Fannie Mae’s short-term goals include following; improve and educate the staff and process in controller’s office, clear-up all irregularities in their accounting and improve procedures and controls in all aspects of the accounting process. Their long-term goals will also include the continual the efforts and upkeep of their short-term goals plus; keeping their triple-A credit quality, correcting the public image, and improve their relationship with HUD.
Fannie Mae is in a strong financial position and their operating Earnings per Share (EPS) have been in the double digits for the past 15 years. A possible merger could upset the company and its dominance in the mortgage industry and could result lawsuits for monopolies. Its strong financial position is overshadowed by investigations of questionable accounting practices. A horizontal merger could result in increased synergy and more management talent could be added to the pool to establish or fix their accounting practices.
Managing International Acquisitions Simulation
Businesses operating internationally use acquisitions to enter new markets or consolidate existing operations. This simulation examines the key issues in acquisitions, ranging from the identification of a strategic fit to measuring the gains from an acquisition. The latter involves estimating the cash flows of the target businesses and discounting these cash flows to obtain their present value.
The simulation we are the associate Vice President Corporate planning in First South Pacific Bank (FSPB). We have the responsibility to plan and implement the acquisition strategy for a bank in Kitanesia. We target six banks, identify which banks are the best fit for FSPB, and narrow the list down to three. The banks are analyzed on the following parameters:
- Competitive position of the banks in its market segment,
- Assets and liabilities of each bank,
- Sectoral exposure,
- Networks of branches/ATM’s, and
- Product range.
FSPB’s fortunes in Kitanesia are determined by our decisions
After narrowing the list to three banks, we used the discounted cash flow (DCF) technique to measure the potential gain from each acquisition, and identify the best two options of the three banks.
We evaluate and assess the three banks for accuracy. The discount rate also includes the risk of making an investment in particular banks. We observe the profitability index of acquisition in the case of each bank.
Then we have to close the deal. We decided that the Eastern Union Bank (EUB) as the best deal. There is a competitor that also wants to acquire the same bank. EUB is open to being taken over as long as the shareholders get the best deal. So we must decide on an appropriate bid. We go through a valuation process. We determine future cash flows by looking at:
- Historical trend growth,
- Banks inherent growth rate, and
- Economic projections.
The cost of equity is used to discount the cash flow using the following factors:
- Level of non performing loans,
- Return on equity, and
- Net interest margin.
Our competitor outbids the company by 100 million. We give a counter bid. The higher our counter bid the lower the profitability index. The total payback years, goes up, and the internal rate of return is lower.
We decided a counter bid for EUB would be too expensive. We decided to acquire both Merchants Savings Bank (MSB) and Great Progress bank jointly.
Analysis Theories, Fortune500 Company – Bank of America
For this paper, we will provide financial planning and financial statement analysis theories in comparison to Fortune 500 Company – Bank of America. Bank of America faces similar challenges as First South Pacific Bank. They both utilize the financial planning and financial statement analysis theories of to best meet their needs. By looking through the balance sheet, income statement, uses and sources of funds and the overall measuring of the executive paper’s financial condition, they are able to make an educated decision regard the company or corporation in question. The financial planning is crucial to know where the company sees their road map in a best-case or aggressive growth plan, normal growth and a plan of retrenchment. Knowing the entire basis in financial positioning, health of the company and the industry, goals and benchmarks of the company and their financial plan allows both Bank of America and First South Pacific Bank to make the best decision possible.
Bank of America’s short-term goals; listening to their customers, investing on improving the banking centers overall experience, fast service with knowledgeable sales personnel and providing excellent telephone and on-line banking services. Their long-term goals include the continuation of their short-term goals along with; improving consistency from bank to bank, franchise to franchise, product development example: Loan Solution, International ATM transfer cards, and renovate the banking centers to provide better customer service.
Bank of America has merged with Seafirst Bank creating a company that puts customer service at the forefront. Their earnings are over $10 billion and the plan for expansion of 550 new or renovated banking centers has resulted in positive synergy. They are also in the process of cresting international ATM cards. This is a company that also values diversity and its employees.
