Revisiting Cost of Capital in Commercial Banks

CHAPTER 1: INTRODUCTION 2 Background Capital Structure decision remains one of the corporate strategies to corporate managers because it affects firm’s value. This research is conducted within the commercial banks. In many research journals and articles the cost of capital is the expected rate of return of capital in investor’s investment. Weighted average cost of capital is considered as required rate of return in the company. Component of cost of capital are; long-term debt, preferred stock, and common stock. Each must have minimum return.We analyze from previous research articles that the banks should not focus on historical cost but on new cost, because in order to invest and rise, new cost of capital is used to make decisions. Level of interest rates, tax rates are two of the factors that affects cost of capital in the commercial banks. Interest rates apply on debt and equity. It is the most important factor for investors. Cost of debt affects by the level of inter est rates and also the cost of equity. As described in many articles, if interest rates increases the cost of debt increases, which increases the cost of capital.So, the raising of capital delayed till interest rate become favorable. This shows how the interest rate can be a source effective measure of the cost of capital. Similarly, if the tax rates increases, the cost of debt decreases, which decrease the cost of capital as it affects the after tax cost. The cost of capital directly and totally linked with capital structure. Capital structure influence the value of the banks, firm, company potentially by reflects the financing strategy. And capital structure should consider tax strategies.We found from different articles that the most important capital structure decisions are when the expected tax rates goes higher. The basic function of capital structure is to minimize the cost of capital and risk. Interest is tax deductable. The deductibility of interest payments provides influe nce for value. Higher the tax rate, the greater impact of deductibility of interest potentially on the after-tax cost of debt. These are the proved facts that are evaluated in previous researches. According to this research we are trying to find what role these factors play in commercial bank’s capital structure.It is necessary for top management of any business institutions to ascertain the banks or firms relevant cost of capital. From the banks’ perspective, the cost of each source of capital reflects the level of return because it is affected by certain factors like tax rates, interest rates, dividends etc. as the time period changes, the level of return also changes. In its simplest form, the capital structure decision is the selection by firm management of debt-to-equity ratio for the firm. Cost of Capital is perhaps the most fundamental and widely used concepts in financial economies.Managers of banks or corporation and also regulators employ the weighted average cost of capital for investment decisions. The WACC and the tax rates are endogenous to the firm’s debt policy. The interest rates affect the cost of debt as increasing debt increasing interest payments. We also derive the sources of capital structure that which source is better for the commercial banks and how the interest rates, tax rates brings variation in the cost of debt and the dividends and growth rates affects the cost of equity that totally affect the weighted average cost of capital.Our methodology allows us to value the government tax rates and interest rates that affect cost of debt. We specify numerically the affects of the variations in the factor like interest rates, tax rates and dividends, thus providing useful conceptual framework for the tax and interest policy debates that influence cost of capital of debt and equity. Finally we come to analyze that cost of debt increase or decrease by variation in the interest rates and tax rates and that help in the est imation of WACC that show that whenever the WACC decreases, it results in an increase in the profit that is useful for any organization or commercial banks. . Problem statement (Revisiting the cost of capital in the commercial bank) The problem statement of this research proposal includes re-examine the cost of capital in commercial banking sector of Pakistan and also to evaluate the direct and indirect association of the factors that affects weighted average cost of capital and how this variation (increase or decrease) can affect the profit and also the capital structure -debt and equity- of the commercial banks. 2. Research objectives While doing research planning, we analyze that the cost of capital considers the factors affecting decision making.The following object of the research comes into play: ? We will find out the factors which creates the variation (increase or decrease) on cost of capital and their effect on the capital structure decision making. ? To analyze the after effects of these factors on capital structure. ? To examine up to how much extent they are controllable or not from bank’s perspective. 3. Significance The importance of this research paper is that, the relation between the different determinants of the costs of capital creates different impact on the different commercial banks by affecting capital structure of that commercial bank.We know that as the weighted average cost of capital decreases, it increases the profit n the Commercial Banks. Risk associated with cost of capital and capital structure taking needs to b looked at differently in the case of the commercial banking institutes. This research sheds new light on how the cost of capital computed in the case of commercial banks. Also the relationship between the cost of capital and capital structure is investigated. This research has another importance as banking system has a vital role to play in the economic development of a nation. A healthy economy requires a sound banking system.This research states that how banks applies different techniques that enhance their performance and also affect the decision making of the Mangers regarding their capital. In this research, the main finding of the paper suggests that the commercial bank should focus on reducing the cost of capital that maximizes the profit. According to our findings, it is concluded that each banks has its policies of financing. Each bank takes decision of selecting capital structure for minimizing their cost, risk factor differently that occupies good financial position in market.Factors that have impact on cost of capital as well as on capital structure are tax rates, interest rates, dividends payout, risk of default and other like market fluctuation, corporate governance. This research plays a vital role by showing the significant contribution of Commercial Banks while equating debt to equity ratio. It also shows the understanding of the performance of Banks by evaluating weighted average cost of capital. The main findings of the paper suggest that private commercial banks should focus on reducing the cost of capital which can magnify the returns to their stockholders.Finally this research paper would also help the students in academics in understanding the relation between the factors and the cost of capital and also their after affects that create impact on the weighted average cost of capital. 4. Limitation Time constraint of this semester is the issue for this study as we have limited time in this semester as compared to the actual time required for the research. By being in banks we will acquire interviews approximately 15 -30 minutes with questionnaire because of the time given by the Mangers of Finance Division.The information given by the managers is also limited because it difficult for them to provide all necessary information as they are bound by the policies of the commercial bank. 1. 6 Report Structure Chapter 1 represents the introduction of res earch topic its background, problem statement, objectives of research that set, significance of this research and limitations. This chapter gives brief information about the topic pervious information, the scope of research and its benefits, the target of the research. And also provides the basic information that already conducted by different authors researchers.Chapter 2 deals with the literature review and conceptual framework. In this portion you will find the different views of different researchers related to this research topic cost of capital in commercial banks including capital structure importance its link with cost of capital, and factors that affect cost of capital. This portion also gives the direction and relevant information which is very helpful in proceedings the research. Conceptual framework helps in determining the relationships of factors with WACC.Chapter 3 provides the detail of methodology that is adapted to proceedings the research. This portion gives expla nation of research type, method, sample size, instruments that is used in finding and collecting the data. Chapter 4 gives the analysis of data that is collected through the questionnaire, interviews and calculating the WACC of commercial banks that chosen with assumptions, and research findings that proves the hypotheses that is set. Chapter 5 includes the conclusion of research findings and literature review findings.Also gives the recommendations. Finally Appendix attach to our research that contain Questionnaire. CHAPTER 2: LITERATURE REVIEW AND CONCEPTUAL FRAMEWORK 1 Literature Review 2 Capital structure (Khadka 2005) has analyses in his research that the firms meet their operational needs by raising their funds and this can be done through the capital structure that involves the two major sources of debt and equity. There should be an appropriate balance between debt and equity as it has effects on the risk and return of the shareholders of the company.If there are reasonable proportions of debt and equity in the capital structure of the firm, it maximizes the shareholders wealth while minimizing the cost of capital and that could be considered as the optimal capital structure. (John J. Pringle, Jun. , 1974) Since banks are private economic units, it is reasonable to suppose that shareholder interests will influence, if not control, managerial decisions. Capital is an important managerial decision variable and that it plays an important role in the financial management of the individual bank. Groth 1997) said that the selection of capital structure affects the cost of capital. Carefully selection of capital structure is more important. Banks and companies consider more conservative capital structure with sensitivity to cyclical effects of economy. It involves in dividing not in sharing. If payments of dividend are not deductible and if interest is tax deductible on debt then capital structure is important. Barton and Gordon (1987) Financing and capital s tructure choices are among the several key decisions made by firm managers.Yet the study of these questions has been generally neglected by strategy researchers. Several scholars have noted that the issues involved are concerned with fundamental choices ‘which should support and be consistent with the long- term strategy of the firm. Balakrishnan and Fox (1993) said that by selecting suitable financing, a ‘firm's ability to manage its relationship with lenders thus becomes a key source of competitive advantage. Capital is a critical resource for all firms, the supply of which is uncertain. This uncertainty enables the suppliers of finance to exert ontrol over the firm. Stearns (1986) and Mizruchi (1993) estimate the cost of equity capital use a dividend discount model (DDM) methodology and earnings estimates. They find that the cost of equity capital for large U. S publicly traded companies ranged between 10% and 12% during 1979-1995, depending on the assumptions used wi th the DDM approach. Interestingly, Myers and Borucki (1994) obtain the same range of estimates for the cost of equity capital of a limited sample of U. S. utility companies using a DDM-type method.Bruner (1998) and Weaver(2001) surveying large corporation and confirm about WACC methodologies. Both authors find that there is a significant difference exists in estimating the equity capital component of the firm. Some uses CAPM while other uses different methods. 