Application Exercise 4f:
Given that the Billabong CEO was considered high performing, his redundancy is unlikely to be considered in a favourable light by investors in the marketplace. Analysts and investors will be concerned that any new CEO will not be as effective, so the decision creates uncertainty and exerts downward pressure on the demand for and price of Billabong shares.
A lower value of the Australian dollar improves the international competitiveness of exporters, including Billabong, which boosts foreign demand for Billabong products and raises the profitability of Billabong. This ultimately will increase the demand for and price of Billabong shares as investors expect higher returns.
An expected takeover of Billabong will immediately cause an increase in the demand for Billabong shares as investors are aware that the takeover company needs to acquire a majority ownership of the shares in the company. It can only achieve this by buying up shares in the marketplace (i.e. demanding more shares) which necessarily inflates the price.
As these countries experienced a recession (i.e. two consecutive quarters of negative economic growth), the demand for most goods and services will fall, including the demand for Billabong products. This fact, combined with general market uncertainty, is likely to result in a fall in the demand for and price of shares in Billabong as well as many other companies.
A reduction in tariffs on imports of Surf wear products is likely to have a negative impact on the profitability of Billabong. This in turn leads to a reduction in the demand for and price of Billabong shares as investors expect lower returns.
The use of ‘slave labour’ will be problematic for Billabong given that many consumers will steer away from purchasing products from those companies that are considered to be socially irresponsible and/or exploitative. This will negatively impact on the profitability of Billabong products which necessarily results in a fall in the demand for and price of Billabong shares.
The announcement of a government sponsored ‘Get Fit Programme’ is likely to increase the demand for all those products associated with the fitness industry. This includes Billabong products, resulting in higher profitability and the resulting increase in the demand for and price of Billabong shares