Introduction
Business Finance is the attainment plus apportionment of the corporate resources,
treasuries aiming at shareholder capital maximization like the values for stocks. In corporate
monetary managing, resources are generated from several sources like the liabilities and equities,
which are further invested in various assets which are desirable. The initial resource acquisition
function in the corporate finance is referring to the fund generation from the external and internal
avenues at a minimal cost probable to the company, the leading groupings of capitals are
venders’ equity as well as accountabilities. Equity examples are the return from investments,
sales of stocks, as well as retained earnings. Liability comprises of the bank debts and loans,
product warranties, accounts payable, among other commitments where the entity is deriving
values.
The additional purpose for business finance is resource allocation, which is the fund
investment increasing the wealth of the shareholder; the simple groupings for the investments are
the fixed and current assets. The existing assets comprise the inventory, cash, as well as account
receivables. While the fixed assets are the real estate, building as well as machinery.
Additionally, the resource apportionment purpose is disturbed with imperceptible resources like
patents, benevolence, brand names, and workers. It’s the role of the corporate manager or
financial officer to conduct the purposes above in a manner that exploits shareholder’s wealth,
and the stock value. The financial manager has the obligation of balancing the owner’s interests,
or creditors, shareholders, including the bondholders and banks, among other parties like the
suppliers, customers, and employees. For instance, corporation might decide to capitalize the
capitals in uncertain projects with the determination to provide possibility of huge revenues to
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the shareholders. However, the risky venture might reduce the alleged security in the bond
market of the company, therefore decreasing the bond market value while increasing the interest
rate, which the corporation is required to pay to access loans. Contrariwise, company capitalizes
unadventurously, it flop to exploit its equity’s worth. Better performance by a firm in comparison
to other companies will increase its theoretical stock value, which helps in raising extra capital at
the lowest possible costs.
Corporate Finance Concepts and Principles
First Principles
Every field of study has the first principles governing and guiding all the activities within
that domain. Every business economics is also made on fundamental values that are investment
belief, dividend principle, and financing standard. The investment principle is responsible for
determining where the venture is investing its resources. Financing principle is governing the
funding mix, applicable for funding the investments, while the dividend principles are answering
the question concerning the earnings that require re-investments into the business as well as the
amount of return that the shareholders and owners of the venture get. The essential business
economics values are specified as; Investment principle: investing in the projects as well as
assets which produce greater profit compared to the least obstacle rate acceptable. The degree of
hurdles ought to be advanced for ventures that are riskier besides reflecting the financing mixture
like venders’ equity, debt or borrowing. The projected return is measured through the cash flows,
as well as the timing for the flow. Both the negative and positive side effects of the projects
should be assessed (Shenker, Joseph, Chun, and Jordan 20).
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Financing principle: Choosing financing mix such as equity and debt, which maximizes
the financial investment value as well as matching the financing nature of assets that requires
funding.
Dividend Principle: the principle is asserting that if the investment does not earn a
obstacle degree, then the currencies should be return to the business owners.
When making decisions on financing regarding investment and sharing of dividends, the
corporate finance is single-minded concerning the final objective, which is maximization of
business value. The first principle is crucial in all the corporate decision making since it
recognizes that all decisions like investment, dividend or financial decisions which increases the
business value are good decision, while those that diminish the value of the firm are poor
decisions.
Investment Principle:
The companies have scarce resources that require appropriate allocations to meet the
competing needs. The function of corporate finance is providing firms with framework for
making wise decisions concerning the financial allotment. Investment decisions comprise of
decisions which create profits and revenues like the introduction of the product line or expansion
into new areas of market, as well as the decisions which save money through building new and
efficient distribution system. The investment Principle is revolving around the concepts that the
venture has resources that require allocation (Shenker, Joseph, Chun, and Jordan 20). The first
and the most significant decision in corporate finance is to provide revenue opportunities and
providing money for future operations and expansions. That entails working capital decisions
like the credit days allotment to clients. Measuring the return on the planned investment decision
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through comparison of the minimal rate of hurdle tolerable as well as deciding whether the
investment or project is feasible should it be undertaken. Working Capital is the cost incurred
while purchasing inventory, operating expenditures and wages. The money that is generated
through the sales is reinvested in the business for purchasing further inventory, incurring more
salaries and cycle goes on, the cycle continues as the revenue is exceeding the expenditure and
more profit is generated.