4 Cost of capital Cost of capital is the minimum required rate of return by investors in firm’s securities. It occupies an important role in the theory of financial management and in the investment decision making as it provides criteria for allocation of the capital that what a firm pays for its capital like debt, preferred stock and equity.Cost of Capital is related with the level of risk associate with existing and new assets and investments. (Khadka 2005) Modigliani and Miller (1958) proved that firms cost of capit al is independent of capital structure as it has no effect on the capital structure. The traditional belief of Modigliani and Miller (1963) is that the cost of capital can affect capital structure as in this belief they said that the personal taxes may include that brings variation in the cost of capital and hence affects the capital structure of the company. Khadka 2005) states that there is an empirical relationship between the cost of capital with capital structure, the size of the firm, growth of the firm, dividend payout ratio and liquidity of underdeveloped economy like Nepal but the major focus was the relationship of the leverage with the cost of capital where he conclude that negative beta shows that there is a negative relationship of cost of capital with the leverage as cost of capital decreases with the use of the leverage and this is done by the tax deductibility of the interest charges in the Nepalese firms.Cost of capital is the expected rate of return of capital in i nvestor’s investment. On debt, the amount of interest is paid is called cost of debt. Whereas cost of equity is equivalent to the risk free rate of interest plus risk premium for business risk. (Groth 1997). 5 Factors that affects cost of capital Groth (1997) further said that risk is one of the factors that affect the cost of capital which determines the expected risk of cash flow in the asset side of the bank. Business risk is that when bank and companies cash flow are not able to meet its operating expenses.Risk is linked to economic changes. And it would be at risk to business risk when change in economy occurs and when financing is done by totally with equity. Cost of equity influenced by business risk. Equity holder’s risk has not accepted by the creditors and preferred stock holder if present. If increase in business risk occurs then it decreases the financial risk and the optimal D/E ratio, and increases the cash flow uncertainty of asset side. Financial risk i s that when bank and companies cash flow are not able to meet its financial obligations. If firm finances through debt, then it has financial risk.Tax rates and interest rates are also factors. Interest payment expected deductibility give opportunity for value. If the tax deductibility is realized by the company then stockholders get the expected benefit of the tax deduction. Jorgenson and Landau (1993) or Bond and Devereux (2003) analyses that the government’s choice of the corporate tax rate is an important factor with respect to the investment decision made by shareholders and it is well known that the existence of corporate taxes distort this investment decision away from the social optimum . John J. Pringle, Jun. (1974) said that the traditional function of risk-bearing, capital is important in adjusting the maturity structure of liabilities. Risk is a function of uncertainty regarding future events, e. g. , earnings, losses on loans and securities, fluctuations in depos its, conditions in the financial markets, etc. Cost of equity increases if the financial risk become high. The cost of equity and debt increases with the increase in debt. The deduction of tax and its benefit is an expected benefit, to allow deduction of interest; the pre-tax EBIT income must be large.On after tax cost of debt, there is the greater the impact of interest deductibility, if the tax rate s higher. John R. Graham, (2003) analyze that the appropriate cost of capital in the presence of personal taxes does not depend directly on either the dividend payout rate or the tax on dividends. Equity shares have a market value lower than the difference between the reproduction cost of a firm's assets and the market value of its debt obligations. Because of this capitalization, it need not be true that an economy without risk or uncertainty would have no equity financing.Groth (1997) said that asymmetry of effects is that the expected return to stockholder will goes up, if in place of some equity; some debt is used. The good or bad leveraging effects are asymmetry if interest is tax deductable. The inability to realize the interest deduction result in an asymmetry effect on expected return to stockholder. Weighted average cost of capital become low with the cost of capital high, if the debt capital increase in proportion. Cost of equity increases with the cost of debt.If the cost of components high the weighted average cost of capital increases and reason is that shareholder prefer to use of debt when expected value of tax benefit is attractive as compared to the added financial risk associated with the debt. The Demanded rate of increase in cost of debt and equity, effects on value of the expected increase in tax benefit of using more debt. Interest rate affects the cost of debt. It involves the risk components that have the probability of default on the debt. Meziane (2006) in his article said that a company pays interest which is treated as an expense for t ax purpose and therefore it is tax deductable.Company will be bankrupt, if default on payment of interest to bank present by company. Equity financing cannot create a tax advantage because dividends are paid after interest and tax. Interest is paid on debt before tax deduction, whereas, dividend is paid after tax benefit. So, the cost of equity is high then cost of debt. Debt financing becomes attractive when tax is deductable from interest. Banks use cost of capital for decisions, a weighted average interest on debt. Bank should select D/E ratio for which the cost of capital fluctuate with the degree of debt finance is minimized.The D/E ratio is considered as one of the way of financing. (Alan J. Auerbach, aug. 1979). William F. Coffin and Sean Collin (2006) said that in the mid of 1990, a trend towards higher B/S debt in which low cost interest rate, lending level reduced by commercial banks and increase payback period for borrowers, a stable banking system. Cost of capital become low that could lower by the management in down market through viewing current corporate governance themes, taking action on giving management training with respect to capital market issues of today and advanced planning to identify the potential investors. Cost of capital and Corporate Governance Ramly and Rashid said corporate governance is also the factor that affects the cost of capital. CG directly affects the cost of equity, And indirectly with beta. This means poor performance of manager created through weak rights, thus increase cost of capital. Strong (weak) shareholders right associated with increase (decrease) cost of equity capital. CG generate liquidity problem in which investor high the sell price and decrease the buy price which can high the transaction cost and also affects the COEC.Thus, the CG creates strong mechanism on COEC and provides positive shareholder value for firm. It has also reducing effects on cost of capital. Banks and other financial institutes have negative influence on CG. Hennart, (1994) Both classes of suppliers (debt holders and equity holders) have governance abilities. The level of governance ability varies between the two and the optimal selection of the type of financing depends on the nature of resources of the firm. Seth, (1990) financing choices have the potential to affect performance by changing the level of governance costs. Importance and difficulties of WACC Denis Boudreaux (1995) in his article uses the buildup model for the cost of equity capital by estimating cost of equity capital for capital budgeting analyses. He said that whenever there is a need to determine the value of the firm, the cost of capital must be estimated. He said that the cost of debt of closely held firm is much higher that the publicly traded organization because of the loans or debt borrowed by the closely held firms including the commercial banks.He further said that the public traded firms have the low risk whereas a huge risk factor is involved in the closely held businesses. Experts have recognized that the exploitation of debt and equity can enhance the corporate value in 1940s. Later in the years, five concept developed on this area(1) early gearing leverage model; (2) the model of Modigliani and Miller (MM); (3) Capital Asset Pricing Model(CAPM); (4) Arbitrage Price Theory (APT); and (5) Gordon Model Shubbar and Alzafiri, (2008). Unless a firm can gain in excess of its cost of capital, it will not add value to its investor’s wealth.Company’s cost of capital is expressed by the weighted average of the cost of individual sources of capital employed. Bruner et. al. , (1998). For a firm using common stock (equity) and bond (debt) financing, with re and rd as the cost of equity