corporate finance final project - imt

8/12/2019 Corporate Finance Final Project - IMT

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2 Session Long Project -12DCP - 073

Assignment 1

Do you think finance departments are the best place to train future CEOs?

The decision that a CFO can become a CEO depends on certain conditions that consider theCFOs past experience and the companys vision, ultimately comparing the strengths and

weaknesses of candidates from a financial background.

Over the last 3 decades, the CFOs role has changed greatly. The reputation of CFOs as

technical accountants focused on excel sheets and cloistered from an organizations core

operations has slowly evolved. In fact, they are now required to have knowledge in a number of

fields that have a direct nexus with a firms business For example, the CFO must have

substantial knowledge of various regulations such as those set by SEBI, in order to execute and

comply with corporate governance legislations, as well as have knowledge of inventory,

procurement, marketing and operations to make sure the companys financial cycle is managed

efficiently.

When a CFO might be suitable for the CEO position?

While there are no fixed criteria when a CFO will be suitable for the job of a CEO, there are a

few circumstances that favor this switch (CFO to CEO)

When companys strategic priorities are focused on finance-related issues The CFO has a versatile portfolio of management experiences to draw upon as CEO. Depending on the industry:

Deregulated industries Those industries where there is minimal governmentinterference, usually enacted to create more competition within the industry.

Desperate companiesCompanies that are financially desperate.

Complex companies with many moving financial partsThe CFO might be best suited to work as a CEO in companies that involve complex

financial decision-making. However, they may not be best for organizations with

simplistic financial structure.


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Why a CFO might not be the right person to be CEO?

There is still a belief among some corporate insiders that CFOs lack the ability to thinkstrategically about key operational questions outside of finance. For example, while

discussing about some key issues like creative solutions and marketing strategies, adding

or discontinuing product lines, acquisitions, CFOs wont be involved in the discussion.

The role of CFO in some companies might not be tractable to making the switch. WhileCFOs have evolved professionally from being just technical accountants, there still might

be scope for additional growth in understanding a companys full business range in order

to become the main authority to groom the next generation of corporate leaders.

Recently, there has been a growing trend of CFOs becoming CEOs: Indra Nooyi of PepsiCo,

James Bell at Boeing and James Ziemer at Harley Davidsons, Jose Luis Duran of Carrefour.

The failures:

As per Lawrena Colombo, partner with PWC, when a company CEO retired in

PricewaterhouseCoopers, the organization sought a CFO to take his place. He was a well

regarded CFO with real credibility among key shareholders and the board of directors. His style

as a leader was well-established and comfortable.

While his efforts were rewarded by increased stock value in the marketplace, he elected not totake on some of the agenda items the retiring CEO had left unfinished. Instead, he led the

organization, protecting the brand, assets and market share, but not pushing demonstrable leaps

forward.

Three years into his tenure, the stock valuation plummeted and the unaddressed issues became

labeled by some observers as a failure of the CEO to lead.

Another CFO who went into the top spot looked for ways to cut costs in order to improve

margins and show strong performance to the board. He did it poorly, demoralized the sales

organization, and ultimately experienced a mass exodus of key sales people. After the board fired

the CEO, it took several years for the company to build back its reputation with its customers.


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Conclusion:

To an extent it can be said that the finance departments are the best place to train future CEOs,

but, in my opinion, merely restricting the CEO into finance departments would not help him or

her know all remaining departments of the organization properly. That's why, a CEO is supposed

to be well acquainted with all departments of the organization or company - finance, HR, public

relations, customer service, sales, marketing etc.

Also, it depends a lot on a person-to-person basis. Some people are born leaders and it depends

how the person in question adapts to the new position and whether he/she is able to take a

broader perspective of the organization or not.


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Assignment 2

Company Chosen: GlaxoSmithKline plc

About GSK: GlaxoSmithKline plc (GSK) is a British MNC pharmaceutical, biologics, vaccines

and consumer healthcare company headquartered in London, UK. It is the world's fourth-largest

pharmaceutical company measured by 2009 prescription drug sales (after Pfizer, Novartis, and

Sanofi).

