Investments and Wealth Creation
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General Electric Corporation and Tyco International are both classified as "conglomerates" (having many diversified business lines). General Electric has pursued a conservative growth strategy by focusing on being the number one or number two in each industry where it competes.
Tyco has pursued very aggressive sales and earnings growth strategy through rapid, multiple acquisitions.
General Electric www.ge.com
Tyco International www.tyco.com
From each company's web site, and/or web based financial services sites (e.g.: finance.yahoo.com, moneycentral.msn.com, annualreports.com, sec.gov) locate the following information:
Common shareholders' equity (total equity less any preferred stock equity)
Market Capitalization (total common stock shares outstanding times latest stock price)
Net profit margins for each company for the past 5 years.
Answer these questions:
- Have the investors assuming that greater risk been rewarded with greater investment.
- Based on these market-to-book ratios, which company's strategy has provided greater shareholder wealth creation?
- Calculate the average net profit margin for each company for the five years' worth of data obtained. Include your calculations in the assignment. Based on these average net profit margins, which company has done a better job of maximizing profits?
- Did the company achieving the greatest profit maximization also achieve the greatest stockholder wealth maximization? If not, which strategy was more beneficial to the shareholders?
- Which company's strategy has presented greater risk to the shareholders' investment?
- Divide each company's market capitalization by that company's shareholders' equity. This market-to-book ratio provides one measure of shareholder wealth created by each company. Include your calculations in the assignment
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This solution answers various questions regarding investments and wealth creation.
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For Q1 to 3 see excel file attached.
4) Did the company achieving the greatest profit maximization also achieve the greatest stockholder wealth maximization? If not, which strategy was more beneficial to the shareholders?
Profit maximization should not be the decision criterion of the management. Instead, it should be wealth maximization, which is based on the maximization of cash flows. Cash flows are more important to business as it leads to wealth maximization. The profit maximization has certain pitfalls as a criterion, which is as follows:
? It is Vague
? It Ignores the Timing of Returns
? It Ignores Risk
Moreover, in new business environment profit maximization is regarded as:
? Unrealistic
? Difficult
? Inappropriate
? Immoral.
Benefits of cash flow as criteria
? Maximizes the net present value of a course of action to shareholders.
? Accounts for the timing and risk of the expected ...
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