The CPI should utilize the techniques of financial analysis to determine if their efforts can generate a considerate amount of revenue. It should engage into prospects of growth that can maximize the value of the firm and increase the amount of wealth by the shareholders (Cho, 1987).
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The future earnings of the firm can be determined by the ratio of price to earnings; which compares the selling price of the stocks earning per share (Cho, 1987; Forgang & Einolf, 2007).
The recent trading price of the stock was $58.87 with a ratio of price to earnings of 24.06 and $2.45 as the earnings per share (Company, 1985).
At the end of the year 2012, the P/E was 10.56, the trading price was at $54.43 and the earnings per share at $5.15, this is a clear indication that the investors are paying more of the share per stock in the current year and their earnings are at a lower rate (Company, 1985).
The Colgate Palmolive may be overvalued. A high price per earning indicates that the investors are willing to pay more of the stocks because of their anticipation of a higher growth rate in the near future.
A low price per earnings makes the investors to assume that the earnings in the future may be constrained (Company, 1985; Cho, 1987).
In comparison with the Colgate Palmolive, an assumption of the CPI’s P/E ratio is given as 7 with 14 as the industry average. The current P/E of Colgate Palmolive is 24.06. For CPI to attract investors, they must strive to meet the industry average of 14 (Danker, 1971).
If it were to grow using its own cash reserves, then the P/E and the earnings per share would result in an improved value of the firm.
If additional equity and fund growth are issued, there will be a dilution in earnings per share causing a decrease that is short term to the shareholder wealth and the price per earnings (Danker, 1971; Company, 1985).
The CPI is restricted only to some certain regions of the country limiting the growth and the options to the investor.
As it continues to investigate the options of expansion, the P/E ratios of other competitive companies can be used as a benchmark in attaining a maximum value of the shareholder’s wealth (Danker, 1971).
Inelastic, elastic and unitary price elasticity all are linked to the concept of price elasticity. “They usually measure the demand for the goods and compare them to the fluctuation in the price of the goods” (Danker, 1971, p.21).
“The demand for any good is measured by determining whether it is unitary, elastic or inelastic” (Boone, 2012, p.43). The elasticity usually varies between products because products differ in the rate of demand.
In elastic price elasticity, the demand is usually greater than the price, the good or the demand for the product.
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“When a product is elastic, the changes in price level lead to a huge change in the product demand” (Boone, 2012, p.43). Many of the services offered and goods are usually elastic (Boone, 2012; Danker, 1971).
In the determination of elasticity of demand, percentage change in quantity of a product is divided by the change in price percentage. “After the calculations are made and the equation is equal to one or greater, then the product is usually considered elastic”(Yu, 2005, p.21).
The opposite of elastic demand is the inelastic demand. If change in demand is less than one, then the product is considered to have inelastic demand. Necessities are usually the products that are considered inelastic change in price level does not usually affect the demand of the product.
“Unitary goods are goods that result to no effect on the demand even when there is a price change” (Boone, 2012, p.43). Very few goods are considered unitary (Boone, 2012; Yu, 2005).
In the determination of exposing the currency revenue, the VP of marketing and the CFO need to ask themselves; will exposing the currencies revenue place the CFI in a better position or will it continue to give a lower return to its shareholders? (Bernstein & Griffin, 2006).
The CFO should put into consideration the value of its shareholders first before exposing the revenue currencies.
If exposing the revenue will place the business in a better place and the shareholders earn maximum interest then my advice for the option (Bernstein & Griffin, 2006; Yu, 2005).
Most businesses do not operate in a vacuum. When making plans of the business, one has to consider the world, country, state and the neighborhood.
The local factors are mostly considered as the macroeconomic factors while the international and national trends are the macroeconomic factors (Sloman, 2005).
When putting into consideration the macroeconomic trends, one must look at how the overall business environment is (Forgang & Einolf, 2007).
If there is increased rate of unemployment, bankruptcies and foreclosures in homes, then the consumers may have a bad attitude towards making any purchase.
