Understanding The Corporate Financial Decisions of a Company

Executive Summary

Billabong international is being has a challenge of how to expand the company. With an impressive performance in the preceding five years which has been characterized by slow yet steady growth. The companys growth has been limited partly due to the small size of the surf wear fraternity industry. The company has therefore resulted to moving towards the much broader active wear class. However its not limited to that alone since it can develop its business brand based on physical expansion into the moderately emergent North American and South African markets. This has been facilitated by intense competition in its current market where its operating, due to the fact that the group is in the production life cycle rather than the servicing sector. Its therefore highly recommended that Billabong focus more on geographic expansion. This will result in giving them access as well as increased growth and new opportunities, but consequently keep and enhance its presence and market share against facing direct competition from larger companies likely compete both on marketing and on price. Overall Billabong international is a profitable company and it can expand its influence; brand and market share if it follows the above suggestions to increase the share holders wealth. I strongly believe that the recommendations made in good faith will catapult it to greater heights and be a major world wide brand.

Introduction

Billabong's strengths are the very popular brands and quality of Billabong products as well as the target market which are mainly the young and sporty. This has been the companys financial strength, and its ability to leverage its brand to add value to smaller brand names it acquires. The company is an established leader in the surf wear and other sports wear accessories, both with surfers and outside the surfer market. Both target markets are important for Billabongs financial growth and reputation because it represents the bulk of the core market and more so the latter because the young present the greatest opportunity for future market. Brand equity among retailers is dependent on commitment to the surfing culture such that any firm not deemed fully committed to the culture of the industry gets dismissed.

The company has increased revenues and profits consistently over the past five years. In that span, gross margins have improved from 19.5% to 54.7%. Net sales have shown a slight improvement as well. The company's earnings per share have doubled in that span. Billabong's liquidity is exceptional, with a current ratio of 3.07. Interestingly it has a roughly 50/50 capital structure and has maintained a range of 50% debt-to-equity with some consistency over the past several years. Another strategy that put it ahead is that it has tried to add value to the smaller brands it acquires. The brands performance add credibility to the company's lineup, especially given that quality of products in question are typically highly dependent surf brands. Billabong maintains the brand's integrity by maintaining the staff permanently.

Billabongs Structure and Corporate Governance

The company has come to realize in recent times on the importance of good corporate governance which is backbone for its success to spread and have influence worldwide. To achieve this it has to start from the top which as illustrated by its leadership protocol. This can be seen by its increase in efficiency and quality in production and innovation processes. This has been set out in the way it always achieves its set goals and objective no matter how ambitious. Billabongs in its mission to achieve its objectives have in its capacity a board of directors and are categorized as follows;

The Non-Executive Chairman

Three Non-Executive Directors

Executive Director and General Manager, Billabong USA

Executive director and chief executive officer

The non-executive directors usually assemble autonomously of the executive directors and other management to handle performance issues and other factors affecting the company. The directors on the other hand are permitted to convey different and independent judgment to consider in their decision making. The role of the board among others includes;

set objectives, goals and strategic direction for all the business components;

overseeing financial performance including accepting favorable business plans, the annual operating and capital expenditure budgets and financial statements;

appointing and going over the performance of the CEO and other senior management;

accepting and monitor major capital expenditure and management, acquisitions, divestments and identified business developers monitoring areas of significant business risk and ensuring arrangements are in place to manage those risks;

Ensuring obedience to environmental, social and occupational health and safety announcing to shareholders on performance.

To be able to accomplish all the tasks it has targeted to undertake, the board has created an audit committee, a nominations committee human resource and remuneration committee. The audit committee ensures that the honesty and reliability of the companys financial statements and compliance with all legal requirements while the nomination committee finds suitable candidates to take up board positions review and make sound suggestions to board on its composition and the appropriate guidelines among others.