Risk Management Simulation
In this simulation, we managed (minimize) risk by diversifying and choosing investment options with the desired volatility. The simulation shows the effects of market risk and unique risk on the performance of investment portfolios.
For this simulation, we are the stockbroker. Risk management is volatile, and is unpredictable. It can make millionaires or paupers out of many.
In this simulation, we are the sole director of a four-month-old investment consulting company. We have just signed up our third client, and they want us to manage their portfolio.
The three clients want to test our investment capabilities before they employ us for the longer term. They will use the following criteria;
- We will manage their investments for an 18-month trial period,
- They will review there portfolio performance every 6 months. and
- They can withdraw there capital if their portfolio makes a loss anytime during the trial period.
We look at the hot tip, and each client’s investment information. Looking at each client’s investment desires. We decide what risk level to use; high, moderate or conservative. Then we choose what percent to invest in stocks and in treasury bonds. Our plan is reviewed by the clients and then we are given the go-ahead. We then choose what investment options work the best for our clients. The choices are two stocks, one mutual fund and U.S. Treasury Bills. We judge the future prices of the stocks and mutual funds on their historic data and discussions with three leading market analysts. The Treasury bill gave a steady 6% annual return. The six-month value of this return is used for our calculations. We also decide how much capital is to be invested in each of these assets.
As the quantity is invested in the various stocks, we are able to see what the future price is projected to be from the leading analyst. We took all three analysts costs and came up with an average future price. As we invested each client’s portfolio in various stocks, we were able to see the affect on the overall beta for the client’s portfolio. We invested in such a way to achieve the highest beta under each clients need, high, moderate or conservative for each client’s beta. Even then there was no guarantee that the stock would perform. Each client was happy with our six-month return. Then we moved into the next six-month session, where another stock is added to our choices.
After making a few adjustments all, the clients had still made a profit and were waiting to see how the next six month would turn out. However, after making many adjustments the clients lost money in the last six months. Two of our three clients withdrew there capital.
Analysis Theories, Fortune500 Company – Merrill Lynch
For this paper, we will provide financial planning and short-term financial planning analysis theories in comparison to Fortune 500 Company – Merrill Lynch. Merrill Lynch faces similar challenges as Kramer Associates. They both utilize the financial planning and short-term financial planning analysis theories of to best meet their needs. They analysis the company’s product development and their objectives with business plan for the future to include; best-case scenario, normal growth and a plan of retrenchment in times that could become lean. The short-term financing is essential when trying to maximize the net working capital (current assets minus current liabilities), to make good decisions about the profitability a particular company. The assets could include cash, marketable securities, inventory, and account receivable. The liabilities that are the most important are the short-term loans and accounts payable.
Merrill Lynch short-term goals include; improve public image, maintain client privacy and to keep the best interest of their shareholder and their cliental. Their long-term goals include the continuation of their short-term goals along with maintaining a good relationship with the government and regulators, valued added research and protecting and prevent any internal, illegal activity.
Merrill Lynch has been the world leader in investment and financial planning in the global market. They have recently entered into the world of energy trading by entering into an agreement with Entergy – Koch. This partnership exists despite the negative public image that found four former bankers guilty of conspiracy in the Enron scandal. The potential for a vertical acquisition exists but the SEC will be monitoring closely.
Conclusion
This paper has described the key financial challenges facing the organization(s) in the simulations of “Working Capital Management, Managing International Acquisitions, and Risk Management”. An evaluation and analysis for each of the simulations has been provided. In addition, this paper has provided research on selected Fortune 500 companies that faces similar challenges to those that have been identified from the simulations. A description of the company was included with an evaluation of the company’s financial performance, along with a brief discussion of short-term and long-term financial strategies that could improve the company’s financial performance. Additionally, consideration was given to whether a merger or acquisition could positively impact chosen Fortune 500 Company’s strategic outlook, a description of the pros and cons for such a venture, including possible synergies, cost savings, and moral issues was provided. Strategic financial planning and management, as seen in these simulations and Fortune 500 company evaluations and analysis, is the cornerstone of a successful business in today’s market. Strategic financial management is a part of the essential operational framework in the complex and demanding areas of corporate finance for the business environments of today. Strategic financial management will provide dividends to the stockholders, and wealth to stakeholders.
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