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Unit VI Essay

Nguyen Duy Son

Columbia Southern University

MBA 6081, Corporate Finance

Dr. Andrew Borg

04 April 2021
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Unit VI Essay

The assignment summarizes the internal and external financing, agency conflicts such as

conflict of cost, agency problem, dividends and dividend policies, buyback shares. These

contents are quite important for leaders and investors in company or project management.

Especially the case study "Royal Dutch Shell Buy Back Shares" also details buyback shares.
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Part 1 External Financing Requirements and Agency Conflicts

External Financing Requirements

External financing is a firm's capital which financed externally, such as loan banks or

private and corporate investments through the issuance of company shares. There are two

common ways to mobilize external finance. First, the company borrows money from banks or

finance companies. If the company chooses the first option, they need to consider the interest

rate to repay the loan. The second is to issue and sell company shares and solicit investment from

individuals or capital companies. If the company chooses the latter option, it should consider the

dividends to shareholders and the maximum number of shares allowed so that the company

owner does not lose control. The advantage of using external finance is to allow leaders to use

internal finance for other beneficial purposes, for example, leaders can use internal finance to

bring higher results for the interest payment of loans which come from external finance. Also,

companies use external finance to invest in infrastructure, machines and equipment because

normally these investments need large capital and have a long depreciation period. Therefore,

using external finance for them is the most appropriate, for example banks or financial

institutions often encourage businesses to borrow capital to supplement business with low

interest rates or invest in infrastructure, machines and equipment to increase business efficiency

at preferential prices (Berk & DeMarzo. 2017).

Agency Conflicts

A conflict is a disagree and inconsistent views between two parties, specially owner and

manager or shareholders and manager or bondholders and shareholders. According to Berk &

DeMarzo, a normally conflict of interest between manager and investors occurs when investors

want high profits while the manager wants to priority ensure safety risks for the company with
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average profits, so they will not follow up owner requirements. This is called agent problems.

Also, there is a conflict of cost between owners and agent. Owners is shareholders and agent is

manager, for example, owners think that they have paid a high cost for the manager to operate

well and maximize the company's profit, and at the same time have to pay for the monitor for

manager activities. These costs are collectively known as agent costs. However, the Manager

does not perform profit optimization as requested by the owner. Besides, there is a conflict of

interest between bondholder and shareholder, for example, the owner company wants to use

profits to reinvest the company for more development, but the shareholders want the company

to pay dividends (Berk & DeMarzo. 2017).

Part 2 Royal Dutch Shell Buy Back Shares

Royal Dutch Shell and BG Group Introduction

BG Group is a British company while Royal Dutch Shell was established in the

Netherlands 1907. Royal Dutch Shell acquired BG Group after they agreed and signed off the

regulatory and shareholder agreement in 2015. Main products are exploration, production oil,

gas, and chemicals (Shell. 2016). This combination aims to create a strongly competitive

company worldwide and focus on its core expertise in deep water and liquefied natural gas.

According to the agreement, BG Group and Shell shareholders have the same dividends,

specifically, dividend 2015 is $ 1.88 per share and at least that amount in 2016. At the same time,

Shell is expected to buy back stakes in 2017 for at least $ 25 billion between 2017 and 2020. And

they've been able to keep up with their commitment to buy back shares despite the company's

negative year. Shell expects this program to offset the number of shares issued under the

program. Shell scenario dividends and a significant reduction in equity issued related to the

Consolidation (Shell. 2016).

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Dividend policies

The dividend is the share of profits which paid to shareholders. Dividend payment and

dividend policy are crucial to a company's business decisions. Because it directly affects the

capital used for investment and future development of the company. Dividend policy includes

the form of dividend paid in cash or preferred shares, payment time, payout rate. There are four

common types of dividend payout policies. First, a regular dividend policy is a company that is

committed to paying annual dividends, regardless of whether the company is operating profitable

or not. The companies with stable cash flow and good liquidity can apply for this policy. Second,

a stable dividend policy is a company that commits to pay a fixed annual dividend for example a

company commits to pay 3% dividend / profit. However, the company's profits change every

year so the company's use of this dividend policy is high risky investment. Third, an irregular

dividend policy means no specific dividend schedule by company, the BOD will decide the

policy of paying annual dividends based on the company's operating profit, which is suitable for

companies without cash flow. permanent. Finally, no dividend policy is no dividend paid to

shareholders, but dedicated all profits to reinvest in company development. Companies applying

this policy aim to gather capital and profits for rapid growth (Berk & DeMarzo. 2017).

Reason behind repurchase and financial metric affected

Repurchase or buyback is a company acquiring a share of the company that has issued it.

Buyback helps the company improve financial ratios such as ROA, EPS, P / E. Since the

buyback company shares, the company's cash, assets, and numbers of shares decrease while

earning unchanged leads to an increase in ROA and EPS and a decrease in P / E as illustrated

below under the assumption that the company performs a buyback of one million shares at $ 13

per share.
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Before buyback After buyback

Cash 25,000,000 12,000,000
Assets 60,000,000 47,000,000
Earnings 2,000,000 2,000,000
Shares Outstanding 10,000,000 9,000,000
ROA 3.33% 4.26%
Earnings Per Share EPS 0.20 0.22
P/E 65 58.5

Then, the buyback of shares also increases the value of the company's reputation because it

affirms the company has an abundant source of capital, especially with large cash. Besides, the

buyback shares also increase the value of a company's shareholding, leading to increased power

in operating and managing the company (Janssen. 2021).

On the other hand, buyback shares have the following disadvantages. First, the financial

indicators improve while earnings and profits not changing and investors do not appreciate it.

Second, the company that uses a large amount of cash to buy back shares leads to a decrease in

cash and lower liquidity of the company. Finally, the buyback shares with a large amount during

the market downtrend, the company will face more difficulty (Janssen. 2021).

Conclusion

In summary, this essay helps us to understand the concept of external finance, conflict

agency, dividends, and stock repurchases. In particular, the case study is a detailed and detailed

illustration for us to learn and know information easily.

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References

Berk J. & DeMarzo, P. (2017). Corporate finance (4th ed.). Pearson

Shell (2016). Recommended Cash and Share Offer for BG Group PLC by Royal Butch Shell

PLC. https://www.shell.com/investors/information-for-shareholders/bg-documents/

recommended-cash-and-share-offer-for-bg-group-plc-by-royal-dutch-shell-plc.html

Janssen, C. (2021). Stock Buybacks: A Breakdown.

https://www.investopedia.com/articles/02/041702.asp