The Impact of Dividends on Bukit Darah-Free-Samples for Students

Question: Analyze the Impact of dividends on Bukit Darah PLC and the resultant effect on every management decision undertaken that may increase the Companys hedging policies. Answer: Introduction Bukit Darah PLC is an investment holding company that has interest in many other industries such as real estate,oil palm plantations, portfolio assets management among others. OIn this paper, we shall look into the companys dividend policy, how the companys share price has been fairing in the last few years. Decision of Dividends The dividend decision consists in determining the optimal profit distribution volume that allows maintaining an adequate policy of sufficient remuneration and self financing to the actions of the company (Anil Kumar, Kumar and Mariyappa, 2010). Thus, a dividend policy is the decision in which a company distributes profits made for the year versus retention of the same for reinvestment in the company. The main issue that is derived from the dividend decision is whether market value of the company is independent of the dividend policy followed by the company. There are two main positions in economics that disagree with the way dividends are distributed in the company. Modigliani and Miller (1961) is one of the theories advanced in this topic which suggests that the dividend policy of a company is not relevant to the market value of the company (Bingham and Kiesel, 2004). The second position taken by economists is the Gordon (1962) that suggests that when a firm operate on an optimum dividend policy that is able to maximize the value of the firm and assumes that the buyer of a share pays its future dividends (Cassedy, 2004). The economic-financial structure of the company Bukit Darah PLC requires financial resources to carry marketing and other production activities. It needs financial resources so as to finance the investments necessary to be able to carry out its productive activity as well as to be able to face the payment of the current expenses originated by the same (Coyle, n.d.). The balance, for the economic-financial analysis which is the main model of the company, includes in the liabilities and the various financial resources that the company uses, while it relates the materializations of these resources which are investments and jobs (Dalton, 2013). In simple terms, the asset collects the working capital or productive capital and the working capital or financing liabilities. The economic structure of Bukit Darah Plc consists of investment in both current and fixed assets (Hicks, 2000). The investment in long term Assets which are also called fixed assets for the company is fundamentally determined by the capacity of absorption of the market, that is to say, by the demand. There is a necessary unsatisfied demand, which is however not sufficient, condition for an investment to be made in fixed assets and consequently for the company to grow. The investment in short term assets ensures the operation of the operating cycle for the company and is dependent on the value of the fixed assets (Joseph, 2009). Current assets investment is derived or complementary to the investment in fixed assets.The financial structure of the company consists of the resources that the company needs to carry out its activity, that is, the different means of financing, the origin of capital. We will group the financial resources in the following sections: Capital and Reserves The capital stock together with the reserves constitute the own funds of the company. These are the most stable or permanent sources of financing, since they have no maturity, and at the same time they are the ones that bear the greatest risk because, in case of bankruptcy, the partners participate in the value resulting from the liquidation of the company in last place, after having repaid the other credits (Labbi, 2014). Dividend policy of Bukit Darah In the year 2016/17, the company did not pay any dividends t its shareholders, this is the same case to the year 2015/16, where there was no dividends paid to the shareholders. Judging from the past two financial years, in which the company has not paid any dividends we can confidently say that the company dividend policy is a constant pay out ratio (Loader, 2007). Which means that the company pays out a fixed percentage of the companys profits, in this case, the percentage is zero percent of the total earnings. Dividend payout Ratio-DPR ratio is the total dividends paid to shareholders relative to net income of the company.It is the percentage of earnings paid out to shareholders. Bukit Darah Plc has not paid out dividends in the year2015/16 and the year 2016/17, which means that the dividend pay out is zero.Dividend Yield- Dividend yield is a stocks dividend as a percentage of the price of the stock of the company. The dividend yield is given by annual dividend/Current stock price. Dividend yield measures the investment productivity and is also viewed as an interest rate earned on an investment. The share price is 230lkr while the dividend paid is zero. Thus, the dividend yield for the company is zero.Market share value- this is also known a s the market capitalization, it is the