Generally, exchange rates refer to the price at which given currency exchanges for other foreign currency. It is the value of a currency in relation to other foreign currencies. Exchange rates are an important component of international trade as they significantly influence the process of importation and exportation from a country. They can depreciate or appreciate causing instabilities in international trade. There are several causes of changes in the exchange rate. The most important is the purchasing power parity (PPP). This factor is based on a strong assumption that similar goods should be sold at equal prices in the international market. This being the case, exchange rates for individual countries fluctuate with a view to establishing equilibrium in the prices of goods internationally. The PPP view has two main approaches. The first is based on the balance of payments. Balance of payments is determined by the flow of currency into or out of the country based mainly on the levels of imports or exports. High imports mean greater demand for foreign currency hence depreciation for local currency. High exportation on the other hand means high demand for local currency hence appreciation. Again the PPP is also viewed from a monetary as well as a portfolio approach. This approach looks at the differences in the value of certain assets in local and foreign markets. The most important factor in this view is the level of domestic interest rates in relation to the foreign interest rate (Theory of Exchange Rate Determination,2010, par2-6).
Common Stock
The book value per share of common stock is a measure that helps to assess how safe individual shares are after the elimination of all liabilities. The basic formula for determining the book value per common stock is:
- Book value per common stock= Total Shareholder Equity-Preferred Equity Total Shares outstanding
This being the case, the value gives the investor an idea of how much their investment would be worth in a case where the company invested in is dissolved. Notably, the total shareholder equity is comprised of the total assets less the liabilities. This being the case, the level of book value per common stock can be determined by several factors. The most important factor is the level of retained earnings. Retained earnings are derived from the profits earned throughout the years. If the company has accumulated a huge amount of retained earnings for investment in assets, then the value of shareholder equity is expected to be high a case which would lead to a rise in the level of book value per common stock. Again, the changes in liabilities for the company over time have an effect on the shareholder’s equity. In a case where the liabilities of a company are rising with time, then the book value of the common stock would be falling due to the fact that the share holder’s equity would also be falling. Other factors likely to affect the value include changes in levels of preferred stock as well as changes in the number of shares a factor which would lead to a rise or fall in share values over time (Book Value Per Common Share, 2010, para4).
Mergers and Acquisitions
Mergers and acquisitions are business strategies applied by companies to achieve common goals. They are justified in cases where operating as one bigger firm produces much higher benefits as opposed to operating in solitude. There are a host of reasons why mergers occur. However, the most important fact is that they are based on the ability to offer operational, managerial as well as financial synergies (Graham, Smart & Megginson, 2009, p14).
Operational synergies accrue from the efficiencies resulting from the formation of a much larger entity. An example is the merger of two pharmaceutical companies which would lead to a rationalization of activities from research and development to the use of common distribution networks to reduce costs. Managerial synergies result from the fact that a learner managerial team is able to effectively manage a larger scope after a merger due to the elimination of redundant managerial personnel after a merger. Financial synergies mainly result from the fact that the bigger entity is able to engage in bigger projects which offer greater returns and also gain access to higher levels of funding which normally come with lower rates. This not only reduces finance costs but also builds on the rates of returns.
In spite of the attractive synergies, it may not be possible for a merger to occur mainly due to two reasons. First, most nations of the world have put in place laws that restrict mergers among big corporate firms in a bid to protect citizens from monopolistic behaviors which often tend to be exploitative. Secondly, the decision to merge is made by the owners and not the managers. This means that the managers may recommend mergers but the shareholders, out of limited knowledge and fears of stock value dilution may object.
Business Failure
Businesses fail due to a number of reasons. The first is poor financial management. Prudent financial management entails accurately projecting cash flows and applying the correct form of financing for various elements in the business. The basic tools of financial management are often not common among entrepreneurs. Secondly, some businesses may be willing to be pioneers. However, some radical departures from what is considered normal may push away customers. The establishment of irrelevant or ineffective partnerships is also known to be a major factor leading to a business failure (James, 2010, para2-5).
References
Book Value Per Common Share, (2010). Investopedia. Web.
Graham, J., Smart, S., Megginson, W., 2009. Corporate Finance (linking Theory to what companies do). Oklahoma. South-Western Pub
James, N., (2010). The Top 7 Causes of Business Failure. Web.
Theory of Exchange Rate Determination, (2010). Determinants of Exchange Rates. Economy Watch. Web.