capital and the cost of debt capital, the WACC is expressed the following equation: WACC = r = wd rd (1 ? t) + we re Where, wd (weight (proportion) of debt) = (value of debt/value of debt and value of equity), we (weight (pr oportion) of equity) = (value of equity/value of debt and value of equity), wd + we = 1, and t = tax rate on corporate income.The component costs, re and rd, as well as the weights are based on market values: re is frequently calculated as the risk free rate plus a risk premium, based on the capital asset pricing model, and rd reflects the market rates on the firm’s outstanding debt and on the rd of similar firms. The standard treatment includes (1? t) in the WACC calculation to reflect the deductibility of interest payments in the calculation of the corporate tax on the firm’s income statement: the interest cost of debt, by this procedure, is reduced.Also, to avoid double counting the tax â€Å"advantage† of debt, the interest payments are not calculated in the prospective cash flows. This is the textbook treatment in calculating a firm’s cost of capital. (Miller2006) Evaluating a firm’s weighted average cost of capital has its importance to the m anagers who estimate investments projects for capital budgeting purposes or to the investor whose desire is to assess the overall riskiness and expected return from a company’s activities for valuation purposes. (Miller 2006).Fama and French (1997, 1999) analyse that few difficulties arise because there is some uncertainty in evaluating a firm’s (or banks) cost of capital. This uncertainty is a sort of risk faced by the firm when projecting a project’s cash flow. Bruner, Eades, Harris, and Higgins, (1998) also analyze that there is wide variation in estimating WAAC by different methods. This is due to the manager’s differences in firms cost’s of equity capital that helps in investment decision making. 8 Conceptual Framework DV= DEPENDENT VARIABLE IV= INDEPENDENT VARIABLE MV=MODERATE VARIABLE 9 Conceptual HypothesisHo: WACC increases with increase in interest rates and decreases with decrease in interest rates. H1: WACC increases with decrease in ta x rates and decreases with increase in interest rates. H3: Cost of debt increases with increases in interest rate and decreases with decrease in interest rates. H4: Cost of debt increases with decrease in tax rates and decreases with increase in interest rates. CHAPTER 3: RESEARCH METHODOLOGY 10 Type of Research Research can be defined as the search for knowledge, or as any systematic investigation, with an open mind and facts, usually using a scientific method.Our research is empirical research, which tests the feasibility of a solution using empirical evidence. This research comprises of both the qualitative and quantitative research method for the data analysis. Firstly we search for the secondary data in order to know and understand the analysis of the previous researcher that how they work and create different perspective for the Weighted Average Cost of Capital than we include the researches of the previous researcher in the literature review of this research in order to creat e relation and direction between the previous researches with our research. 1 Sampling Technique Sampling Technique used in our research is Random Sampling in which we chosen from a population for investigation. In this method we chose from managers in the Commercial Banks and estimates obtained from the random sample in order to solve our queries related to WACC. 12 Sample Size The Sample Size is comprises of 5 Commercial Banks of Karachi. More than the given sample size is not possible because of the time of this semester and also the little difficulty in finding the appointments with the Mangers of Finance Departments. 3 Instruments Questionnaire includes 12 question given to the Managers of the Commercial Banks in order to analyses the perception of the manager that how each individual differs in their perception for the factors that affects the weighted average cost of capital. Most of them include five point likert scales. Other than questionnaire, the balance sheet of 2009 of each bank is used to estimate the WACC for the year and evaluate how the factors like tax rates, interest rates affect WACC. 14 Data CollectionThis research has been carried out to evaluate the correlation between the factors of cost of capital like tax rates, interest rates and the WACC that how these factors affect the WACC in the commercial banks. The selected five banks include: Allied Bank Limited (ABL), Habib Bank Limite(HBL), Muslim Commercial Bank(MCB), Alfalah Bank and Soneri Bank Limited. Descriptive Data Analysis is taken place in order to estimate WACC. This study employs after-tax cost of debt and equity in order to estimate WACC for selected banks. The procedure of calculating after-tax cost of debt and cost of equity has been stated here.The cost of debt measures the cost of borrowing funds of the firm. In calculating the after-tax cost of debt of each bank for the year 2009 by the following formula: After-tax cost of debt = pre-tax cost of debt (1 – tax rate) The cost of equity evaluated through the given formula: Cost of equity = Gordon growth model =(Do (1 + g))/ (market price per share)] + g) Finally the Weighted Average Cost of Capital calculated by WACC = (Weighted average cost of debt) + (weighted average cost of equity) CHAPTER 4: DATA ANALYSIS 15 QUESTIONNAIRE ANALYSIS Banks normally prefer financing through debt plus equity. 1% of the commercial banks use both (debt and equity) as their sources of finance while remaining 29% of the banks prefer debt for their investment. Only exploitation of equity is not preferred by any banks because through debt finances, the banks gain and improves profit. [pic] Equity sources liable bank to pay dividend, 71% of the banks says that the dividend payment increases the cost of capital while the other 14% said that it decrease the cost of capital and the remaining said that dividend payment has no such impact on the cost of capital. [pic] 5% of the commercial banks said that by using tax shield , cost of capital decreases as it decreases cost of debt and also impact interest rates. While 14% said that it has no such impact like some of Islamic bank like Meezan Bank. [pic] 71% of the sample size agreed that the Cost of capital has positive impact on the capital structure by using both sources of finance while 15% disagree and other 14% are highly disagree. That means most of the commercial banks are in the favor of Ho that the using both sources improves the profit of the commercial bank. [pic] 7% agrees and 28% strongly agrees that the risk factor of the default increases as there is an increases liabilities when bank finance through debt while only 10% of the sample size disagree to this fact but still they have profit by increasing their liabilities. [pic] Approximately 86% of the commercial banks agree from the fact that the fluctuation in the interest rate affects Cost of Capital and also the Capital Structure of their banks while other says that there is no as such im pact of the interest rates but from secondary data we analyze that interest rate is the factor that affects the cost of capital and the capital structure. pic] 71% of the managers agrees that as low dividend payout affects the reputation of their bank, similarly high dividend payout and dividend growth also affect the capital structure decision whereas 29% of the managers said that high dividend has no such impact on the cost of capital and on investment decision. [pic] 100% of the sample size agrees that cost of capital highly impact the investment decision in the commercial bank that also affects capital structure decision making and increases the profit if the weighted average cost of capital is low. [pic] 5% of the sample size agrees that the cost of capital has a huge impact on the level of risk because the maximization of the profit in the commercial bank is truly based on cost of capital and its other factors. [pic] 57% of the sample size agree that the taxes bring variation in the cost of capital in commercial bank while the other denied that taxes has no such affects on cost of capital but many researches has proved that taxes highly affects the cost of capital. [pic] 100% of the managers agree that weighted average cost of capital reduces as there is reduction in the net financial debt.It can be explained by the fact that if the cost of debt remains same but there is variation in the weightage of the debt. The lower weightage reduces the WACC of the commercial bank. [pic] While the method used for the cost of equity varies in different banks. 15% uses the CAPM, 42% uses the Gordon Growth Model whereas the remaining percentage uses both the CPM and Gordon Growth Model method when they finances through the equity. [pic] 16 DESCRIPTIVE ANALYSIS 17 Allied Bank Limited WACC = (Weighted average cost of dbt) + (weighted average cost of equity)WACC = (interest (1-tax)) + (Do (1 + g))/ (market price per share)] + g) COST OF EQUITY: |YEAR |2005 |2006 |2007 |20 08 |2009 | |DIVIDEND/SHARE |2. 5 |2. 5 |3 |3. 5 |4 | |GROWTH |0% |0% |20% |16. 66% |(14. 28%) | Average growth=4. 476% Cost of equity = Gordon growth model =(Do (1 + g))/ (market price per share)] + g) Cost of equity =4(1+0. 4476)/59. 11+0. 04476 = 11. 54% | |g |Growth Rate |4. 476% | | |Do |Last Dividend |4 | | |MP |Market Price |59. 11 | | | | | | COST OF DEBT: Interest Rate = 9. 619% Tax rate = 32. 4% Weighted average cost of debt after tax = 0. 09619(1-0. 324)Weighted average cost of debt after tax =6. 503 % WEIGHTED AVERAGE COST OF CAPITAL: | |AMOUNT |%AGE COMPONENT |COST |WACC | | |Thousand |(a) |(b) |(a*b) | | |(000) | | | | |DEBT |39,457,216 |0. 0055 |0. 650 |0. 00036 | |EQUITY |7,110,007,580 |0. 9945 |0. 1154 |0. 11476 | |TOTAL |7,149,464,796 | | |0. 11512 or 11. 51% | ANALYSIS In order to prove our research hypotheses, we find different relation between the interest rates, cost of debt and WACC; we assume different variation in the interest rates as it is the independent v ariable that affects the WACC hich is the dependent variable. In 2009, the interest rate of ABL was 9. 619%, we assume two different rates in which one is greater than 2009 rate i. e. 15% and other is less than 2009 interest rate i. e. 7. 00%. As the interest rates increases, it also increases the cost of debt that results in the increase in the weighted average cost of capital. Hence, hypotheses Ho and H3 of our research has proved by this analysis because as the interest rate decreases to 7. 00%, the cost of debt also declines which result in decreases in the WACC and vice versa. INTEREST |COD |WACC | |7. 00% |4. 73% |11. 50% | |9. 62% |6. 50% |11. 51% | |15. 00% |10. 14% |11. 