Corporate Financial Management
Section 1: Equity and debt financing, risk and return, cost of capital
5. Nintendo’s stock has under or outperformed the market
In order to calculate whether stock is under or outperformed the market, comparable approach can be used. Under this technique, the performance of the share can evaluated by market value of per share is divided by the earning per share (Da et. al. 2012). In this, it is found that the current market price of Nintendo is 47.66. At the same time, the company is providing the 30 Yen as the earning per share. Therefore, the value of the stoke will be
= 47.66 / 30
= 1.58
Hence, it can be said that Nintendo’s stock has under market.
6. How much of the performance can be attributed to management
Typically, in the business environment, the management of the organisation is responsible for the overall performance of the company. The management of the company is liable to make the profit by making the effective utilisation of the resources. If a company performs well then it indicates the management is making the effective utilisation of the resources. On the other hand, if company does not perform well it means that management is not effective in utilisation of the organisational resources (Dempsey, 2013).
The term cost of equity refers to the dividend paid in against of the capital invested by the shareholders. It can be calculated by the evaluated percentage dividend paid by the company. The financial statement of the company shows that it paid ¥ 51,654 million on the total shareholder equity ¥ 1,262,239 million.
Cost of equity = Dividend paid / shareholder equity * 100 (Edmans, 2011)
= 51,654 / 1,262,239 * 100
= 4.09%
Therefore, it is found that the cost of equity is 4.09%.
Section 2: Capital structure choices
1. Different kinds or types of financing that Nintendo has used to raise funds
NINTENDO uses the different kind of the source to raise the fund for its business operation. In this, it is found that the company uses both main source of financial such as debt finance and equity finance. Under the debt finance, company raise the fund from the account payable, short term finance, bank loan etc. On the other hand, as the equity finance company raises the fund from the preference share and equity share (Filis, et. al. 2011).
- Debt to Equity Ratio and Debt to Total Asset Ratio
| Ratio | Formula | 2017 | 2016 | 2015 | 2014 | 2013 |
| Debt to equity ratio | Total debt / Total equity | 0.17 | 0.12 | 0.16 | 0.17 | 0.15 |
| Total debt | 21,80,06,000 | 13,60,01,000 | 18,53,90,000 | 18,79,71,000 | 20,68,887 | |
| Total equity | 1,25,09,72,000 | 1,16,09,01,000 | 1,16,75,54,000 | 1,11,84,39,000 | 1,36,08,552 | |
| Debt to total asset ratio | Total debt / Total assets | 0.15 | 0.10 | 0.14 | 0.14 | 0.13 |
| Total debt | 21,80,06,000 | 13,60,01,000 | 18,53,90,000 | 18,79,71,000 | 20,68,887 | |
| Total assets | 1,46,89,78,000 | 1,29,69,02,000 | 1,35,29,44,000 | 1,30,64,10,000 | 1,54,02,966 |
The above table shows the calculation of the debt to equity ratio and debt to total assets ratio for Nintendo last five years. In this, it is identified that debt to equity ratio is low for the company. In the financial year 2017, the debt to equity ratio is calculated 0.17 that increased from the previous year 2016 by 0.12. It means that company have more belief in the equity finance. At the same time, debt to total asset ratio is identified 0.15 in 2017 that is also increased by 0.10 from the last year 2016.
3. Advantages and disadvantages associated with the firm using debt?
By the help of the calculation of the debt ratio, it is found that there is a low debt ratio. In capital structure of the company, there is a big part of the equity as compared to debt. The main advantage of firm using debt is that it has to provide the less dividend and tax. On the other hand, it also shows that most of the organisational assets are fully owned. It also minimises the risk of the company (Shepherd, 2015). At the same time, advantage of using the debt is that it helps to retain control on the flow of the capital. It also provides the tax advantage to the company because interest on debt is tax deductible. In additionally, debt finance is also supportive in the planning.
At the same time, the main loss of firm using the debt is that it decreases the profitability of the company because it has to pay interest on the operating profit. At the same time, in order raise the money by debt, a company has to need a good image in the term of the credit rating (Squire, 2013). At the same time, debt finance is risky form of the debt finance. However, it is used to raise fund quickly but is risky. It requires interest whether profit made or not.
