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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. Toyota shareholders last week approved the issue of 50 million new shares - and n... 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
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Long-term Investment: The decision to issue 'Model AA' shares allows Toyota to secure a guaranteed long-term investment, aiming to raise $4 billion. This investment will particularly focus on enhancing R&D, developing new technologies, and improving staff development necessary for the next generation of automobiles.
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Benefits to Shareholders: 'Model AA' shareholders will benefit from a guaranteed annual dividend that increases each year, ensuring they receive consistent returns on their investments. This long-term strategy also aligns with Toyota's aim to maintain profitability.
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Mitigating Short-term Pressures: By tying up investment for five years, Toyota's management will not be subjected to immediate market pressures. This allows them to focus on innovation and necessary adaptations in the automotive market without the distraction of fluctuating share prices.
Step 2
Possible counterbalance to this strategy:
Answer
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Short-term Rewards: Some shareholders may be dissatisfied with the long wait for returns. This may lead to a push for shorter-term gains which could cause management to feel pressured to change strategies too quickly.
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Market Responsiveness: Rapid changes in consumer preferences might require a quicker reaction than the long-term focus allows. Some shareholders could argue that managers need to balance their time between responding to immediate market shifts and focusing on long-term innovations.
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Ownership Dynamics: Some investors may prefer immediate returns and could influence management to operate under different priorities, possibly causing friction in the overall strategy.
Step 3
Potential judgement on the issue:
Answer
The automotive market is characterized by its dynamism and competitiveness. Toyota's decision to issue 'Model AA' shares appears beneficial as it provides financial stability and encourages long-term planning. However, for this strategy to be successful, shareholders will need to be patient and understand the implications of a long-term approach in a constantly evolving marketplace. Ultimately, if Toyota effectively addresses short-term shareholder concerns while pursuing this longer-term vision, it can position itself advantageously for future growth and innovation.