52% | pic] For the relation between the taxes rates, cost of debt and WACC. We find different variations among them. Tax rates are the independent variable so they create different affects on WACC as it is dependent variable. In 2009, ABL has the tax rate of 32. 40%. Similarly we assume one tax rate greater than 32. 4% and another is less than 32. 4% in order to prove our hypothesis. From the following analysis, we come to know that as the tax rates increases, it decreases the cost of debt that results in the decrease in the weighted average cost of capital.Hence, hypotheses H1 and H4 of our research have proved by this analysis. |TAX RATES |COD |WACC | |30% |6. 73% |11. 84% | |32. 40% |6. 50% |11. 51% | |35% |6. 25% |11. 50% | [pic] 8 Habib Bank Limited (HBL) WACC = (Weighted average cost of debt) + (weighted average cost of equity) WACC = (interest (1-tax)) + (Do (1 + g))/ (market price per share)] + g) COST OF EQUITY: |YEAR |2005 |2006 |2007 |2008 |2009 | |DIVIDEND/SHARE |1. 5 |1. 48 |1. 48 |3. 01 |0. 30 | |GROWTH |0 |-1. 333% |0 |103. 378% |-90. 033% | Average growth=2. 4024%Cost of equity = Gordon growth model =(Do (1 + g))/ (market price per share)] + g) Cost of equity = 0. 03 (1+0. 024)/40. 9+0. 024 = 2. 475% | |g |Growth Rate |2. 4024% | | |Do |Last Dividend |0. 03 | | |MP |Ma rket Price |40. 90 | | | | | | COST OF DEBT: Interest Rate = (LIBOR+1. 75) = 18. 65% Tax rate = 37. 2% Cost of debt after tax = 18. 65 (1 – 0. 3732) Cost of debt after tax = 11. 69% WEIGHTED AVERAGE COST OF CAPITAL: | |AMOUNT |%AGE COMPONENT |COST |WACC | | |Thousand |(a) |(b) |(a*b) | | |(000) | | | | |DEBT |33,536,837 |0. 786 |0. 169 |0. 0912 | |EQUITY |9,108,000 |0. 214 |0. 0246 |0. 0053 | |TOTAL |42644837 | | |0. 0965 or 9. 65% | ANALYSIS We find different relation between the interest rates, cost of debt and WACC in order to prove our research hypothesis. We assume different variation in the interest rates as it is the independent variable that affects the WACC which is the dependent variable.In 2009, the interest rate of HBL was 18. 65%, we assume two different rates in which one is greater than 2009 rate i. e. 20% and other is less than 2009 interest rate i. e. 12. 00%. As the interest rates increases, it also increases the cost of debt that results in the increase in the weighted average cost of capital, this can easily proved by given table and you can also find this relation through the given graph. Hence, hypotheses Ho and H3 of our research has proved by this analysis because as the interest rate decreases to 12%, the cost of debt also declines to from 11. 69% to 7. 2% and which result in decreases in the WACC from 9. 65% to 6. 44% and vice versa. |INTEREST |COD |WACC | |12% |7. 52% |6. 44% | |18. 65% |11. 69% |9. 65% | |20% |12. 536% |10. 38% | pic] Tax rates are the independent variable so they create different affects on WACC as it is dependent variable. In 2009, HBL has the tax rate of 32. 40% that having COD 6. 503% and a WACC of 11. 51%. Similarly we assume one tax rate greater than 32. 4% and another is less than 32. 4% in order to prove our hypothesis. From the following analysis, we come to know that as the tax rates increases, it decreases the cost of debt that results in the decrease in the weighted average cost of capital. Henc e, hypotheses H1 and H4 of our research have proved by this analysis. Tax rates |COD |WACC | |30% |6. 73% |11. 84% | |32. 4% |6. 503% |11. 51% | |35% |6. 25% |11. 50% | [pic] 19 Muslim Commercial Bank (MCB)WACC = (Weighted average cost of debt) + (weighted average cost of equity) WACC = (interest (1-tax)) + (Do (1 + g))/ (market price per share)] + g) COST OF EQUITY: |YEAR |2005 |2006 |2007 |2008 |2009 | |DIVIDEND/SHARE |4. 5 |5. 1 |5. 6 |6 |6. 8 | |GROWTH |0 |13. 33% |9. 8% |7. 14% |13. 33% | Average growth=8. 72%Cost of equity = Gordon growth model = (Do (1 + g))/ (market price per share)] + g) Cost of equity=6. 8(1+0. 0872)/189. 79+0. 0872 =12. 62% | |g |Growth Rate |8. 72% | | |Do |Last Dividend |6. 8 | | |MP |Market Price |189. 79 | | | | | | COST OF DEBT: Interest Rate = 12. 75% Tax rate = 33. 07% Cost of debt after tax = 12. 275 (1 – 0. 3307) Cost of debt after tax = 8. 216% WEIGHTED AVERAGE COST OF CAPITAL: | |AMOUNT |%AGE COMPONENT |COST |WACC | | |Thousand (000) |(a ) |(b) |(a*b) | |DEBT |44,662,088 |0. 0221 |0. 0822 |0. 0018 | |EQUITY |1,972,537,950 |0. 778 |0. 1262 |0. 1234 | |TOTAL |2,017,200,038 | | |0. 1252 or 12. 52% | ANALYSIS From many different previous researches, we find different relation between the interest rates, cost of debt and WACC. We assume different variation in the interest rates as it is the independent variable that affects the WACC which is the dependent variable. In 2009, the interest rate of MCB was 12. 28%, we assume two different rates in which one is greater than 2009 rate i. . 11. 6% and other is less than 2009 interest rate i. e. 14. 90% in order to find the after affects of these changes. Remaining other things constant, as the interest rates increases, it also increases the cost of debt that results in the increase in the weighted average cost of capital, this can easily proved by given table and you can also find this relation through the given graph. Hence, hypotheses Ho and H3 of our research has proved by t his analysis because as the interest rate decreases to 11. 6%, the cost of debt also declines to from 8. 22% to 7. 6% and which result in decreases in the WACC from 12. 52% to 12. 51% and vice versa. |INTERSET RATES |COD |WACC | |11. 60% |7. 76% |12. 51% | |12. 28% |8. 22% |12. 52% | |14. 90% |9. 97% |12. 6% | [pic] For the relation between the tax rates, cost of debt and WACC. We find different variations among them. Tax rates are the independent variable so they create different affects on WACC as it is dependent variable. In 2009, MCB has the tax rate of 33. 07%. Similarly we assume one tax rate greater than 33. 07% and another is less than 33. 07% in order to prove our hypothesis. From the following analysis, we come to know that as the tax rates increases, it decreases the cost of debt that results in the decrease in the weighted average cost of capital.Hence, hypotheses H1 and H4 of our research have proved by this analysis. |TAX RATES |COD |WACC | |30% |8. 59% |12. 53% | |33. 07% |8. 22% |12. 52% | |40% |7. 36% |12. 50% | pic] 20 Al-falah Bank Limited WACC = (Weighted average cost of debt) + (weighted average cost of equity) WACC = (interest (1-tax)) + (Do (1 + g))/ (market price per share)] + g) COST OF EQUITY: |YEAR |2005 |2006 |2007 |2008 |2009 | |DIVIDEND/SHARE |0. 5 |1. 25 |1 |2. 25 |2. 25 | |GROWTH |0 |150% |-20% |125% |0 | Average growth=51%Cost of equity = Gordon growth model =(Do (1 + g))/ (market price per share)] + g) Cost of equity = 2. 25(1+0. 51)/26. 13+0. 51 = 64% | |g |Growth Rate |51% | | |Do |Last Dividend |2. 25 | | |MP |Market Price |26. 13 | | | | | | COST OF DEBT: Weighted average Interest Rate = 6. 406%.Tax rate = 34. 84% Cost of debt after tax = 0. 06406 (1 – 0. 3484) Cost of debt after tax = 4. 174% WEIGHTED AVERAGE COST OF CAPITAL: | |AMOUNT |%AGE COMPONENT |COST |WACC | | |Thousand (000) |(a) |(b) |(a*b) | |DEBT |18,687,600 |0. 00138 |0. 0417 |0. 000057 | |EQUITY |13,491,562,500 |0. 986 |0. 64 |0. 639104 | |TOTAL |13,5 10,250,100 | | |0. 639 or 63. 9% | ANALYSIS Many different researches have concluded that different variation in the interest rates as it is the independent variable that affects the WACC which is the dependent variable. In 2009, the interest rate of Alfalah Bank was 6. 404%, we assume two different rates in which one is greater than 2009 rate i. e. 8. 6% and other is less than 2009 interest rate i. . 4. 6% in order to find the after affects of these changes. Remaining other things constant, as the interest rates increases, it also increases the cost of debt that results in the increase in the weighted average cost of capital, this can easily proved by given table and you can also find this relation through the given graph. Hence, hypotheses Ho and H3 of our research has proved by this analysis because as the interest rate decreases to 4. 6%, the cost of debt also declines to from 4. 174% to 2. 997% and which result in decreases in the WACC from 63. 914% to 63. 0% and vice versa. |I NTEREST RATES |COD |WACC | |4. 6% |2. 997% |63. 90% | |6. 406%. |4. 174% |63. 914% | |8. 6% |5. 604% |63. 918% | [pic] For the relation between the taxes rates, cost of debt and WACC.We find different variations among them. Tax rates are the independent variable so they create different affects on WACC as it is dependent variable. In 2009, Alfalah has the tax rate of 34. 84%. Similarly we assume one tax rate greater than 34. 84% and another is less than 34. 84% in order to prove our hypothesis. From the following analysis, we come to know that as the tax rates increases, it decreases the cost of debt that results in the decrease in the weighted average cost of capital. Hence, hypotheses H1 and H4 of our research have proved by this analysis as they are negatively correlated. TAX RATES |COD |WACC | |25% |4. 805% |63. 917% | |34. 84%. |4. 174% |63. 9% | |40% |3. 844% |63. 915% | [pic] 21 Soneri Bank Limited ANALYSISSoneri Banks has following interest rates and tax rates, which affe ct WACC in the same manner as it affects other commercial Banks. In 2009, it has interest rate of 12. 63% that has the cost of debt 8. 54% and the WACC is of 0. 37%. Variation in the interest rates brings following changes and hence proves our research. |INTEREST RATES |COD |WACC | |11. 60% |7. 84% |0. 35% | |12. 3% |8. 54% |0. 37% | |14. 60% |9. 87% |0. 43% | [pic] Tax rates posses the same affect. As tax rates increases, it has negative relation with the COD and WACC that proves the hypothesis H1 and H4 of our research as in 2009, the tax rate was 32. 34%, when it decrease, the COD increases which also increases WACC and again inversely proportional when Tax rate increase. TAX RATES |COD |WACC | |25% |9. 47% |0. 41% | |32. 34% |8. 54% |0. 37% | |40% |7. 57% |0. 