Remuneration

The remuneration committee is responsible for providing advice on remuneration and incentive policies and practices and detailed recommendations on remuneration packages and other terms of employment for Executive Directors, other senior management and Non-Executive Directors. Non-executive directors receive their payment based on their responsibilities and also the demands they have made. Their maximum fee is at $1, 200, 000 with no share options or retirement benefits, but receive additional yearly fee if they chair a committee.

The executive pay, in contrast, has four divisions;

base salary and benefits

short-term performance incentives

long term performance incentives(Billabong Executive Incentive Option Plan and the Billabong Executive Performance Share Plan

Executives are offered remuneration that comprises ideals of base pay and benefits under the consultation of external remunerators to echo the market for a suitable role. The base pay is usually reviewed annually to maintain competition and also in the event of promotion. The benefits include health insurance, superannuation and sometimes, travel as well as accommodation may be availed. Short term performance incentives (STIs) are offered to executives based on individual performance and financial performance of the company. Middle and lower management STIs are issued based n personal performance and the benefits which are paid in September hugely depend on profit target the discretion of the human resource and remuneration committee. The long term performance incentives include the Billabong executive incentive option plan that was set up 4 July 2000. Options are approved for a year period, exercisable after each of year 2, 3, and 4. Employees privileges to the options are not conditional on future employment after they become exercisable though they carry no voting rights and dividends but are convertible to an ordinary share. The amounts receivable on the options are identified as share capital. The other long term performance incentives the Billabong executive performance share plan which is sub divided into performance shares and conditional rights. Under the performance shares, an employee is does not legally have a right to them but can vote and receive dividends under them. For Australian employees once they vest, the dividends remain in their trust but if the performance shares dont vest, they are forfeited by the employee. For conditionally rights. An employee is not legally entitled to shares in the Company before the rights allocated under. The fair value of the rights given is documented in the report of financial performance over the phase during which the rights vest and employees become unconditionally entitled to the shares. Award, vesting and exercises under the plan are made for no consideration.

The remuneration plan of billabong is under strong guidance of performance which no unfair loopholes to unfavorable remuneration. The entire remuneration framework is market competitive matching to the reward strategy of the association. Its alignment to shareholders interests by focusing on maintained growth in shareholders wealth as well as alignment to program participants interest by rewarding capability, recognition for contribution among others, ensures Billabongs remuneration structure is sufficient.

Capital Structure

Billabong is hugely reliant on equity finance which has greatly sustained the business though in recent years it has sought other avenues of financing such as Australian Exchange Securities (ASX). Equity in this case comprises treasury shares which grew to 27,945,000 about from 24,896,000 over the last three years, option and other reserves, retained profits, rights issue, and dividends paid, bring the overall equity over the last three years to about1,176,936. Thus the cost of equity when levered is about 33.6%.

Billabongs part of its financing structure also consist borrowing from overseas markets so as to take advantage of lower interest rates or to have generally, more munificent payment conditions. According to the 2009-210 financial report, these borrowings amounted to about 720,478,000 both in current and non current liabilities. The debt ratio of billabong during this financial period was on a relative low of 16.8% showing that the company is able sustain itself fairly well. Accounts payable in recent years has increased, since the company is taking advantage of attractive credit terms by its suppliers, improving the credit worthiness of the company.

In addition to this, the company has a diverse portfolio of leases under its sources of debt financing, especially the capital leases portfolio. The capital lease obligation represents the portion of lease obligation that is due beyond one year. Properties below this type of lease are capitalized when the lease term of certain asset is considerably close to the constructive life of the asset. When such lease obligations are capitalized, the associated asset is written down as an asset of the company and prone to depreciation.

During the past three years Billabong has been quite active in the stock exchange with its current share price trading at averagely A$ 6.68. With an average of about 1,500,000 shares issued and traded over the last 3 years, the dividend yield is about 2.71 with an average of about 920,196 paid. This shows that the percentage change is on the increase by about 0.45% meaning the company is performing well and maximizing the shareholders wealth. The dividend policy of Billabong is aligned with its corporate objectives since it pays a fixed payout ratio based on companys growth as well as performance of about 62%. Also, the company has about share rights and options available to its executive and non-executive directors based on their performance as stipulated in the company policy.

