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FIN621 Financial Statement Analysis-GDB NO 2 SPRING 2012
Discussion Question: Used Computer Providers (UCP) is a world renowned dealer in 2nd hand computers market with 37% world market share and existence in 3 continents of the Globe. UCP is dealing in all types of branded computers, manufactured across the Globe. UCP is the first choice for the world buyers of 2nd hand computers. The company is controlling its operation through its marketing offices located in the Central World. The company had a long track of profitability and dividend payments mainly due to its sustained growth rate. Over the last 17 years, the company’s shareholders have enjoyed a capital appreciation of around 4,000% in terms of their share price. All this credit goes to Chief Executive Officer of the company - Mr. CEO. 17 years back, at the time of entering to his office, the company’s share was trading at Rs. 9.50 each and now, it is at Rs. 410 each. Besides other challenges, Mr. CEO had to get a sustainable rise in the company’s share prices for the shareholders. Mr. CEO, working closely with the company’s Finance Executive – Mr. CFO, devised very aggressive financial strategies to concentrate on sales, earnings, and dividend payments. This has been resulted in a sustained growth in the revenue at 27% till the last year – well above the sector’s growth of 22%. But this year, due to heavy duty imposed by a large populated and developing country on import of used computers, it is expected that UCP’s earnings would be around 33% to 39% below the expectations of the market analysts. Moreover, there is news that the CEO is planning to join another industry player – Big Computers Limited as the company’s president. Smelling an unfavorable outcome of these rumors, UCP’s spokesman has announced that the CEO’s shift and expected profit decline would have no bearing upon the company’s financials and its will continue its business polices especially usual dividend policy.
As a financial analyst, do you see any change in the face value and market value of UCP’s share? Support your answer with strong logical reason.
Tags: 2, 2012, Analysis-GDB, FIN621, Financial, NO, SPRING, Statement
Replies to This Discussion
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Permalink Reply by Yasmeen(S.admin) on -
A change in executive leadership is a significant event in the life of a firm. This study investigates an important consequence of a CEO turnover: a change in equity volatility. We develop three hypotheses about how changes in CEO might affect stock-price volatility, and test these hypotheses using a sample of 872 CEO turnovers over the 1979 to 1995 period. We find that volatility increases following a CEO turnover, even for the most frequent type, when a CEO leaves voluntarily and is replaced by someone from inside the firm. Forced turnovers increase volatility more than voluntary turnovers, which we argue is consistent with forced departures implying a higher probability of large strategy changes. For voluntary departures, outside successions increase volatility more than inside successions, which we attribute to increased uncertainty over the successor CEO's skill in managing the firm's operations. We also document a greater stock-price response to earnings announcements following CEO turnover, consistent with more informative signals of value driving the increased volatility. Our findings are robust to controls for firm-specific characteristics such as changes in firm operations, firm size, and both volatility change and performance prior to the turnover.
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Permalink Reply by Muhammad Rafaqat Balawal on
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Just an idea: Dont Copy.
CEO is very significant in any organization or firm. Change in executive leadership is a significant event in the life of a firm. This study investigates an important consequence of a CEO turnover, a change in equity volatility. We develop three hypotheses about how changes in CEO might affect stock price volatility and test these hypotheses using a sample of 872 CEO turnovers over the 1979 to 1995 period.
We find that volatility increases following a CEO turnover, even for the most frequent type, when a CEO leaves voluntarily and is replaced by someone from inside the firm. Forced turnovers increase volatility more than voluntary turnovers, which we argue is consistent with forced departures implying a higher probability of large strategy changes.
For voluntary departures, outside successions increase volatility more than inside successions, which we attribute to increased uncertainty over the successor CEO's skill in managing the firm's operations. We also document a greater stock price response to earnings announcements following CEO turnover, consistent with more informative signals of value driving the increased volatility.
Our findings are vigorous to controls for firm specific characteristics such as changes in firm size, firm operation, both volatility change and performance prior to the turnover.
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