Nokia Essay

913 Words Jan 10th, 2014 4 Pages
1) Evaluate Nokia’s strategy and historical operating performance.
Nokia, the global leader in mobile communications, competes in a fast moving and highly competitive mobile phone industry. Threatened by intense competition from iPhone, Android phones on the high end and rival products in the larger, lower-priced segment as well, Nokia’s strategic plan is to partner with Microsoft to build a new ecosystem with Windows Phone (WP) serving as Nokia’s primary smartphone platform while its own Symbian platform phasing out gradually and a combined approach to capture the next billion in emerging growth markets.
Operating performance has been weaker in the past five years (2007-2011). Sales decreased from 51 billion to 39 billion, gross profit
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Several assumptions are made here: new stock price € 4, interest rate of new debt remains the same as 5.7%, dividend € 0.4 per share, cash balance 9.5 million and its interest rate 1%. However, based on these assumptions, the EBIT interest coverage for debt financing is only 2.42x, which is well below the average of BBB credit rating companies. There will be a high chance for Nikia to be downgraded in credit rating if it goes through debt financing. Therefore, its EPS and EBIT interest coverage should be even lower due to increased interest expense resulted from the downgrade.
4) What are the advantages and disadvantages of the alternatives proposed in the case?
Issue Debt:
• Advantage: Tax benefits, add discipline to management
• Disadvantage: Distress cost, risk of downgrade in credit rating (as mentioned in pro forma analysis)
Particularly for in Nokia’s care, though it has negative net debt due to its high cash balance, the rating agencies did not refer to net debt. Instead, credit ratings are a combination of financial strength and business risk, which due to competitive pressure was high for Nokia. If Nokia gets a downgrade to non-investment grade, it would be harder to raise funds in economic downturns when firms might have a greater need to borrow.
Issue equity:
• Advantage: Flexible (no legal

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