Blog 6

I have always thought that only big companies in the market can buy off smaller companies to use them to their advantage. After attending this week’s lectures, I have learned that a company that intends to buy another company off its owners does not necessarily mean it wants more power or to gain more market shares. Mergers and acquisitions happen almost every day and it is not surprising because of the advantages it brings. Two companies working together will bring more synergy than their competitors and will also have more market power, good economies of scale and many other benefits. If things work out well, a successful merge will often result in an increase of profitability. However, not ever mergers and acquisition work out and the attempt of doing so might affect the companies’ share prices. The knowledge acquired in the lectures this week will be useful to me in writing my assignment as it talks about the failure of Fiat Chrysler to start merger discussions with General Motors.

The seminar for this week is rather laid back as we do not have to prepare anything prior because there is an assignment discussion with the tutor. For me, the most significant experience that I have gained here is definitely how to be more prepared. Previously, I do not really prepare for classes and because tutors would just give us the answers to the questions. Unlike studying here, we have to prepare for classes or else we might be asked to leave the class and that has somewhat improved my way of learning. Another thing that I have noticed is that the European students are generally more vocal and brave to voice out their opinions in the classroom. Looking back, and even now whenever I am with my fellow Asian friends in class, I realized that we tend to be quiet and timid when asked for opinions that we shy away from voicing them. We would just let the lecturers and tutors do all the talking. After the assignment discussion in the seminar, we were asked to form groups to have an informal evaluation of our blogs progress so far. I was grouped with 2 Europeans and 1 Chinese. We looked at each other’s’ blog posts and needless to say, I did not have much to comment. However, I received a lot of comments from both the European students and I have learned things that I would not have thought about. I kind of feel bad for them as the Chinese girl and I did not really give constructive comments to the European students. Having attended the seminar this week has helped me form a deeper understanding of what the assignment questions really ask of us. Additionally, I have received constructive criticism on how to write my blog posts better from my fellow classmates. 

Blog 5

This week I chose to watch the movie Wall Street: Money Never Sleeps. This 2010 movie is a sequel the Wall Street, the 1987 film. This movie talks about the financial crisis that happened in 2008. While this is a fiction, it has made me understand more about the working life in investment banks and the greed of bankers in the financial world. Following a documentary about the collapse of the Lehman Brothers about 3 weeks ago, this movie has a little similarity at the beginning where Keller Zabel Investments (KZI) faces loss during the 2008 financial crisis and is forced to arrange a bailout with other Wall Street banks. While KZI is facing bankruptcy, Bretten James of Churchill Schwartz saw the opportunity to make money by buying out the company’s shares at a very much cheaper price compared to what they were trading for before this. This shows that instead of helping each other out, the bankers are actually trying to benefit from the downfall of one another on Wall Street. The downfall of the company also meant that all of the employees have lost their jobs.

Later on, Gordon Gekko, the man who went to jail for insider trading and fraud revealed that the collapse of KZI was due to rumours about toxic debt that the company has being spread around. This reminds me about the lecture topic a few weeks ago about the stock market and the efficiency of it. It is basically how the public react to information that are being circulated or spread. Initially, I did not see how the theories I learned in class could be applied to real life scenario but this movie opened my eyes and after reading about the lectures again, I could see it being applied. A hypothesis called efficient market hypothesis (EMH) suggests that prices of stocks fully reflect on available information that are related to them. There are 3 degree of efficiencies which are strong efficiency, semi-strong efficiency and weak efficiency. In my opinion, there is no absolute one definite form of efficiency in any given market. With the improved technology we have now, information are being spread every second but are the information legit?

Having watched this movie has improved my understanding of how stock market efficiency can be applied to the real world. However these are just my thoughts and opinions and may be wrong. I would definitely love to learn more about this when I am older and can therefore take this into practice by working in an investment bank or just by trading stocks and see how this can be applied.

Blog 4

Dividends, something that I see myself receiving in the future when I invest in the shares market. I have always looked at dividends as some forms of passive income and that with good investing decisions in the share market, I will essentially have my money working for me to generate even more money. After this week’s lecture, I learned more about what are some of the dividends policy and the reality of how dividends actually work.

Every company that is funded by shareholders have to ask themselves 2 questions; do we reinvest the money into the company in hopes for better returns or do we pay out dividends to our shareholders in hopes of attracting more people to buy our shares? Ultimately, a company’s goal is to increase profits and to maximize shareholder’s wealth. This week’s lectures have opened my mind up to the 2 argument of dividend policies which are the Dividend Irrelevance School and the Dividend Relevance School. Based on what I have understood, the Dividend Irrelevance School states that dividends are merely residual payment that are paid only if there is a surplus after investing all the earnings. This would have the same results according to Modigliani and Millar as investment and dividends payout both increase shareholder’s wealth. The Dividend Relevance School however, states that because the future is uncertain, investors would prefer to have the dividends paid out now than to leave it in the uncertainty of investments.

Having learned this and thinking about some of the shares that my parents have bought back home, I think that dividends truly matter to companies and are definitely relevant. This is because companies generally do not want to lose investors’ confidence by paying out low dividends but at the same time paying overly high dividends may be unsustainable in the long run so they need to find the right balance. 

Blog 3

Capital structure is the topic for this week’s lecture. Coming into the lecture I expected that the idea of raising capital using different sources would be discussed, which is what it is all about anyway, at least that is what I presumed. Being a person who has a short attention span of about 20-30 minutes, I listen attentively during the first half of the lecture because I know that the remaining of that would be difficult for me to endure. True enough to what I have assumed, the introduction started with the lecturer stating the equity vs debt discussion, where raising capital through debt has lower risk and costs compared to raising capital through equity. However, it does not necessarily have to be only one way of raising the capital. A company can use a mixture of both debt and equity to raise capital. The weighted average cost of capital calculation is then introduced and it suggested the concept of an optimal capital structure. For me, the most significant aspect of this idea is that theoretically by increasing the gearing of the company, the weighted average cost of capital will be lowered. However, there are some risks of financial distress as the debt goes higher and higher. In 1958, Modigliani and Millar argued that a company’s capital structure has no impact on the weighted average cost of capital and that there is no optimal structure. This is questionable as they assumed that they is no taxation and that there are no costs of financial distress. In 1963, they revised the argument and included tax into the assumption. Having attended the lectures and reading the slides again when I went home, I have understood that as gearing increases, weighted average cost of capital decreases because of the tax benefit and in turn, this will increase the value of the company. The next thing that I would like to do is to read more about the effects of the costs of financial distress on the levels of debt which I will when I have the free time.