Part 1
The Maximization of the Shareholder’s Wealth
Introduction
In going to the flow of facing new challenges for their sustainability on the corporate sector, its leaders needs to have the capacity in incorporating the strategies for the leaders who hast the ability in incorporating strategies for their profitability and sustainability into their respective businesses in achieving the value maximization in the most of the holistic way. Majority of the corporate financial theorists are agreeing that the major corporate objective is the maximization of the long-term wealth or value. There are also the emergences of the criterion that can maximize the market value or the entire firm. This means that the maximization of the shareholder’s wealth are focusing only to the stockholders and the maximization of the value of the firm are encompassing the whole financial claim holders that includes the common stockholders, preferred stockholders, and the debt holders. This had been done due to the fact that the stockholders are considered to be most important stakeholders on the firm while the financial manager will have the fiduciary responsibility in acting to be the best interests. Taken from the perspective of the stockholders, they imply that the good management decision will lead to the increase in the value of the stock due to the reason that most of the investors are prefer the more wealth to less. This only reflects that the firm’s financial goal is the maximization of the shareholder’s wealth while reflecting the market price of the stock. Shareholders simply refer to the current stockholders or owners. On the other hand, the maximization of the firm value is the objective of the decision making of the non-publicly traded firms (Baker and Powell, 2005, p. 11).
On the contrary to majority of the famous belief, most of the organizations have no unlimited resources. With the help of the strategic planning, the firm can have the marshall resources in its competencies as well as the leveraging to the other business units which can also be the future of the opportunities and the expected growth of the company which it needs to face. The said factors can also increase the value of the company in which the shareholders will have the concern on only thing which matters. This can also signifies that the value had translated on the greater profits and can also be appreciated in the stock value as well as the dividend pay out (Brigham and Gapenski, 1991, p. 19).
Theoretical Views in Maximizing Shareholders Wealth
There are many reasons why it needs to focus on the maximization of the share price. The first reason is the stock maximization which can use as an objective function and can permit in making the definitive statements regarding the best way in allocating the resources as well as in financing them. The other reason is the stock prices which are highly observable measure and can be used in evaluating the performance of the corporations held in public. There are also no competing measures which can provide the comprehensive measure in the standing of the firm. This stock price can take into the account of and present and to the future earnings per share, the duration, the timing and the risk of the earnings. This also involved in the stock of the firm and the measurement of the economic owner of well being. Lastly, most of the stock prices can reflect to the long-run effects of the decisions that can make in the firm. For the business managers and leaders, the economic fulfillment and responsibilities can always and be critically depends on the survival of the company. This can ensure that the availability of the sufficient resources will always need to devote on the other responsibilities. Under the principles of management, the management must consider the shareholders interests for any business decisions. Nevertheless, this argument got many alleged oppositions and the actions of the management and enrich at the shareholders expense. The example of this is the acquisition of the dilutive shareholders and can cause the combined company in having the twice profit and might split in several shareholders (Valentino, 2007).
The value maximization can also be viewed as the scorecard which can tells the organization in assessing their success for achieving the vision or the implementation of the strategy which can always be dependent on the organizational short term performance. Maximizing the wealth of the shareholders rests the part of the assumptions and the corporate objective function assumes that the managers are operating the best interests for the stockholders and not to themselves which not also attempt in using the expropriate wealth from the lenders in order to have the stockholder’s benefit. Thus, the maximization for the wealth for the shareholders will assumes that the managers do not take the actions in deceiving the financial market in boosting the price of the stock of the firm. The other assumption will determine the manager’s act is responsible manner and have to create the unreasonable costs for the society in pursuing the maximization of the shareholders wealth. This only determine that the financial need not take the unethical or illegal actions in order to increase the value that is consistent with the best interests of the stockholders or the society in the long run (Baker and Powell, 2005, p. 12).
According to the writings of Professor Michael Jensen who writes the about the dilemma in the maximization of the value for the company and the theory of demand for stakeholders for taking into the account of the interest for all of the stakeholders in the from the Harvard Business School, the solution is simply lies on the new way for measuring the value. From the theory of the stakeholders which model and identifies the groups and the stakeholders of the corporation, this simply recommends and describes the methods wherein the management can integrate and address the interest of the groups in achieving the value of the sustainable and maximization of the development through the companies that participating the network of the government, stakeholders and the other NGO’s. The other theory also defines that the constituencies and the individuals are contributing either compulsory or not in the wealth-creating capacity of the company and its activities can be therefore considered risk bearers or potential beneficiaries. This also includes the individuals or the groups that benefited from or can harm the rights and are respected or violated by the corporate actions. In this definition, the groups of stakeholders are constantly expanding in order to include the wide range of the parties that are impacted by the operations of the company. These are also includes the customers, the consumers, host government, employees, press, and media, suppliers, local communities, activists, and the partners. These also include the NGO’s, competitors, research institutes, educational institutions, and the think tanks. There is also the special consideration for stakeholders that boil down the simple fact and can have the major impact on the maximization of values for any company as when they represent the economic or rational motives for the firm. Most important to recognized are the primary stakeholders without the on going corporation participation which can survive for going concern. These also cover the shareholders, employees, customers, investors, suppliers and even the communities and governments. There are also some of the stakeholders which can influence or even affect the companies yet less essential to survive. There are also debates that matters on the shareholders as supports only for the responsibility of the managers and save the interests of the shareholders. This can also maximize the value of the entire firm and provide the incentives for the managers in taking risks. On the other hand, stakeholders are affected by the activities of the company and have the manager’s consideration (Valentino, 2007).