33% | [pic] CHAPTER 5: CONCLUSION AND RECOMMENDATION 1. ConclusionAccording to past related researches, there should be a suitable balance between debt and equity as it has effects on the risk and return of the sharehold ers of the bank. If there are reasonable proportions of debt and equity in the capital structure, it maximizes the shareholders wealth while minimizing the cost of capital and that could be considered as the optimal capital structure. Factors like Interest payment expected deductibility give prospect for value. If the tax deductibility is realized by the bank then stockholders get the expected benefit of the tax deduction.If firm finances through debt, then it has financial risk. And if through equity, then it has business risk. The cost of capital can affect capital structure that the taxes bring variation in the cost of capital and hence affect the capital structure of the banks. Cost of equity increases if the financial risk become high. The cost of equity and debt increases with the increase in debt. On after tax cost of debt, there is the greater the impact of interest deductibility, if the tax rate s higher. Weighted average cost of capital become low with the cost of capital high, if the debt capital increase in proportion.Cost of equity increases with the cost of debt. If the cost of components high the weighted average cost of capital increases and reason is that shareholder prefer to use of debt when expected value of tax benefit is attractive as compared to the added financial risk associated with the debt. The Demanded rate of increase in cost of debt and equity, effects on value of the expected increase in tax benefit of using more debt. Interest rate affects the cost of debt. It involves the risk components that have the probability of default on the debt.In this research, the main finding of the paper suggests that the commercial bank should focus on reducing the cost of capital that maximizes the profit. According to our findings, it is concluded that each banks has its policies of financing. Each bank takes decision of selecting capital structure for minimizing their cost, risk factor differently that occupies good financial position in market . Factors that have impact on cost of capital as well as on capital structure are tax rates, interest rates, dividends payout, risk of default and other like market fluctuation, corporate governance.These factors differently affect the cost of capital and capital structure of each commercial bank. Some banks agree that tax brings variation in the capital structure as the use of taxes decreases the cost of debt but some banks strongly disagree, like Islamic bank Meezan and Alfalah,. These Islamic banks have no such interest rate risk. Tax impacts on cost of capital increases cost of capital agrees by majority of commercial banks, and disagrees by some commercial banks. Dividend impacts on cost of capital increases cost of capital agrees by some banks, and disagrees by some banks.Interest rate brings effects on increase in cost of capital as the interest rate increases the cost of debt also increases but some banks strongly disagreed. Other factors like market fluctuation also influen ce interest rate to increase. And sometimes sudden increase in interest rates influence market. Due to this, all factors differently impact on cost of capital variation (increase and decrease) and capital structure decision making. We have estimated Weighted Average Cost of Capital (WACC) of commercial banks in order to find the effects of cost of capital and their factors on profit and capital structure decision making.We analyze from computing WACC with different assumptions that; †¢ The interest rates increases (decreases), it also increases (decreases) the cost of debt that results in the increase (decreases) in the weighted average cost of capital. Hence, hypotheses Ho and H3 is verify. †¢ The tax rates increases (decreases), it decreases (increases) the cost of debt that results in the decrease (increases) in the weighted average cost of capital. Hence, hypotheses H1 and H4 is verify. The cost of capital improves the profit and capital structure decision making in wh ich other factors also takes part to maximize the profit in the commercial banks. . Recommendations Cost of capital plays a central role in valuation, portfolio selection, and capital budgeting. Therefore, measuring and validating the cost of capital has been the subject of much research. †¢ For reducing cost of capital of bank, we recommend that proportion of debt plus equity financing is better although debt increases risk of default as most of the commercial banks prefer debt financing. Because, debt financing provides tax benefit under suitable market conditions and reduces WACC. †¢ Through equity financing banks give dividend which increases their reputation in market.In short, payment of dividend gives market position. And it is also important because in terms of financial ratios, equity financing shows bank more strong as compared to debt or liabilities. †¢ Adopt an optimal capital structure to improve shareholder value. Capital structure is part of a bank†™s package of financial policies, which include dividend policy and amount of debt and equity claims issued which improves share holder wealth and reduces WACC. Conventional thinking in the area of finance has also assumed that a certain amount of debt in the capital structure is a good thing. Interest rates are high in Pakistan.The following reforms looked-for from the Government of Pakistan (GOP): †¢ Allow and encourage consideration of financial institutions to reduce disintegration in the financial sector. †¢ Strengthen legal and judicial reform laws to allow financial institutions to foreclose on guarantee to reduce risk in the case of unpaid loans without going through lengthy court proceedings. CHAPTER 7: AREA OF FURTHER STUDIES After performing this research we have concluded that the researches on the Weighted Average Cost of Capital in Banks are less or there is no proper research that has taken place for the Commercial Banks.There should be more researches on the factor that are affecting WACC in the commercial banks as its proper estimation maximizes profit. It is found with the help of weightage there is a huge impact on the cost of capital that may be a source of further studies for the commercial bank because proper weightage of debt and equity can improves or enhances the profit of commercial banks. The WACC affects the profit or Capital Structure decision making that has direct affect on the reputation of the commercial banks. CHAPTER 8: REFERENCES †¢ Nadeem A.Sheikh and Zongjun Wang, June 2010, International Journal of Innovation, Management and Technology, Vol. 1, No. 2, Financing Behavior of Textile Firms in Pakistan, pg 130-135 †¢ Khadka, H Bahadur,2006. Leverage and the Cost of Capital. The Journal of Nepalese Business Studies,Vol. III, No1: 85-91 †¢ Modigliani, F. and Miller, M. H. 1963. Corporate Income Taxes and the Cost of Capital: A Correction. American Economic Review: 433-443. †¢ Shubber, K. and Alza firi, E. (2008). â€Å"Cost of capital of Islamic banking institutions: an empirical study of a special case†, International Journal of Islamic and Middle Eastern Finance and Management, Vol. No. 1, pp. 10-19 †¢ Bruner, R. F. , Eades, K. M. , Harris, R. S. , Higgins, R. C. (1998). â€Å"Best practices in estimating the cost of capital: survey and synthesis†, Financial Practice and Education, Spring/Summer, pp. 13-28. †¢ Miller, R. A. (2006). â€Å"The weighted average cost of capital is not quite right†, The Quarterly Review of Economics and Finance, 49 (2009) 128–138 †¢ Jorgenson, Dale W. and Ralph Landau (1993). Tax Reform and the Cost of Capital – An International Comparison. Washington, D. C. : Brookings Institution. †¢ Fama, E. F. , and K.French, 1997, Industry costs of equity, Journal of Financial Economics 43, 153-193. †¢ Fama, E. F. , and K. French, 1999, The corporate cost of capital and the return on corporate inv estment, Journal of Finance 54, 1939-1967. †¢ John J. Pringle, the Capital Decision in Commercial Banks, the Journal of Finance, Vol. 29, No. 3 (Jun. , 1974), pp. 779-795 †¢ Richard Lambert*, Christian Leuz, Robert E. Verrecchia â€Å"Accounting Information, Disclosure, and the Cost of Capital† September 2005, Revised, August 2006 †¢ Barton, S. L. and P. J. Gordon (1987). ‘Corporate strategy: Useful perspective for the study of capital structure? Academy of Management Review, 12, pp. 67-75 †¢ Balakrishnan, S. and I. Fox (1993). ‘Asset specificity, firm heterogeneity, and capital structure', Strategic Management Journal, 14(1), pp. 3-16. †¢ A. Seth (1990). ‘The impact of LBOs on strategic direction', California Management Review, 32(1), pp. 30-43. †¢ Groth John C. , â€Å"Capital structure: Perspectives. † Management Decision 35:7 (1997): 552–561. †¢ John C. Groth, Professor, Texas A University, USA â€Å"Capi tal Structure: Implications†, 1997. †¢ Ross, Stephen A. , Randolph W. Westerfield, and Jeffrey Jaffe. Corporate Finance. 9th ed.Boston, MA: McGraw-Hill, 2010. †¢ Alan J. Auerbach, Wealth Maximization and the Cost of Capital, the Quarterly Journal of Economics, Vol. 93, No. 3 (Aug. , 1979), pp. 433 †¢ John R. Graham, â€Å"Taxes and Corporate Finance: A Review†, the Review of Financial Studies, Vol. 16, No. 4 (Winter, 2003), pp. 1075-1129 †¢ Meziane Lasfer, Professor, Cass Business School, UK â€Å"Optimizing the Capital Structure: Finding the Right Balance between Debt and Equity†. †¢ William F. Coffin and Sean Collin, 2006, Techniques to lower the cost of capital in today’s volatile markets, CCG Investor Relations. Ali Murtaza, manager financial reporting and analysis, finance division, BANK ALFALAH LIMITED. †¢ Amir Ahmed, risk manager, Asst. vice president, Risk Management Unit, MEEZAN BANK. †¢ Aniel Victor, Asst. manag er, Riak management, UBL FUNDS MANAGERS. †¢ Syed Ali Shabar, Branch Manager, MCB BANK LIMITED. †¢ Raza Abbas, Asst. vice president, Portfolio Management, HABIB BANK LIMITED. †¢ Aamir Maysorewala, customer service manager, ALLIED BANK LIMITED. †¢ Riazullah Khan, Assistant Vice President & Manager, SONERI BANK. APPENDIX A Questionnaire NAME_________________________DESIGNATION_________________ BANK__________________________ BRANCH_______________________ 1. Debt and equity are the sources of finance, through which source your bank finances their investment? a) Debt b) Equity c) Both 2. What is the impact of dividend payment on cost of capital as using equity is source of finance that will liable bank to pay dividend? a) Increase cost of capital b) Decrease cost of capital c) No impact on cost of capital 3. Tax shield also has an important factor in cost of capital, how tax impact on cost of capital? a) Increase cost of capital b) Decrease cost of capital ) No impact on cost of capital 4. Cost of capital has positive impact by using both sources of finance. [pic] 5. When bank finance through debt, it increase liabilities that also increase the risk factor of default. [pic] 6. Fluctuation in the interest rate affects Cost of Capital and also the Capital Structure of your banks. [pic] 7. As low dividend payout will affect the reputation of your bank, is high dividend payout and dividend growth affect the capital structure decision? [pic] 8. Cost of capital occupies an important role in the financial management and in investment decision making in commercial banks. [pic] . Cost of capital affects the level of risk in commercial bank. [pic] 10. Taxes bring variation in the capital structure of commercial banks. [pic] 11. Reducti