market price of the share multiplied by the total number of ordinary shares of the company. The image above shows that the price of the share of the company is shedding. This means that the market cap is reducing, which could be as a result of potential buyers not expecting dividends. Theories on Dividend Policy Between the two previous positions there is a set of theories that are developed theoretically: residual dividend theory, the clientele effect, the informative value of dividends, dividend policy and agency or the theory of expectations. Theory of Residual Dividends :The Theory of Residual Dividends promotes its distribution only when all the investment opportunities have been satisfied; this is when there are residual benefits once the investment policy of the company has been established. The Theory of MM( Modigiliani and Miller) establishes the hypothesis that there is no brokerage expenses, that is to say, there are no expenses of issuing shares; however, the real situation is that there are emission costs in the market, so that the company is more expensive the money coming from the issuance of shares than it gets via retained earnings (Yip, 2008). The effect of issuance costs is to eliminate the indifference between issuing shares to finance dividend payments and domestic finan cing. The maxims are: - Keep the debt ratio constant for future investment projects. - Accept an investment project only if its net present value is positive. - Finance the part of the disbursement of new projects from the ordinary shares, first through internal financing and when it is exhausted, through the issuance of new securities.- If any internal financing remains unapplied after allocating the investment projects, it will be distributed via dividends (Yip, 2008). Otherwise there will be no dividend payment. According to this theory the dividend policy has a passive influence and does not directly affect the market value of the shares Recommendations For a company to use the best practices it should set a non binding policy to the company. The company should at least strive to pay its shareholders who have not been paid for the last two years by putting in place cost cutting measures to increase profits. the dividend policy of the company should be linked to the economic situation of the company and also its long term strategy so that it cannot affect future operations and investments to be made by the company. Companys exposure to foreign exchange risk Exchange rate risk is one of the modalities of so-called market risk, which refers to price variations, and also includes interest rates, financial asset value and commodity prices (raw materials, grains, etc.). It is called this because it is the risk that is run because of fluctuations in the exchange rate. It is particularly relevant for Indonesia and Malaysia. Sources of foreign exchange risk An organization, business or other, or a person, is exposed to exchange rate risk in essentially the following ways: by the mere fact of receiving income in foreign currency or having expenses in it when one operates essentially in local currency; there is always a risk that these revenues or expenses will be lower or higher, depending on the case, at the time of making them; the time factor is exacerbated when the time of receipt or payment is longer, as this increases the likelihood of an unfavorable exchange rate variation. Exporters and importers are well aware of this risk, which in ext reme cases can destroy their margins, by what is called foreign exchange losses, and make them work at a loss. Importance of foreign exchange risks Debts that can be commercial and especially financial; the risk is even greater if you have income in local currency, because with these you may have to pay more than you had anticipated. Many will think at the time of their mortgage or vehicle debts, which in Indonesia are heavily dollarized - with 45% of the loans being dollarized in general. This type of risk is the one that has caused to break in times of crisis to numerous companies in the most varied countries. During the Asian crisis, dollar debts multiplied as a result of devaluations by 1.5 or more times in countries like Malaysia, and Thailand, Indonesia being an extreme case (up to 6 times at any given time, for finish in more than 3 times) (Verma, 2008). By having deposits and other financial assets in foreign currency; these can earn or lose value in local currency equivalent with exchange rate variations. Of course, many will think of their dollar deposits that have lost value from about 3-4 years ago, for example, but losses only materialize when one has to sell them, and in the meantime they are only potential (WARREN, 2018). The same thing happens to companies, which can thus lose a part of their cash reserves, and also to banks, which may have had much of their liquidity in dollars and lose money for it. due to the fact of having debts in foreign currency. Hedging It is important to pay attention to the fact that the index in question has the greatest possible degree of correlation with the assets of the portfolio. If for example the portfolio has a dominant presence of companies in the technology sector, a benchmark index could