Fig 1 Showing monthly for ASX market index and Billabong

CAPM whose full expression is, capital asset pricing model is key to determining the most theoretical suitable rate of return of an asset. This means that an asset that is to be added to an already highly rated portfolio, after calculating and projecting assets non-diversifiable possibility. This is because the model considers and compares the asset's sensitivity to systematic risk, frequently shown by the quantity Beta () of the financial industry, as well as the anticipated returns of the market in addition to expected returns by a hypothetical risk-free asset.

The formula is:

E(Rj)=Rf+Bj(Rm-Rf)

lets consider that billabong companys beta risk is 2.3, while the free-risk rate of return is 9% in addition to that, the significant risk premium intended for the market index in excess of the risk-free investment ( Rm-Rf) has been 2% .the expected return would be:

E(Rj)=Rf+Bj(Rm-Rf)=9+2.3*2=13.6%

This simply means that the Billabong should get at least 13.6% return from their investment. If it will not result to these returns, then it will most likely reconsider investing in a different asset or stock.

Thus in reference to CAPM the formula above, one is able to see the significant measure of a stock's peril. This is because its able to determine stock's comparative volatility. Hence, Beta in comparison to equity in addition to risk premium reveals the sum of reward that equity investors could do with for undertaking of further risks.

We can comfortably urge Billabong international to undertake the investment if it meets the desired conditions and is willing to.

The above diagram shows ho Billabong is perfume I relation to the a Australian Stock Exchange This puts the firm in amazing position to be able to raise capital suitable for its future expansion programs. Moreover this show the confidence that investors have in the company as ell as the companys management. This is reflected by the increasing yet stable stock prices thus showing that the managements policies and programs are working and that they are abl to increase the shareholders wealth

Billabongs WACC Estimates.

The weighted average cost of capital is show in the calculations below. Its results show that Billabongs default probability of 1.6%, thus the relatively debt amount of Billabongs on its balance sheet is quite small an indication that its equity cost takes the whole cost of capital. Thus Billabongs WACC utilized is just 10.72%

Risk Management and Hedging Policy

Billabong has taken up a risk management system based on Risk Management standard and the ASX Corporate Governance principles and recommendations under AS/NZS 4360:2004. The following risks are observed under this framework which include risk identification of all foreseeable risks to the business in a consistent manner, risk evaluation where risks are evaluated using a standard risk assessment format, risk mitigation which involves developing plans to reduce the risks associated with the business, and finally risk monitoring and reporting where risk management activities and risk specific information is reported to appropriate sections of management in a timely style.

The CEO and senior management team is tasked with the identification, evaluation and monitoring of risks as well as the validity of risk report presented to the board and to determine clear communication of the board and senior management on its position regarding the risks. In addition, a formal risk assessment process is undertaken in the process of capital acquisition by performing post acquisition review, eighteen to twenty-four months of major business acquisitions, huge capital expenditures among other initiatives.

Billabong a part of its risk management policy also has a hedging policy that cushions the company from adverse business conditions, having in mind it is a global company in its own right. Having this in mind, Billabong has huge exposures to international prices for its manufacturing and distribution networks, this being perfectly reflected in the recent recession that affected most companies. Thus the company in its effort to militate against risks uses a range of derivatives such as forward exchange contracts to hedge against exchange rate fluctuations. It also has a foreign debt portfolio incorporated debt, with a host of maturity dates that provide some protection against interest rate and exchange rate activities.

Conclusion

Billabong is growing brand thanks to its unique innovativeness and quality thats appreciated by many loyal and ne customers. This can be attributed o its quality and effective management coupled with strong company values and policies that are only making its star shine brighter in the world arena.