Textiles Del Hogar

DEFINICION DEL PROBLEMA: Resolver si es mas conveniente continuar con el negocio o liquidar. Si mi decision es liquidar la empresa debo definir cuando y como hacerlo. CARACTERISTICAS PRINCIPALES DE TEXTILES DEL HOGAR S. L. : Antecedentes A mediados del 2002 tras el gerente Oriol Ventura presentar los demas accionistas llamaron a RamonQuesada para que les asesorara. La entrada de los Quesada en Textiles del Hogar se dio el 6 de Febrero del 2003 tras 24 horas de reuniones con los accionistas por un contrato de gestion, una opcion de compra por parte o el total a ejecutar en 6 meses segun resultado de una due diligences y refinanciacion de la empresa. La sociedad Altafix. SL (creada por los Quesada) adquirio en acciones y refinancio el prestamo o aval lo preciso para que textiles del Hogar mantuviera en operaciones. _Objetivos _Estrategicos Los objetivos de los Quesada en Textiles del Hogar era aumentar la facturacion, generar fondos para poner la empresa al dia y generar dividendos para los accionistas. Producto Buena imagen en las tiendas de barrio y un producto con buena calidad/precio en comparacion con la competencia nacional y extranjera. Ventas Estacionales y con tendencia a la baja. El mercado acusa las importaciones asiaticas y se reduce el mercado para los fabricantes nacionales. Proceso de fabricacion e instalaciones Muy poca productividad debido a maquinaria muy obsoleta. La produccion se fabricaba en forma continua. Se fabricaba para stock en tejidos crudos para cumplir plazo de entrega mas cortos. Los pedidos de clientes de pocas unidades se producian sobre pedido Personal Ambiente laboral inicial muy deteriorado con 24 perronas (11 h + 13 m) con una edad media de 48 anos y una antiguedad de 20. 6 Cosedoras que no constaban en nomina y no habian sido dado de alta en la Seguridad Social. Entre el 2003 y 2005 la situacion se habia mejorado notablemente con el ingreso de los Quesada. Canales: Cartera de pedidos: Los pedidos oscilaban entre 1 y 4 semanas. Con mucha Incertidumbre. A pesar de apretados plazos, solo entre 5 y 10% se retrasaban en la entrega y casi unca mas alla de 5 a 10 dias. Proveedores: Principalmente fabricantes de hilo o de tejidos no fabricados por Textiles del Hogar. Subcontratistas solian ser acabadores. CRITERIOS PARA LA TOMA DE DECISION _Matriz de _decision _ _ Dividendos a Accionista Los socios llevan mucho tiempo sin cobrar ni un solo Euro y con las ventas cayendo a un 4 % constante en los siguientes anos siendo optimista el resultado del ejercicio es pos itivo sin embargo se va disminuyendo con el paso del tiempo lo que refleja poca viabilidad a largo plazo bajo las condiciones actuales. El ingreso para los accionistas en caso de liquidar seria solo por la venta de las existencias, las cuales son no perecibles y se pueden vender rapidamente aplicando un descuento, y las cuentas por cobrar (cartera 100% recuperable) ya que por las maquinas no obtuvieran ningun valor representativo. *Caida de facturacion del 4 % constante Gastos fijos aumentan a 180 para cubrir los 9 mil de los Quesada *(GESL tiene pendiente de recibir 5. 000â‚ ¬ durante 30 meses (150. 000â‚ ¬). Inversion en Tecnologia. Debido a que en Textiles la maquinaria era de cuarenta anos de antiguedad y los rendimientos muy bajos invertir en maquinaria permitiria mejorar los costos de fabricacion que permitan seguir los niveles de ventas. A esto lo debemos agregar la compra de un ERP (para mejor control administrativo) mas una normativa municipal esta inversion no seria menos 200. 000 euros. Entorno Economico* (Mercado y Ventas)*. Los mercados emergentes (especialmente China) son una amenaza constante para la sostenibilidad. Las ventas se vienen reduciendo en promedio 4 % anual peros esto puede aumentar por el factor mencionado haciendose mas dificil cada ano cumplir el presupuesto. Otro factor del mercado es que se compite via precio y no por disenos u otro factor diferenciador. La salida del mercado textil puede representar el ingreso al sector inmobiliario que segun uno de los accionistas , Adria Guasch, quien es propietario de las naves tiene un gran potencial. Indemnizaciones a Empleados Los costes de jubilacion se ven reducidos por la nueva legislacion en el sector textil lo ue facilita la liquidacion de esta. Este factor debe ser tomado en cuenta en para el â€Å"cuando† cerrar ya que el importe de 300000 euros es bastante significativo para la compania Responsabilidad social De acuerdo con el analisis de los criterios realizado en el punto anterior y ya que los dividendos y responsabilidad social son los criterios con mas peso se llega a la conclusion que los Hermanos Quesada deberian de c ontinuar con el negocio de Textiles del Hogar pero definiendo un plazo de espera para que repunte el negocio segun el plan de accion. Segun proyecciones de ventas y estado de resultado este punto debe ser el ano 2007 ya que la utilidad del negocio disminuye despues de este ano. PLAN DE ACCION Al tomar la decision de continuar con el negocio se debe de hacer cambios en los criterios expuestos para tener estabilidad y sostenibilidad a corto y largo plazo. Se debe empezar por potenciar el mercado que permita disminuir las comisiones de 5 al 8 % y asi aumentar el margen. Una alternativa puede ser consolidar una fuerza de venta propia. De manera paralela debemos buscar la manera de salir del mercado de commodity (via precio) a un mercado donde la calidad sea el diferenciador. Tambien se debe buscar capital para inversion en maquina ya que estas estan muy obsoletas y asi ser mas competitivos en tiempos y reducir costos de produccion. La otra inversion que se necesita es la de la normativa municipal y el ERP que conjuntamente ascienden a 200000 Euros. Reducir la estacionalidad en ventas es un punto igualmente importante. Una solucion seria buscar productos alternativos para los periodos en que las ventas caen. Si bien es cierto que la jubilacion sin costo por la nueva ley jubilacion del personal puedes ayudar ya que se puede contratar mano de obra mas joven y barata, considero que debe ser una ultima medida ya que la responsabilidad social para los Quesada es un criterio muy importante como se habia mencionado anteriormente.