be the money markets, which focuses mainly on assets in the sector (Sims and Clift, 2001). It is very important to keep in mind that this type of hedging strategies will probably have less return than an uncovered buying position in a period of strong market rises. The cost of accessing lower volatility and lower levels of risk is the lower return offered by hedged strategies during upward periods (Ullrich, 2009). Some investors also prefer to give a dynamic approach to the coverage scheme. In these cases, for example, the level of coverage can be increased when it is considered that the market circumstances so warrant (Rheinla?nder and Sexton, 2011). Internal hedging strategies Due to the fact that companies have both payables and receivables in foreign exchange currency but the companies that have these two classificationsin this respect; They can be classified as Hedging of currencies that values are to appreciateHedging of currencies that values are to depreciate The types of hedging in internal strategies include the following Denomination in currency of local value- the exchange can be completely avoided if the transaction is only done in local currency. To make the things equitable, the invoice transaction risk is the invoice value in spirit (Rana, 2010). This process only distributes the spread risk appropriately between the contracting parties but does not hedge the risk. Leads and lags this is done especially importers and exporters in forecasting of transactions and whether the currency will weaken or not. This means that the currency will be devalued or depreciated or strengthened for future transactions (Mukherjee and Mohammed Hanif., 2006). According to the expectations, the exporters and importers may like to postpone the payment or receipt of the foreign currency. Manipulation of foreign currency will depend on the timing and the expectations of change in currency.. In a hedging strategy instead, we have a buy position in a stock portfolio combined with a sales position in an equity index. In these cases, it is key that the stock portfolio generates a higher return than the rise of the long-term indexes, otherwise it would be more convenient to apply another kind of risk control strategies (Michayluk, 2007) External hedging methods: There are various methods in which external hedging can be classified to represent operations with the specific internal business operations that represent external hedging. The instruments in external transactions undertaken arises from internal business operations should represent the external component of hedging (Malley and Walsh, 2005). The products are known as derivatives and to manage this derivative risks, the transactions of financial instruments derive the financial value through them. Values of foreign currency derive their foreign currency expected risks from the underlying currency. The commonly used derivatives for external hedging are Future contacts Forward contracts Option contracts and swaps; Importance of derivatives in External Hedging includes the following Speculation. Maximizing of profits. Adjusting liquidity and hedging mismatched maturity risk. Export operations pose various risks to the exporting company. In addition to the risk of default or breach of contract are added two other types of potential situations that pose risks to the seller. One of them has to do with the exchange risk that the exporter undergoes having carried out the operation in a currency other than his own (Loukoianova, Neftci and Sharma, 2006). On the other hand, there is also a risk that political or economic circumstances in the importer's country will prevent the exporter from collecting. In addition to the normal risks associated with commercial activity (commercial and financial), the activity there are many more risk factors and uncertainties that can be found. 1.Risk of insolvency or collection risk: It is derived from the insolvency of the importer or from his delay in payment. 2.Risk of termination of the contract: This is the unilateral cancellation of the other party to the contract or purchase commitment. Depending on the sector, the res olution of a contract may have more or less catastrophic. Conclusion In a companies decision making strategy, the best decisions are usually aimed at maximixing shareholders wealth and the continuity of the company through expansion strategies. In this case, the company is using the hedging starategy for long term and short term business appraisal while the dividend policy is being used to make the best dividend payout decisions for the shareholders. A company is its decision makers, bad decision leads to a bad company and vise versa. References Anil Kumar, S., Kumar, V. and Mariyappa, B. (2010).Corporate accounting. Mumbai [India]: Himalaya Pub. House. Bingham, N. and Kiesel, R. (2004).Risk-neutral valuation. London: Springer. Cassedy, P. (2004).Finance. San Diego, Calif.: Lucent Books. Coyle, B. (n.d.).Hedging currency exposures. Dalton, H. (2013).Principles of Public Finance. Hoboken: Taylor and Francis. Hicks, A. (2000).Managing currency risk using foreign exchange options. Cambridge, England: Woodhead Pub. Joseph, T. 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