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A Company’s Value: Financial Management

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  1. Common shareholders have different rights and privileges when compared to other shareholders. Notably, the legal implications of these rights differ based on the state where the business’s headquarters is (Horton, 2019). However, common stockholders can have an influence on the management of the company, can share the income, profit, and assets of this organization, as well as voting rights. The principal privilege is the ability to purchase newly issued shares or preemptive rights.
  2. Free cash flow (FCS) describes all the cash that is in the company’s current availability and can be distributed among shareholders (Brigham & Ehrhardt, 2017). The weighted average cost of capital (WACC) is the return rate, and the value of operations. It can be established by discounting the WACC by the present value of the future FCS. Thus, future FCS and WACC are used as an evaluation model of the free cash flow.
  3. Chart 1 and 2 present the sources of a company’s value, and Chart 2 displays the claims on a company’s value. Equity is a residual claim because they allow shareholders to receive a portion of the business’ value if it is liquidated. In general, the company has to pay its debt owners and preferred shareholders in case of liquidation. The remaining value is distributed within other shareholders through equity claims.
Sources of a hypothetical company’s value
Chart 1. Sources of a hypothetical company’s value (created by the author).
Claims on a company's value.
Chart 2. Claims on a company’s value (created by the author).

This is the formula for calculating the most recent free cash flow:

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  • Vop=FCF1/WACC gL

This is the formula for the present value:

  • Vop=FCF0*(1+gl)/WACC-gL

Report

The expansion of business and acquisition of other companies usually leads to a synergy effect – resulting in improved efficiency and affecting the profits in a positive manner. Regardless, there are several potential ethical issues that can appear as a result of expanding into other fields. It is evident that upon acquisition, the human resource management company will want to integrate the two businesses into its operations by aligning the workflow and general procedures.

This will allow the business to have better control over the operations. However, the ethical problem is the competition between the two human resource management firms. This can result in difficulties when planning for the growth and development since this human resource organization’s management may prioritize their business over Temp Force Company and B&M.

Additionally, a primary ethical consideration is the acquisition of companies that supply staff by a human resource management organization. This human resource organization sources employees in a variety of fields, and it is vital to ensure that the expansion will not create a conflict of interest for the three organizations (“Ethical considerations,” 2016). Notably, Temp Force Company has a clearly outlined specialization – word process operators and software developers, meaning that it is better to include a strategy that would allow Temp Force Company to continue working in this field.

The strategy must include an opportunity to promote ethical standards within the organization. The human resource company must ensure that both companies’ approach to managing human resources is ethical and aligns with the legal requirements, such as work standards, fair wages, and equal opportunities, to avoid moral dilemmas after the acquisition. In general, an expansion that the human resource company aims to carry out should strengthen its position.

References

Brigham, E. F., & Ehrhardt, M. C. (2017). Financial management: Theory and practice [with MindTap] (15th ed.). Mason, OH: South-Western.

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Ethical considerations in international business. (2016).

Horton, M. (2019). What rights do all common shareholders have?

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