Controversy: On 2 July 2012, GSK pleaded guilty to criminal charges and agreed to a $3 billion

settlement of the largest health-care fraud case in the U.S. and the largest payment by a drug

company. The settlement is related to the company's illegal promotion of prescription drugs, its

failure to report safety data, bribing doctors, and promoting medicines for uses for which they

were not licensed. The government investigation of GSK was launched largely on the basis of

information provided by four whistleblowers. GSK settled the whistleblowers lawsuits for a

total of $1.017 billion out of the $3 billion settlement, the largest civil False Claims Act

settlement to date, eclipsing Pfizer's 2009 $2 billion payment.

As part of the settlement, GSK has entered into a Corporate Integrity Agreement (CIA) with the

US Government. Part of the CIA covers obligations that GSK has agreed to as it pertains to the

manufacturing facilities in its former Ciadra PR plant. GSK will also enter a five-year Corporate

Integrity Agreement, brokered with the Department of Health and Human Services Office of

Inspector General that mandates changes in sales force compensation.

The Future:

With respect to the accounting of the settlement of the lawsuit and its effect GSKs total earnings

Andrew Witty, CEO (GSK) says:

The net effect of these movements on total earnings is expected to be neutral.


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Revenue (ttm): 42.77B

Revenue Per Share (ttm): 17.31

Qtrly Revenue Growth (yoy): -8.10%

Gross Profit (ttm): 31.17B

EBITDA (ttm) : 13.17B

Net Income Avl to Common (ttm): 7.96B

Diluted EPS (ttm): 3.17

Qtrly Earnings Growth (yoy): -18.60%

Balance Sheet

Total Cash (mrq): 5.81B

Total Cash Per Share (mrq): 2.39

Total Debt (mrq): 28.10B

Total Debt/Equity (mrq): 248.79

Current Ratio (mrq): 0.97

Book Value Per Share (mrq): 4.11

Cash Flow Statement

Operating Cash Flow (ttm): 7.41B

Levered Free Cash Flow (ttm): 5.06B

One-Year HPR: -0.40%

Most recent price of share: $44.83

Top Management at GSK:

CEOSir Andrew Witty

Senior VP, Governance, Ethics and AssuranceSimon Bicknell

CFOSimon Dingemans


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President, North America PharmaceuticalsDeirdre Connelly

President, Global Manufacturing & Supply - Roger Connor

President, Pharmaceuticals R&DPatrick Vallance


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Assignment 3

Agency problem is likely to be intense when there is individual ownership. This is because an

individual owner might not be able to exercise that much influence and control, as a group of

owners might. An individual owner is limited in his ability to gather information on what is

going on within the company. On the other hand, a group of owners can brain storm and make

better decisions about the corporate goals. The high percentage of group ownership might lead to

a higher degree of agreement between owners and managers on decisions concerning risky

projects.

Additionally, institutional owners have extensive experience with handling their resources in

monitoring managers performances. They will be better able to bring in these experiences to

monitor the managersperformances of the other organizations as well.

Because of the above mentioned reasons, there is a tendency of agency problems being less

severe in Germany and Japan than USA. However, with trends growing towards institutional

ownership in USA as well, agency problems will tend to decline there as well.


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Assignment 4: Executive Compensation

The debate on Executive compensation is based on principal-agent theory. Conflicts of interest

and moral hazard issues that arise when a principal hires an agent to perform specific duties that

are in the best interest of the principal but may be costly, or not in the best interests of the agent.

The principal-agent problem develops when a principal creates an environment in which an

agent has incentives to align its interests with those of the principal, typically through incentives.

Principals create incentives for the agent to act as the principal wants because the principal faces

information asymmetry and risk with regards to whether the agent has effectively completed a

contract.