For a project to be accepted, the hurdle rate must be higher for the projects that are riskier
as well as reflecting financing mix. The risk and return discussion are made with proper
definition of risks and its measurements. In the risk and return models, there is conversion of risk
measures into the hurdle rate which is the minimum acceptable rate of return for the personal
investments and business entirely. After the establishment of the hurdle rate, the attention goes to
measuring investment return. Investment return is measured using three method Cash flows,
time-weighted cash flow, by considering the time-weighted cash flows. It comprises the
extensive potential analysis of the side cost that might occur like cost of investments
(Appelbaum et al. 19).
Financing Principle
All the businesses, despite the size and complexity, are eventually subsidized through a
mix of debt (copied capital) as well as equity (owner’s fund. The publicly traded firms, the debt
might take the form of equity and bonds are the usual stock. While for the private firms, the
debts are most likely the bank loans while the equity is the savings from the business owners.
The discussion starts through observing choices of options that the mix of financing that is
optimal for business use considering the objective function of profit maximization. Although,
there are trade-offs between costs and benefits of borrowing, which are established qualitatively.
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There is also a quantitative approach for arriving at the optimal financing mix, which makes it
possible to minimize the rate at which hurdles are experienced. Another approach concerns
fluctuating the financial mix by looking at the impacts on the company value. If there is a
variation between the optimal financing mix and the current one, then it is essential to map out
the best way to achieving the optimal mix from the existing mix. The step should take into
consideration the investment opportunities at the disposal of the firm and the need for timely
response, which ever since the firm is under the risk of bankruptcy or takeover target. After
outlining the optimal financing mix, the attention shifts to the type of financing that should be
used by business, like whether to consider short-term and long-term, fixed or variable payments.
Additional considerations concerning the taxes, as well as external monitors, are added, like the
equity research analysts as well as rating agencies and concluding the financing design.
Dividend Principle
Most of the ventures would prefer having investment opportunities that yield return
exceeding their rates of hurdles. However, every business grows and matures, reaching a stage
where cash flows are greater than the capital required for undertaking worthwhile investments.
At that stage in business lifecycle, the business should consider mechanism of returning the
surplus cash to the owner or investors. For the Private venture, that comprises the owner
withdrawing some funds from his business. While for the publicly-traded company it involves
paying the dividends and buying stock. The trade-off in dividend policy is whether cash should
be withdrawn or left in the business. For the publicly traded venture stockholder, the decision
depends on whether the stockholder trusts the firm manager with huge cash depending on their
past investment of cash. The final stage is considering available options for the company to
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return the assets to the investors through dividends, spin-offs, and stock buybacks and further
investigation concerning the best method for returning the assets to owners.
Corporate Financial decisions, Equity, and Firm Value
If the corporate finance objective function is firm value maximization, then the venture
must align to corporate finance decisions mention above, dividend, financing, and investment
decisions. The link between the firm value and these decisions is made through the recognition
that firm value refers to the present value of the expected cash flow, which is discounted at the
rate reflecting the financing mix and the project riskiness. The investor formulates expectations
for the future projected cash flow based on the current observed cash flow, as well as the
expected future growth, which depends on the firm’s project quality and dividend decisions
(Appelbaum et al. 19). The decisions of financing affect firm value through expected cash flow
and discount rate. Interaction among financing, dividend and investment decisions puts value to
test, and conflict and interest arising between lenders and stockholders to the venture and on the
other hand managers and stockholders. Here we introduce the basic model for valuing the firms
with its equity relating them to the management decision concerning dividend policy, financing,
and investments. In the process we are examining the determinants of value and the process
through which the company can increase its value.