In the year 1970, according to the great writer Milton Friedman, the social responsibility of the business in using its resources and can engage in the activities which are designed in the increase of the its profit for long as it can stay in the rules of the game and engaging in the free and open competition without fraud and deception. This implies that the maintaining the only social responsibility for the law abiding business needs to maximize the profits of the shareholders. There are also incidents that it some can deprive the property rights of the shareholders and stresses that the management has the responsibility in maximizing the shareholders value and any activities which cannot maximize the value are conspired to violate the duty. This can be valid by the premise that depends in the model of the social responsibility which is being adopted by organization in the philanthropic one. In this manner, the starting point will be the giving away for the money of the corporations and belongs to the people. This move can be influential to the stakeholders and can have the real impact on the issues of the license to operate and the compelling of the business case and immediately become the assumption and apparent which is no longer valid. If the company can become more aware in the building the relationship to the customers, about the managing risk, attracts and retained the talented staff, and the assuring the reputation can have the fundamental value creation. This is therefore important that the managing the demand and the expectation of the opinions of the formers customers, local communities, and shareholders can be the managing of the reputation and risk. If the company is investing in the community resources, then the company depends on the maximization of the company and shareholders. This means that the company cannot create the value even without the good relationship to the employees, financial brokers, suppliers, and regulators. This is also important in taking the note for the context of the shareholders as well as to the stakeholders. The management of the social responsibility as well as maximizing the value is similar to any other aspect of business. This can have no constant outcome can it can be done badly or it cal also be good. Then, the main objective of the company is building the relationship to the key stakeholders whose impact is the maximization of value and its effectiveness. The said relationship can signifies and can involve the on-going conflict for the collaboration of the elements that results from the expectations of the stakeholders regarding the corporate behavior of the companies and have no identity in trying the behave in conformity. This is can also be the underlying concept for the company and to the stakeholder’s interests, management, and engagement to the transformed into the higher goals as the maximization of profit and growth and survival (Ibid).
The shareholders value can also maximize by the improvement of its growth and the reduction of the discount rate of the company. These signify that this two factors be the drivers of the P/E ratio Price-Earnings-Ratio ad the ultimate value. Empirically and theoretically, the P/E can goes up for the growth and can control the growth and the goes down if the increases the discount rate. The stock price per share can also be related to the earnings per share and one can understand the value for the market places to the stock relative to the company’s created wealth. If the historical P/E ratio of the company is 16, this only signifies that the average stock that trades of $15 per share and has the proper earnings of $1. If this will be the fair value and can remain to be constant, then increase of the earnings per share will also increase the price of the share and can reduce the earnings per share will decrease the price per share. The changing the organization architecture can also be use in creating value.
Conclusion
The enlightened stakeholder theory can add the simple specification fir the objective function of the firm is to have the long term market value for the firm and the audit and process can evaluate the management of the firm that has the relations to the constituencies. The scorecard will then be the scorecard that measures the success of the management and to the competing stakeholders. Thus, the business thinking is that it is primarily based on the traditional concepts shareholder value and to its maximization. This signifies that the maximization of the values can lead to the increase of the wealth of the shareholders and can also be invested, saved, or spent at the shareholders discretion.
Part 2
A. The Break Even Point Analysis is important to understand the nature of operating leverage. This is the level of the sales whereas there are no results and there are no profits.
The break even point for the hotel must satisfy the equation:
Total Income (sales) = Fixed Costs + Variable Costs
The fixed costs consist of the following:
Cost for renovation (£ 10m)
Purchased costs (£ 40 m)
Annual running costs which consists:
Administration 291,000
Salaries and wages (£ 59,000)
Advertising (£ 400,000)
Maintenance (£ 300,000)
Heat and Light (£ 1,500,000)
The total Fixed Costs therefore is: (£ 52, 550, 000)
The Variable Costs Consists:
Breakfast £ 2 per person every night
Evening Meal £ 6 per person per night
Cleaning and Laundry £ 7 per person every night
£ 15 per person every night (5460 every year)
The Drinks in the bar £ 10 per night and per guest (3,640 every year)
The wages on the three staff (£ 5.52/hour) or (144,668.16 every year)
The Total Variable Costs Therefore: (£ 153,768.16)
Income = Fixed Costs + Variable Costs
= (£ 52, 550, 000) + (£ 153,768.16)
= £ 52, 703, 768.16
To make it a break even, the hotel must have the income of £ 52, 703, 768.16.