Here, principal is the company owner while agents are the executives (read: CEOs).

CEO compensation should be designed in a way to alleviate this principal-agent problem, which

provides both incentives and a monitoring facility to align self-interest of a CEO with that of the

companys shareholders.

Now, whether they are appropriately or overly paid depends on whether shareholders have

prospered as much as CEOs. Earlier, CEOs were often compensated through cash. But recently,

added awareness of the principal-agent problem has slowly shifted compensation schemes

toward a greater use of incentives, whereby the CEO would profit whenand hypothetically,

only whenshareholders did.

What is unclear, however, is the degree to which rising CEO pay is actually linked to greater

firm performance. Empirical evidence regarding executive compensation and firm performance

is quite mixed.

Since the board nomination process is typically controlled by the CEO and the CEO has

considerable information advantage over the board in terms of the company's performance and

his or her role in it, CEOs hold leverage over the boards that set their compensation. This


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leverage persists because board members are generally reluctant to disturb the companys

stability and are somewhat incapable to do much, given their limited time commitments as

directors.

As a result, company boards cannot negotiate CEO pay equitably. Instead, what happens is a

false-negotiation biased towards the CEO by which, CEOs can extract pay that exceeds fair

market value.

The design of the compensation process also matters. Boards tend to benchmark pay in terms of

what the competition offers. When this happens, boards inevitably approve above-average pay

packages because they don't want to send the message that their CEO is average, or worse.

Sometimes, CEOs receive big executive payouts from stock appreciation that stem more from an

industry or market-wide surge than from judicious moves by the CEO.

For example, Oil and other energy firms: Rising stock prices in that industry have been due as

much to political conflict, natural disasters and even serendipity than to the particular activities

or visions of the CEO. Rising energy prices have lifted virtually all stocks in this sector, which

creates windfall compensation for CEOs despite the fact that their company's stock performance

was not unique within the sector.

Though some studies have found correlations between CEO pay and firm performance

(specifically stock prices), there is little evidence that high stock market returns are the direct

result of CEO performance (and related CEO pay).

There are plenty of examples of highly paid CEOs running poorly performing companies, as well

as modestly paid CEOs at the helm of high-performing companies.

Also, there are plenty of examples of pay-for-performance incentives going haywire, where

CEOs either manipulate the books or focus on short-term stock prices to the long-term damage to

the company.


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There is a growing trend toward hiring CEOs from outside the firm, rather than the more

traditional method of promoting from within. Firms tend to pay more to attract CEOs from

outside the firm.

With CEOs having shorter expected tenure, more demands for performance, greater demand for

their services and higher personal liability for a firm's financial statements, economic theory

suggests that reservation wagesthe level at which a person chooses work over leisurefor

CEOs should also be going up.

There appears to be a solid correlation between good governance and shareholder return, though

research to date is limited.

In essence, current CEO pay levels, whether deemed too low, too high or just right, haven't

happened by chance, but by design. And in the future, better design is likely to come about

through better corporate governance. That might or might not lead to changes in CEO pay levels,

but it would better ensure that CEO paywhatever its levelis more surely attached to

performance.


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Assignment 5:

Five Year Chart:

Expectations:

The shares have been stagnant over the last year. They trade on just 11 times next year's forecast

earnings with an attractive dividend. Investors have begun to understand the fact that this

company is undervalued but there should be more to come.

The company is about to come up with drugs for cancer and diabetes. It has already submitted its

application for the two drugs to FDA. This will be a huge boost to the top-line drugs that GSK

produces and shall reflect in the share price. My expectations are that the share price of GSK

should rise the next year.

Past Trends:

Over the past 1.5 years, the share price has been relatively stable with the price being in the

range of $43 - $47. However, before that, in the year 2009, the share price fell steeply due to the

lawsuits filed against GSK for its strategy on sales compensation.


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Alternative Investments:

Fixed Bank Deposits Savings Bonds Gold Options Real Estate Commodities (crude oil etc.)

