İŞLETME FİNANSI II - Deneme Sınavı - 11

Operational risk is simply any event that disrupts the normal flow of business processes and which generates financial loss or damage to the image of the bank.

A measure of the average of all potential losses exceeding the VaR at a given confidence level, which makes up for VaR’s shortcomings in capturing the risk of extreme losses (ie tail risk).

Liquidity, frequently overlooked by financial institutions, may bring substantial losses in a very short period of time. The most profitable financial instruments tend to be illiquid assets.

The characteristics of the multinational corporations are:

Exporting is the most popular low-risk entry strategy as it involves little investment and exit is unproblematic. It is a fact that for the firms with insufficient resources for other types of internationalization strategies, exporting is the only way to reach to foreign consumers. However, success is entirely dependent on being able to identify efficient and reliable distribution channels. Other critical factors are import tariffs and quotas as well as freight costs

Nominal Exchange Rate is the rate between two currencies and represents the relative price of two currencies (the offer to exchange one currency into another). The exchange rate is generally determined in the exchange rate market under the demand and supply conditions. The foreign exchange rate used in the contracts is generally the rate as determined by the intermediary financial institutions referring to the rate determined in the market.

With the ultimate goal of profit maximization, traders in the interbank market try to buy and sell various foreign currencies and so they quote two-way prices. The bid rate is the rate at which they want to buy a base currency and the ask rate is the rate at which they sell the base currency. The difference between these two rates is known as the bid-ask spread.

The principal functions of the foreign exchange market are the following:
• To set the prices of some currencies with respect to others (currency pairs).
• To allow for the realization of currency risk coverage, for example, when investments are made in another currency.
• To favor the exchange of funds between different countries that have excess liquidity and which are in need of foreign currency liquidity.
• To finance international trade, whose transactions represent a significant part of the currency market.

Three main types of exchange rate risks are:

The global financial system is immense, variant and interconnected. It consists of many different types of financial institutions, as well as financial markets in stocks, bonds, commodities, and derivatives. It is a fact that the global financial
the system promotes economic growth by several means:
- facilitating specialization and promoting trade;
- mobilizing resources globally;
- Increasing the set of opportunities available to companies, entrepreneurs, and
individuals to participate in and contribute to global economic growth.
- facilitating risk management,
- obtaining information for the evaluation of businesses and allocating capital

The target distribution ratio is the percentage of net income distributed to the shareholders through cash dividends or stock repurchases; while the target payout ratio is the percentage of net income paid out as cash dividends. As the distribution ratio includes both cash dividends and stock repurchases, the distribution ratio must be higher than the payout ratio

The date the board of directors announces to pay the dividend is the declaration date. After declaring this date, the company is obligated to make the payment. The company will pay the dividend only to the registered shareholders of record on a specific date which is called record date. While registration takes three business days, anyone purchasing the company’s stock at least three business days before the date of record can claim the right to receive the dividend. Therefore, the date two business days before the date of the record is called the ex-dividend date. The company sends a dividend check to each of the registered shareholders at the date which is called payment date

There are four types for stock repurchases;
1. Open-market repurchase. The company makes a public announcement to buy back its own share of stock in the open market that is the most common method. There exist certain daily buy-back limits on the number of shares in open market share repurchases. For instance, the SEC Rule 10b-18, introduced in 1983, dictates that the company cannot repurchase more than 25 % of the average daily trading volume in the US.
2. Tender Offer. The company can repurchase a number of shares through a tender offer in which it offers to buy shares at a specified price.
3. Dutch auction. The company specifies a price range that it is willing to pay, and shareholders offer how many shares they are willing to sell at that specific price range. The company then buys shares from the lowest priced offers. If there are not enough shares offered at the lowest price to accomplish the desired buy-back, the issuer may accept offers from the next higher priced.
4. Targeted Repurchase. The company can repurchase a block of shares at a negotiated price from major shareholders. The most important example is greenmail transactions, in which the shares are repurchased at a large premium over the current market price.

The principal advantages of repurchases are as follows;
1. A company can repurchase stock to distribute excess cash without changing the number of dividends. Because managements are reluctant to increase the dividends unless management is confident in the future. Also, they are reluctant to decrease the dividend because of the negative signal.
2. When a company has more equity than its target capital structure, the company can directly change its capital structure by repurchasing. For instance, a company may issue debt and use the proceeds to repurchase stocks for adjusting its capital structure.
3. A company can repurchase stock to minimize the “dilution effect” associated with exercising the stock options that have been given to employees as bonuses.
4. Due to the signaling effects, stock repurchase is perceived as a positive signal that the company’s stock is undervalued in the financial markets; therefore when a company engages in the stock repurchase, investors prefer to purchase additional shares.
5. Repurchases have a tax advantage over dividends due to the deferred tax on capital gains.

Stock dividends and stock splits are related to the company’s dividend payout policies. The stock dividend is a type of dividend paid out for additional shares of stock to the current shareholders.

Stock split involves exchanging old shares of stock more than one new share. When a stock split is declared, each old share of stock is split up into more than one new shares. For example, in a declaration of a two-for-one stock split, each old share is split into two new shares, therefore doubling the number of shares outstanding and reducing the par value of each share to one-two of the pre-split value.

This is called a dividend irrelevance theory set in a perfect world where
(1) investors can buy and sell stocks without any transaction costs,
(2) companies can issue stocks without any costs,
(3) there are no taxes and transaction costs,
(4) the markets are perfectly efficient,
(5) investors are completely rational and
(6) there are no conflicts of interest between managers and owners.

As a counterpart to Modigliani and Miller’s (1961) dividend irrelevance theorem, Myron Gordon (1963) and John Lintner (1962) proposed their arguments for dividends. In particular, they argued that investors are more certain of receiving dividend payments than receiving capital gains resulting from retained earnings that are called the bird-in-the-hand dividend theory. In another word, investors value a dollar of expected dividends more highly than a dollar of expected capital gains as the risk associated with capital gains is higher than that with dividends. Therefore, when a company decides to distribute more dividends, the required rate of return on equity decreases

The company has to perform the following steps to establish its target payout ratio:
1. determine the optimal capital budget
2. determine the amount of equity needed to finance this budget
3. use retained earnings to meet equity requirements to the extent possible
4. pay dividends only if more earnings are available than are needed to support the optimal capital budget.

The Factors Influencing Dividend Policy: the previous parts, the theories of investors’ preferences for dividends and the other dividend policy issues are described. In this section, the factors that affect the dividend decision are discussed as follows;