The paper is evaluating how Lenovo Group Limited which is listed on the Stock
Exchange of Hong Kong is applying the corporate finance principles in its operations. Lenovo
Group is a private technology firm which predominantly produces hardware and has expanded
its business operations to over 160 countries across the globe, the company is currently operating
in four units of business which are PC and smart devices, selling tablets, PCs laptops, mobile
group is selling smartphones while the data center business is offering storage software, system
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integration services, they recently launched Lenovo Capital and Incubator Group in 2016 April.
Lenovo is the leading PC supplier across the globe, and it is operating in the technology sector of
the Computer systems industry. The essential for investment comprises real assets like
technology used for producing products, properties, buildings, among others, and financial assets
like the stock and bonds.
Asset valuation For Lenovo Company
Price/Book Value Ratio
The Price to book value ratio is used for comparing the market capitalization or the
market value to the company’s book value. The value of the firm is the share prices multiplied by
the outstanding shares. The book value is the company’s net asset. When the company liquidates
the paid debts and assets, it’s only the company book value that remains. Traditionally a range
under 1 is a good P/B value that indicates stock that is undervalued. Lenovo Group Limited has
P/B value ratio of 1.90 which is good value for the value investors who are concerned with P/B
value below 3.0.
Price/ Cash Flow Ratio
It’s the profitability ratio comparing the company’s price to the underlying cash flow. It
shows the company’s value based on the generated cash flow by the firm. The Price/earnings
probably are the common ratio that determines if the company is over or undervalued. However,
the price to Cash Flow ratio is also great mechanism for determining the over or undervaluation.
Price to Cash flow ratio is highly preferred since the net income from cash flow rightly adds
amortization and depreciation back in because they are not cash expenses. While the net income
in the earning part of P/E ratio is not inclusive of amortization and depreciation hence, reducing
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income and making the P/E ratio skewed. The Price/ Cash Flow ratio value ranging from 0-10
gives the results. The next best outcomes fall within the range of P/CF from 10-20, having 10.2
percent benefits. P/CF above 30 is a loss to the company. Lenovo Group Company has Price/
Cash Flow ratio of 5.60 which is a suitable value within the first range of 0-10 (Gordon,
Gwendolyn, and David 559).
Price/Earnings Ratio
It is called the multiple meaning that for a ratio of 20 implies that investor is willing to
pay 20 dollars for the earnings of the company, for the multiple of 20. If the ratio is lower it
implies that shareholders are willing to pay little for every dollar of the firm’s earning. Most of
the value investors prefer the lower P/E value. Lenovo Group Limited has ratio of 13.97, which
is sign of good performance.
Financial Market instruments
The financial market instruments can be divided into there are three categories: the
capital market instruments, the money market instruments, and the hybrid instruments. The
money market is the market for financial assets, which are near money substitutes and short-term
money. Near money substitutes can be converted to money at a minimal cost. The money market
instruments are like Notice/call money, term money, certificate of deposit, treasury bills, and
commercial papers. Treasury bills are short term borrowing for the union government. It’s the
promised from the government for paying the stipulated sum following the expiry for the issued
date. They are distributed at a discount to the face value, and the holder is given the face value
on maturity. Each auction is determining the discount rate and the issue price (Gordon,
Gwendolyn, and David 559).
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Lenovo is taking pride in having a global treasury outlook, which has enabled the
company to be razor-focused and evolving changing economic and business environment.
Lenovo treasury is managing cash of US 3billion dollars, debt of US3.6 billion dollars and
working capital of 3.5 billion US dollars. Lenovo Group Limited has yearly flow of 80 billion
US dollars with over 2,000,000 payments (Wu, 37).
Treasury team at Lenovo Group Limited
Global treasure operations
The Lenovo international treasury is responsible for general management of the banking
operations across the four regions, with approximately 70 banking partners having over 800 bank
accounts. The company’s global treasury is based in Singapore. The group is accountable for the
management of liquidity, cash flow forecasting, managing the bank’s accounts, and supplier
payment (Gordon, Gwendolyn, and David 559).