Therefore, in getting the payment of the customers every night, the income needs to divide 364 or the operating days of the hotel for the entire year.
The daily income of the company is £ 144,790.5719. It had been known that the expected average occupancy for budgeting is 70% which means that it need to divide it by 70 people. The price that the hotel needs to charge in its customers per guest therefore is £ 2,068.436 to make it at the break even.
B. The Return of Capital Employed or ROCE has the ability to earn the return for all of the capital which can have to employs. This is simply calculated as the percentage of the utilized capital of the company and had been made prior the tax profits and the borrowing costs. This is also commonly use for measuring and comparing the two business performances as well as the assessing the generation of the business in the returns of capital payment (Phillips, et. al., 2006, p. 201).
The formula for the ROCE is:
ROCE = the Pre Tax Operating Profit
Capital Employed
The Profit for the Operation = ROCE (Capital Employed)
= 0.20 (£ 2,068.436)
= £ 413. 6872 operational profit every night and every person
The hotel therefore need ask its customer the amount of £ 2,482.1232 so that the consortium will acquired the said figure.
C. The Internal Rate of Return and the Net Present Value for the Hotel is the value for the future cash inflows as compared to the current outflow of first investment. This can measure and indicates the decision making for the future business and implies positive NPV in supporting the project while it has the negative shows and risky for the firm. The Internal Rate of Return is the interest that can be present value for the future cash flow being projected and equal to the Net Present Value (NPV) which is equal to zero. The effectiveness of the project can also be considered and has the greater rate of return in earning the alternative investment (Gorchels, 2005, P. 98).
Thus, the Net Present Value for the Investment in Hotel will be:
The Present Value (£)
T = 0 (-£ 52,703,768.16)
T = 1 (903,492.8448)/1.121
806,690.04
T = 2 (903,492.8448)/1.122
720,258.9643
T = 3 (903,492.8448)/1.123
643,088.361
T = 4 (903,492.8448)/1.124
574,186.0366
T = 5 (903,492.8448)/1.125
512,666.1041
T = 6 (903,492.8448)/1.126
457,737.5929
T = 7 (903,492.8448)/1.127
408,694.2794
T = 8 (903,492.8448)/1.128
364,905.6068
T = 9 (903,492.8448)/1.129
325,808.5773
T = 10 (903,492.8448)/1.1210
290,900.5155
NPV
-£ 48,007,526.36
Computing the Internal Rate of Return into the Hotel can reach for about -47.88% and considered to be risky in the business and not advisable to use.
D. Given the fact that the charging £ 80 during weekend can be helpful to the hotel because it can generate much customer which can serve almost its guests. These can also encourage the guest in availing the services of the hotel and to maximize its revenues and profits. These are also the actions that can constitute to the commodities wherein the demand can increase and can also be applicable if it appears to threatens and expire as well as saleable. On the other hand, there might be difficulty in arising for selling the services in the future due to the estimated elasticity of the demand as the remaining time prior the expiration of the service. Using this irregularly can have the consequence when customers get to use to it. Nevertheless, the expectations in the future can encourage having low judgment. Therefore, the limitations on the prices every night and every person that coming on the hotel must be properly analyze because it must be suitable in selling services before the service had expire and because it has the negative effect on the position of the services. Although, in general, this will have be advantageous to the hotel as it can generate sales and can also avoid the precision of the segment which can be targeted in the method.
E. In generating the additional revenue, the use of Revenue per available room (RECPAR) can be use in order to maximize the total room that the hotel will have in managing the occupancy and the average rate of the maximization of the room revenues. This is applicable for the hotel due to the fact that it includes the two financial measures and to identifies the hotel in combining the two strategies for maximization of the rooms that are being sold and the average room rate which can be form as a strong and useful financial measurement. The hotel room revenues can also increase its total revenues with the aide of increasing the average rate as well as willing to be run in the lower occupancy of the percentage. The canalization for the revenue is not yet completed without analyzing the expenses which is also part of the business cycle. In this regard, the knowledge and practice on the important expenses which must be controlled and analyze are the wage cost and the food costs. These are all important because it has the direct effect on the benefit costs. For so many expenses of the business, these are entitled to have the attention the hotel managers for every hotel department which must be effective in controlling and managing the expense accounts if the profits of the hotel want to maximize. This signifies that whenever the manager have the effective control for her or his expenses in the department, the expenses of the hotel will be in line and can also maximized the profits (Hales, 2005, p. 155-156).
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