Savings Account Interest Rate in a US Bank (MetLife):2%


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Assignment 6:

Two Companies chosen: GSK and Pfizer

GSK:

Book Value per share as at 30thSeptember, 2012: $3.89

Market Price per share: $44.66

Market-to-book ratio = 11.48

Pfizer:

Book Value per share as at 30thSeptember, 2012: $10.99

Market Price per share: $26.9

Market-to-book ratio = 2.44

Analysis:

Since the company is about to launch 2 new major drugs in the market and the company

fundamentals are very strong (proven by their comeback from the lawsuits mire), investors feel

that the company is going to be very fruitful in the future. As a result, the demand and hence the

share price of GSK is highly values as compared to its book value.

On the other hand, Pfizer which has a greater Market Capitalization than GSK is seen as a stable

company by investors, which has many top products in the market. However, lately there have

been no new introductions by the company in the market and hence Pfizer shares trade at a

decent level of 2.44 times of their book value.


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Assignment 7:

A)

a. A large fire severely damages three major U.S. citiesDiversifiable risk. If the portfolio of

assets includes companies not located in these cities, then there is no risk to the returns on that

portfolio. In short, the affect of this situation depends on the portfolio mix and hence can be

avoided.

b. A substantial unexpected rise in the price of oilUndiversifiable risk. The effect of this

situation depends on the economy and affects all the citizens of that economy.

c. A major lawsuit is filed against one large publicly traded corporation Diversifiable risk.

Again, it depends whether the shares of this company are included in a persons portfolio or not.

The return on a portfolio depends on the inclusion of this companys assets.

B)

= 0.55

Since 0 < < 1, the asset moves in the same direction as the market but to a lesser extent. The

asset is relatively steady as it does not fluctuate as much as the market does.

b. Rf = 0.045

RMRf= 0.065

Cost of Equity (RE) = Rf+ (RMRf)*

Cost of Equity (RE) = 0.045 + (0.065)*0.55 = 0.08075 = 8.075%

c.

(Pfizer) = 0.66

(Mc Donalds) = 0.31


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(of Portfolio) = ((GSK) + (Pfizer) + (Mc D))/3 = 0.5067

RE(Pfizer) = 4.79%

RE(Mc D) = 6.5%

Expected Rate of Return (Portfolio) = (RE(GSK) +RE(Pfizer) + RE(Mc D))/3 = 6.455%

The portfolio can be made more diverse because two of the assets belong to the same industry

and if some mandate is released by the Government which works against this industry, then the

returns on this portfolio will suffer.


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Assignment 8

Project 1: GlaxoSmithKline Proprietary Knowledge Pool

In 2009, GSK helped to establish an independent knowledge pool where GSK and others could

make available patents and knowledge that may stimulate research into treatments for 16

neglected tropical diseases (NTDs). This is now known as the Pool for Open Innovation against

Neglected Tropical Diseases (POINT). Since January 2010 it has been independently

administered by BIO Ventures for Global Health (BVGH), a non-profit organization that aims to

accelerate the development of drugs, vaccines and diagnostics to meet global needs.

Funding: GSK's proprietary adjuvant systems

Project 2 (Current): GSK HPV-021 Trial

Cervical cancer is the second most common cancer among women worldwide. Up to 70% of

cervical cancer cases are attributable to human papillomavirus (HPV) genotypes 16 and 18. Two

prophylactic HPV vaccines are now available that have high efficacy against incident and

persistent HPV-16/18 infections and associated cytological abnormalities. However, HPV

vaccines have not yet been tested in Africa. Two sites in Africa, Mwanza in Tanzania and Dakar

in Senegal, are participating in a multicentre immunogenicity and safety trial of GSK

Biologicals bivalent HPV vaccine in young girls.

Funding Source: GSK Biologicals because Biologicals department at GSK is responsible for

projects in these fields.


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corporate finance final project - imt

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