Working capital financial operations
It is also based in Singapore and is led by Sriladda Chalermkarnjana; it’s an integral and
strategic part of Lenovo treasury. Focusing on the working capital finance, the group is closely
working with the commercial teams for monetization of order, counterparty risk alleviation,
creation of capacity with network for distributions through cash-in, among other personalized
solutions. The team is also working with teams from supplier’s side on the opportunities for
terms of payment and costs management together with international supply chain (Gordon,
Gwendolyn, and David 559).
Capital market operations
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It’s based in Hong Kong and Singapore and led by Wong Keith; they are working on
company’s capital structures and looking continuously on opportunities for refining debt mix.
They are managing the debt book with 3-4 billion US dollars, and trapping various categories of
market instruments for funding the core requirement of financing by the group. The Lenovo
group has been able to tap capital market amounting to 500 million US dollars for long-term debt
and 1 billion US dollars of long-lasting debt security (Appelbaum et al. 19).
FX operations
The group is based in Singapore and is managing the general interest rate and currency
exposure. On the global scale, there are several pairs of currency entailed in the Lenovo Group
operations, as well as varying monitoring regimes. The currency basket entails exotic pairs and
G3 and emerging markets in Africa and Latin American; hence, the team is running round-theclock to ensure they manage the volatility risks for the currency and implementing consistent
hedging programs for its publicities. The monthly revenue for the currency hedging programs is
exceeding 6 billion US dollars (Shenker, Joseph, Chun, and Jordan 20).
Shared Services Center (SSC) operation
Robust control and timely execution need strong operations teams; the Lenovo SSC is a
vital base where the treasury structure has been built. It is responsible for global payment
processing and reconciliations and collections. Lenovo Group positively deployed treasury
solutions augmenting efficiency, and simplicity of its processes and operations. Lenovo made
recent initiatives concerning the management of liquidity, working capital management,
restructuring, and treasury integration, debt management and capital structures, which have
proven tremendously effective during the restructuring of the company.
Financial Management
The Lenovo management team for the working capital adopted the targeted technique
that focuses on either side of the balance sheet, extending payment cycle and reducing sales
cycle. The goals demanded tailored solutions for funding the working capital goals for Lenovo
Group Limited. The company implemented key solutions for the last 18 months which has led to
an increment inefficiency of working capital of 925 million US dollars. The measure of
extension is accounting for about 2.3 billion US dollars, letter of credit centered supply chain for
Lenovo Group major purveyor, which is Intel has scaled to 800 million US dollars with the
Lenovo principle international Banking partner. Lenovo Group Limited treasury team with the
banking partners has performed excellently in driving innovation, out-of-the-box solution. The
keen appreciation of the capital structure, capital markets, funding requirement, attached with
capacity for making quick decisions, and taking advantage of the market conditions that have
enabled Lenovo to raise funds in the capital market. Lenovo Group Limited is in line with the
Modigliani-Miller theorem (M&M), which asserts that market value is calculated using
company’s earning power as well as the asset risks, which is independent of the distributed
dividend (Cline 15).
Reference
Appelbaum, Richard P., et al. Innovation in China: challenging the global science and
technology system. John Wiley & Sons, 2018.18-22.
Cline, William R. “Testing the Modigliani-Miller theorem of capital structure irrelevance for
banks.” Peterson Institute for International Economics Working Paper 15-8 (2015).
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Gordon, Gwendolyn, and David Zaring. “Ethical Bankers.” J. Corp. L. 42 (2016): 559.
Shenker, Joseph C., Chun Wei, and Jordan H. Oreck. “A practitioner’s perspective.” From World
Factory to Global Investor: A Multi-perspective Analysis of China’s Outward Direct
Investment (2017): 20.
Shenker, Joseph C., Chun Wei, and Jordan H. Oreck. “A practitioner’s perspective.” From World
Factory to Global Investor: A Multi-perspective Analysis of China’s Outward Direct
Investment (2017): 20.
Wu, Yibing. “What to expect in the years ahead.” From World Factory to Global Investor: A
Multi-perspective Analysis of China’s Outward Direct Investment (2017): 37
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