Anti-Globalization Essay Example | Topics and Well Written Essays - 750 words

Anti-Globalization - Essay Example Globalization is portrayed as a positive thing from which undeveloped countries can benefit. However an alternative view suggests something else. Some people are of the view that through the excuse of globalization the developed countries are exploiting the weak economies. They are making the undeveloped countries dependant on themselves and would eventually result in making them their slaves. The theory behind the movement was so strong and convincing that it brought together the ideological school of thoughts who believed in anarchism and communism, and the activists who have a much pragmatic approach to life. Before this movement nothing had worked in order to unite these two opposite forces. The ideology behind the movement is as I have previously mentioned, strong economies use the excuse of globalization to further strengthen their economies and in the process drain the weak economies. Basically, globalization is giving rise to accumulation of wealth and power. The strong are getting stronger and the weak weaker. The undeveloped countries have started becoming increasingly dependant on the developed nations and thus the developed countries are in a position to make or break them. One of the ba... They do not understand the basic value systems. For instance Pakistan's electricity company has been taken over by a Saudi company and now Pakistan is facing the worse electricity crisis ever. According to Noreena Hertz, in her book 'The silent takeover' "Corporations have become behemoths, huge global giants that wield immense political power" and in the process of their evolution, "justice, equity, rights, the environment, and even issues of national security fall by the wayside." This as we can see is very true. Another major issue is that anti-globalization activists believe that the concept of intellectual property has been overly dramatized and stretched. Now information and intellectual property which used to be possessed collectively by a country or an ethnic group is being retained by a smaller portion of people. Thus sharing of resources has finished. The people cling on to their intellectual property and share very little of it with others. Thus weaker people can not benefit from it and are at a loss. Generally they are the big companies who have retained this kind of intellectual property thus their market concentration increases. Labor issues are also a major back bone of the movement. Referring back to the privatization of Pakistan electric company we see that the developed countries are influencing the developing countries to privatize their businesses. This is because in their opinion privatization is a good thing and therefore they are forcing others to go for it too. However privatization causes unemployment for many of the employees. There have been many influential works seen in the movement. Examples of them include Naomi Klien's book 'NO Logo'. This book talks about the unethical side of the production processes of the multi

Weak Form Market Efficiency Essay Example | Topics and Well Written Essays - 4250 words

Weak Form Market Efficiency - Essay Example However finance theory assumes idealistic models for the stock markets and formulates the investor utility functions and expectations accordingly. These models are based on perfect competition and passage of information in an unfettered manner. As Wikipedia (2007) seems to point out, "In economics and financial theory, analysts use random walk techniques to model behavior of asset prices, in particular share prices on stock markets, currency exchange rates and commodity prices. This practice has its basis in the presumption that investors act rationally and without bias, and that at any moment they estimate the value of an asset based on future expectations. Under these conditions, all existing information affects the price, which changes only when new information comes out. By definition, new information appears randomly and influences the asset price randomly. Empirical studies have demonstrated that prices do not completely follow random walk. Low serial correlations (around 0.05) exist in the short term; and slightly stronger correlations over the longer term. Their sign and the strength depend on a variety of factors, but transaction costs and bid-ask spreads generally make it impossible to earn excess returns. Researchers have found that some of the biggest prices deviations from random walk result from seasonal and temporal patterns. In particular, returns in January significantly exceed those in other months (January effect) and on Mondays stock prices go down more than on any other day. Observers have noted these effects in many different markets for more than half a century, but without succeeding in giving a completely satisfactory explanation for their persistence. Technical analysis uses most of the anomalies to extract information on future price movements from historical data. But some economists, for example Eugene Fama, argu e that most of these patterns occur accidentally, rather than as a result of irrational or inefficient behavior of investors: the huge amount of data available to researchers for analysis allegedly causes the fluctuations. Another school of thought, behavioral finance, attributes non-randomness to investors' cognitive and emotional biases". Taking an apposite viewpoint Leverton () states, "Without market fundamentals being able to predict prices, the investor is forced to learn new ways of investing.. Ratios and trend analysis are important to picking a winning portfolio. Subscribers to the adaptive expectations theory believe investors are backward looking in deciding on the correct price to pay for a stock". Realized and expected rreturns from the stock markets have been the subject of intense debate since a long period of time .Several theories suggesting various constructs and factors responsible for determining the returns from the stocks have been postulated thus far.It was not until the late 1960s and early 1970s that a fully-developed, empirically-supported theory of share prices' behavior emerged in the form of the Efficient Markets Hypothesis (EMH).Prior to the development of the EMH , analysts assumed some degree of dependence across successful price changes. Very many efforts were made towards identifying a predictable trading pattern which could be used for chasing profitable deals. From the mid-1950s to the early 1980s, a random walk theory (RWT) of share prices was developed based on the past empirical evidence of randomness in share price movements. RWT

Research for the Bernard Madoff Case Paper Example | Topics and Well Written Essays - 750 words

For the Bernard Madoff Case - Research Paper Example Finally, Madoff himself revealed the truth to his sons and they reported this case to the court. Bernard Madoff Investment Securities Scandal involves many ethical issues. Moreover, many stakeholders were also involved in this case. This paper briefly explains some facts, ethical issues and stakeholders involved in Bernard Madoff’s investment securities scandal case. â€Å"Madoff founded the Wall Street firm Bernard L. Madoff Investment Securities LLC in 1960, and was its chairman until his arrest on December 11, 2008† (Bernie Madoff’s Investment Scandal Exposed, 2010). Madoff was able to command the respect of the investors because of his huge experiences in Wall Street in different positions. When he offered the customers huge return even on short term investments through his Ponzi scheme, nobody was in any sort of doubt about the fraudulent nature of the scheme. Investors thought that Madoff has got some magical power to multiply their investments because of his huge experiences in Wall Street. Vernon Silver (2009) has mentioned that the returns that Mr. Madoff’s firm provided were consistently good over the years (Silver, 2009). â€Å"Concerns about Madoff’s business surfaced as early as 1999, when financial analyst-whistleblower Harry Markopolos informed the U.S. Securities and Exchange Commission (SEC) that he believed it was legally and mathematically impossible to achieve the gains Madoff claimed to deliver† (What Has Bernard Madoff Investment Securities Done to Investment Securities?, 2010). These concerns expressed by the financial experts forced Madoff to confess his guilt to his sons in December 2008 which they reported to the court. Even though Madoff revealed that he has started his fraudulent activities in the 1990’s, investigating agencies believe that he has started such activities as early as the eighties itself. â€Å"Madoff told the agents that it was his entire fault, and that he "paid investors with money that

