takenCHF 20.9 billion (US$ 18 billion) loss was posted by UBS AG on the 11th march 2009 which was stated in their revise FY 2008 report. It was said that UBS was extremely cautious about the outlook of 2009. UBS announced in its Annual General Meeting held on 15th April 2009, it has plans of cutting 8,700 jobs in its return to profitability. UBS had to make about US$50 bill ion in write-downs and announce of 11,000 job cuts since 2007 due to the global financial crisis. UBS agreed to sell its Brazilian financial service business, UBS Pactual, to BTG Investments for approximately USD 2.5 billion in a statement made on the April 21st 2009. UBS was aiming to reduce its risk profile and to become more profitable by the sale of the Brazilian business. U.S. federal grand jury charges were made on private banker Raoul Weil for which UBS formally cut all its ties on the 1st May 2009. Raoul had been suspended in November 2008 after he was indicated in correlation to the tax evasion affair. A first quarter net loss of two billion Swiss francs (USD1.75 billion) was confirmed by UBS on May 20th 2009 which was less than initially expected. UBS restated its 2008 yearbook report on the May 20th 2009. A further reduction in the net profit was announced by the bank of CHF 450 million, and CHF 269 million in reduction of equity and equity attributable to UBS shareho lders (www.ubs.com/1/e/about/history.html).UBS strengthened its capital base by placing 293.3 million shares from alive authorized capital by taking the advantage of current market conditions. A small number of large institutional investors were placed with the shares. In the view of the regulators it was consistent that this capital raising aims at strengthening confidence in UBS and the Swiss financial centre which is claimed by UBS. The second quarter loss of CHF 1.4 billion (US$1.32 billion) was reported on the 4th August 2009. The Swiss government made a statement of selling its CHF 6 billion stake in UBS on the 20th August 2009, making probatory profit the mandatory convertible notes of 332.2 million which it had purchased in 2008 to help UBS clear its balance sheets of toxic assets (www.ubs.com/1/e/about/history.html).In the Lundquist CSR Online Awards 2009, UBS ranked No.1 in Switzerland and No. 2 globally in November 2009. The award is effrontery for demonstrating best o nline CSR communications.