These can be used in decision making by scaling down of plans of purchasing inventory a business being committed to expansion projects that are costly (Bernstein & Griffin, 2006; Sloman, 2005).
The local trends in a region or neighborhood can have an impact on any business. One should not only consider the economic trends of the premises of the business but also the environment for the consumers (Fosin & Mlambo, 2001).
The micro conditions usually have a direct effect of the operation of any business. The decisions usually are to be based on the falling and rising expectations of the consumers.
A business can survive if it tailors if it tailors its marketing options to lower expectations in order to cut down on the expenses (Fosin & Mlambo, 2001; Sloman, 2005).
The media usually distorts the bad economic times both in the local and the international levels. When these are done, the business needs to make its own observations (Forgang & Einolf, 2007). The bad economic news usually presents an opportunity for businesses.
The company is usually a mini economy. The trends in sales, profit and expenses should be put into consideration. To acquire this, the business should be well positioned in the market which is competitive (Fosin & Mlambo, 2001; Sloman, 2005).
News about the world or neighborhood should not lead into making decisions that may undermine the success of the business. People usually don’t stop buying in down trends but instead buy less. The change in buying habits can still lead a business into making a profit (Forgang & Einolf, 2007).
The business decisions must be balanced with the understanding of the economic trends and the experiences from interactions with customers.
The business must develop a feel for the economic trends and also look at the opportunities that defy the trends (Forgang & Einolf, 2007; Fosin & Mlambo, 2001).
The net income is usually obtained after all the deductions are removed from the companies’ revenue (Barr, 1993). For CPI the net income is
|Selling, general, admin||$16.10||$17.20||$18.90||$19.50||$21.40||$24.30|
(Barr, 1993; Forgang & Einolf, 2007)
|Operating cash flows future value||$4.25||$6.34||$7.21||$8.47||$10.82||$11.39|
|Increase in fixed assets||$1.30||$2.40||$0.90||$0.00||$4.90||$2.10|
|Free cash flows||$2.19||$3.94||$6.31||$8.47||$5.92||$9.29|
|Present Value Cash Flows||$2.06517||$3.5066||$5.41896||$6.22545||$4.03152||$6.18714|
The Net Present Value
This is usually the value of the net inflows that is generated by the project. These are usually the most reliable measure in capital budgeting as it accounts for the value of money in the form of time (Colander, 1995).
|Net cash flow||$2.06517||$3.5066||$5.41896||$6.22545||$4.03152||$6.18714|
|Present value factor||0.943||0.89||0.816||0.735||0.681||0.666|
|Present value of cash flows||$1.947455||$3.120874||$4.421871||$4.575706||$2.745465||$4.120635|
(Colander, 1995; Forgang & Einolf, 2007)
The total present value of cash flows – 20.932006
Less initial investment – 18.000000
Net present value – $2.932006
The CPI has a positive net present value. This project is important to CPI as it enables the company to recover its initial outlay of $18.00. It also enables the company and their shareholders to meet their finance charge and as it generates an additional surplus of $2.93.
The positive net present value shows an increase in the wealth of the shareholders. The dollar value of the NPV is important as this indicates that the value of the dollar is stable. These enable the firm to be able to meet all its expenditures (Barr, 1993; Colander, 1995).
In making his decision, the CEO of the company has to put in mind the value of the shareholders. The shareholders are the ones who keep the firm stable and therefore should be in the forefront while making decisions.
The working environment of the business is also a factor to be considered in making decisions (Sepp, 2012). The environment should be favorable to the consumers with adequate security.
When the environment is unfavorable and the government is too much into a business, that business is likely to fail. The simplification strategies by the government are usually designed to reduce uncertainty and regulatory complexity.
Making the economic environment in which a business operates safe for the consumers will also boost the operations of the business (Colander, 1995; Sepp, 2012).
In conclusion, I would support the above mentioned project as it mainly considers increasing the shareholder wealth.
The project has a positive net present value and this shows that a value that maximizes the company will develop exploit and develop many positive NPV projects as it can. This is usually called capitalization.
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