4. Capital structure of the company and application of qualitative trade-off
From the above calculation, it is found that there the capital structure of Nintendo is not good because there unbalance between the debt and equity. In the capital structure of the company depicts that there is only 14.84% debt that is realty less. At the same time, it is also found that debt to equity ratio is calculated 0.17. On the other hand, industry ratio is found by 37.24% that is much appropriate compared to company. It indicates that other companies in the industry have balance between the debt and equity (Vanhove, 2012).
Qualitative trade-off tehory of the capitalt streucture is associated with the debt and equity that determine how much debt and equity should have in the capitla structure of the company. It helps the company to maintain the balance between the debt and equaity. According to this theory, company should have equal debt and equity in its capital structure. But, on the other hand, the capital strucure of Nintendo contains the 14.85% debt and 85.16% equity. On the basis of this, it can be determined that it has too little debt and unbalanced capital structure (Pilbeam, 2010).
1. How much cash has the firm accumulated over time
Cash is a significant term of the business environment that is used during the making the payment or receiving the payment. The annual report of the company shows that it accumulates cash each year. In the last financial year 2017 company also accumulated some cash. The financial statement of the company shows that it received ¥ 662763 million in the financial year 2017 and ¥ 570,448 million in 2016. Therefore, the cash accumulation of the company was ¥ 92315 (662763 – 570448) million in the last financial year. At the same time, it is also found that in the financial year 2017, the company found generated 19101000 cash from the operating activities. At the same time, it generated 69,518,000 cash from the investing activities. But, Nintendo expended 14,435,000 in the financial activities (Nintendo, 2017).
2. How has the company returned cash to its owners
Nintendo Company returned its owners cash in the form of dividend. The company pays its cash to the equity share holders in the year ended of March 31 is ¥ 51,654 millions. This dividend is occurring with the profits which are generated by the company during in that year. Thus, by distributing the part of the profits among the equity shareholders, company retain its goodwill in the market.
This strategy also encourages the employees to perform well in future and generate more profits for the company. Therefore, it can be stated that dividend plays a significant role to motivate the employees in regards to achieve company goals (Rezaee & Riley, 2011).
3. How does this firm’s dividend policy compare to industry
The firms’ dividend policy of Nintendo Company is quite different as compare to peer industry as company has a basic policy to provide funds internally for the future growth. At the same time, to maintaining the strong and liquid financial position in regards to this keeps update with the changes in the business environment. Moreover, company pays its dividend based on the profits levels in each fiscal period. Other than that, it is in Nintendo Company policy to distribute the surplus twice per year in the form of an interim dividend. As per the company standard, the interim dividend per share is calculated by dividing 33% of consolidated operating profit by the total number of outstanding shares, excluding treasury shares, as of the end of the six-month period rounded up to the 10 yen digit (Rubio, et. al. 2012).
Da, Z., Guo, R.J. and Jagannathan, R. (2012) CAPM for estimating the cost of equity capital: Interpreting the empirical evidence. Journal of Financial Economics, 103(1), pp.204-220.
Dempsey, M. (2013) The capital asset pricing model (CAPM): the history of a failed revolutionary idea in finance?. Abacus, 49(S1), pp.7-23.
Edmans, A. (2011) Does the stock market fully value intangibles? Employee satisfaction and equity prices. Journal of Financial Economics, 101(3), pp.621-640.
Filis, G., Degiannakis, S. and Floros, C. (2011) Dynamic correlation between stock market and oil prices: The case of oil-importing and oil-exporting countries. International Review of Financial Analysis, 20(3), pp.152-164.
Nintendo (2017) Annual Report [Online] Available: https://www.nintendo.co.jp/ir/pdf/2017/annual1703e.pdf
Pilbeam, K. (2010) Finance and Financial Markets. USA: Palgrave Macmillan.
Rezaee, Z. & Riley, R. (2011) Financial Statement Fraud Defined. USA: John Wiley & Sons.
Rubio, F., Mestre, X. and Palomar, D. P. (2012) Performance analysis and optimal selection of large minimum variance portfolios under estimation risk. Selected Topics in Signal Processing, IEEE Journal of, 6(4), pp. 337-350.
Shepherd, R. W. (2015) Theory of Cost and Production Functions. USA: Princeton University Press.
Squire, L. R. (2013) Fundamental accounts, Academic Press: California.
Vanhove, N. (2012) Economics of Tourism Destinations. UK: Routledge.
