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Assess Toyota's decision to issue 'Model AA' shares as a means of raising finance - Edexcel - A-Level Business - Question 2 - 2018 - Paper 2
Question 2
Assess Toyota's decision to issue 'Model AA' shares as a means of raising finance. The new 'Model AA' shares must be held for five years and cannot be sold earlier.... show full transcript
Worked Solution & Example Answer:Assess Toyota's decision to issue 'Model AA' shares as a means of raising finance - Edexcel - A-Level Business - Question 2 - 2018 - Paper 2
Step 1
Reasons for issuing AA shares (a long-term approach)
Answer
Issuing 'Model AA' shares can provide several long-term benefits for Toyota:
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Long-term investment indecision: It allows Toyota's managers more time to focus on developing new technologies for future vehicles, particularly in R&D, technology, and staff development, since shareholders must hold their shares for five years.
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Profitability assurance: 'Model AA' shareholders will receive guaranteed dividends each year, which can foster sustained profitability and align the interests of long-term shareholders with the company’s strategic goals.
Step 2
Possible counterbalance considerations
Answer
While there are advantages to this strategy, there are also potential drawbacks:
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Short-term demands: Some shareholders may seek immediate returns which might compel managers to prioritize immediate outcomes over long-term strategies. This pressure could lead to inefficiencies.
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Market reaction: Shareholders concerned with the company's performance may urge managers to respond to market changes more quickly, such as adapting to the increasing demand for hybrid and electric vehicles.
Step 3
Potential judgment
Answer
In a competitive and dynamic market, prompt responses to market changes and consumer preferences are essential for Toyota. Therefore, although the 'Model AA' share strategy supports long-term investment, its success hinges on shareholders' willingness to be patient and accept a longer timeframe for returns.
In conclusion, while issuing 'Model AA' shares can support long-term goals and allow for significant R&D investment, it requires a careful balance of short-term shareholder engagement with long-term planning to ensure the company remains competitive.