Comprehensive planning Assignment Example | Topics and Well Written Essays - 1000 words

Comprehensive planning - Assignment Example These are some of the items that bring abut controversy in the agendas of local government. With their widespread significance and usage, it is surprising to see that plans are hardly evaluated against standards of best practice. Despite the centrality in plan making about land use, to the regional and city planning profession, there is a knowledge gap in relation to the quality of produced plans. This may be because of the complexity of the plan’s nature, as well as future orientation which bring together issues, factors, and aspirations from many sources to focus on long term outcomes. The gap is also as a result of unsystematic result integration and lack of evaluation because of the perception that they involve a lot of art, which defy rational analysis. Assessment of Plan Quality New York New York is a metropolitan city that consists of a society that is performance oriented. In such a city, people should be able to judge if their development plans achieve their goals, an d how well the planning process has been conducted. The plan by Robert Moses shaped New York City by providing freeways, parks and bridges systems (Ballon & Jackson, 2007; Caro, 1974). The aims of a profession like regional and city planning include enforcing high practice standards. Good practitioners reflect on their work’s quality and their experience so that they can learn (Meck, 2002). In New York, land use plans help the public to develop sustainable communities that value environmental, social, and economic values balance (Godschalk and Kaiser, 1995). These are the main subject matter elements of the plan, together with guiding land use in the future into configurations that are desirable. It also aims at assisting communities in addressing threats and opportunities, so as to make the best choice among policy alternatives. This planning presentation is clear in its organization. New York land use plan reaches the full planning power because stake holders are educated a bout options and issues, thus helping them to build consensus about visions of the community, thus mediating conflict between change and stability. The community’s participation in the process has helped its citizens in educating their future leaders and networks to resiliently respond to stresses like disasters. New York City Plan also gives the community periodic updates where the community gets an opportunity to assess the progress of their goals, and change in conditions that are important. According to Berke, Godschalk and Kaiser (2006), a good plan has a wide range of power to influence life quality, environmental justice, disaster resistance, economic opportunity, infrastructure costs, transportation efficiency and other aspects that affect community life. The New York plan is very comprehensive in taking into account all these issues. It is community oriented, besides allowing community participation. On the other hand, it fits well into Godschalk and Kaiser Developme nt plan. It was systematically evaluated, to specifically identify the strengths and weaknesses, thus determining its overall quality through democratic determination of instruments and visions. This provided a basis that ensured that it attained

The Proposition & Gomorrah Term Paper Example | Topics and Well Written Essays - 500 words

The Proposition & Gomorrah - Term Paper Example em miniature, and many filmmakers use aperature flare, an artifact of having a camera, to make CG sequences feel more â€Å"real.† Two films, â€Å"The Proposition† and â€Å"Gomorrah† use color and camera movement to create two vastly different visual styles, which leaves the audience with two very different impressions: â€Å"The Proposition† seems like a storey book, or a distant tableau, whereas â€Å"Gomorrah† creates a sense of immersion. The color palettes of these two films are one of the first thing one notices when comparing them. â€Å"The Proposition† has an incredibly warm color palette, almost seeming to have yellow or orange gels over the camera lens during every single shot. â€Å"Gomorrah,† on the other hand, has a somewhat cooler, grittier, and more realistic color palette. This creates very different impressions for the audience - the color palette in â€Å"The Proposition† reminds readers of the fact that they are watching a film, a story, and creates a tableau for them to enjoy in the distance. The color palette of â€Å"Gomorrah,† on the other hand, creates a sense of being there, of realism, and of immersion. The choice of camera movement has a similar effect in both films. The camera movement in â€Å"The Proposition† is long and careful – things like slow zooms, smooth movements and so on are incredibly common, as are dolly shots. â€Å"Gomorrah,† however, has a more documentary-style camera movement – many of the scenes are shot by hand-held camera or are given the effect of being shot on hand-held camera, with significant bouncing, jostling and so on. This creates the impression that the film maker is actually documenting real things that are happening, rather than painting a story for the viewer’s enjoyment. All of this serves to make â€Å"The Proposition† more like a storybook, and â€Å"Gomorrah† more like a brutal, real world documentary. The audience’s awareness of the artifice of film is a principle object of a director’s

Kindle Fire Research Paper Example | Topics and Well Written Essays - 750 words

Kindle Fire - Research Paper Example The decisions made by consumers are affected by this behavior and this is the reason why Kindle Fire will be marketed successfully under the behavioral segment. This approach has increased the Kindle fire sales made over the years. The rocketing sales are also controlled by the demand and supply forces such that when demand on Kindle Fire declines, the Amazon’s sales are drastically affected. Evaluation Under the behavioral approach of segmentation, the customers will be divided under various segments. Consumers will be evaluated based on their usage rate, the benefits gained, loyalty and occasion in which they use Kindle Fire. There are various ways of growing a business. The first method is as aforementioned; to attract new customers and the second way is to retain the already existing customers. For Kindle Fire to continue existing in the market, Amazon has to maintain a strong customer base (Cheshire, 2012). This is only through customer dependability. Customer loyalty is targeted as one of the behavioral approaches of consumers. The strategies applied to maintain the Kindle Fire’s loyal customers are different from those that are used in attracting new customers. Customer loyalty is hence one of the techniques of determining customers under the behavioral segmentation. ... It will be easier to identify the customer who needs change the product more often than one who does not use one so often. The other way in which Kindle buyers can be segmented according to their behavior is by identifying those who buy on occasions. Freytag and Clarke’s (2001) argument is that buying on occasion is under behavioral segmentation because the customer is likely to target the holidays and festivities when companies come up with offers at discounted prices. Such a customer base may be large since most people tend to save a lot of money for their holidays and festivities. Segmenting the Kindle Fire customer according to the benefits he or she gains is also another way of evaluating the customer’s behavior towards the product. While Kindle’s competitors, such as Google Nexus and the laptops, have their own benefits, some customers may still look for the benefits they gain from Kindle Fire tablets that they cannot get from its competitors. One of the be nefits attained from the Kindle Fire tablet and not laptops is that it is easier to transport the Kindle from one point to the other as compared to laptops. A laptop is heavier as compared to the tablet. The Kindle tablet is also beneficial to clients who are always online for business purposes or projects. The other advantage of Kindle Fire over other digital gadgets is that it easily usable in the education industry (Cheshire, 2012). This can be fused with good pricing, 24hr customer support and customization of devices for customers in order to be able to stay competitive in the market. This means using a break-up strategy where the prices are favorable as compared to other devices and being able to pack devices as per the specification of customers.

Global Fishing and its Impact on the Environment Essay Example for Free

Global Fishing and its Impact on the Environment Essay The demand of fish in the international market has been increasing in the last few years. This is because many researches on nutrition have revealed that consuming fish is one of the best healthy practices. Fish does not have a lot of fats and bad cholesterol and it is a good source of vitamins and natural nutrients. This paper is about the trends of fishing in the global arena and its impact on the environment. The paper will concern recreational and commercial both types of fishing and the problems they are causing to the marine environment. The current state of global fisheries, aquaculture and the environmental cost of fishing will be the main subjects of interest in this paper. Although many countries have started efforts to develop practices of sustainable fishing through developing the idea of fish farms, however, the main threat to the environment is recreational fishing. The impacts on the marine life itself and the fish population will be discussed in the paper. Current State of Global Fisheries There was a steady rise in fishing, according to the United Nations Food and Agricultural Organization, until the mid 1990s when the trend became stable. In 2001, a study showed that the marine catch has been declining at a rate of 10% each year since the late 1980s. There have also been estimations that around 50% of the world’s fish reserves have been fully exploited, around 20% are overexploited and another 10% are depleted because of overfishing. The histogram graph below shows the increasing share of aqua culture in the total fishing, however, the largest share of the total fish catch is still for the fish being captured from free waters. Southeast Pacific regions contribute the most to the catch of fish globally. The fish that have been captured the most are anchovy and Chilean jack mackerel (Hart Reynolds, 2004). Figure 1- (Hart Reynolds, 2004) The research has also shown that almost 80% of the total fish captured was used for direct human consumption while other 20% went for further processing for non-consumption production. In the year 1997, the per capita consumption of fish has increased in the past 50 years from 9 kg per person to around 16 kg per person each year. This was the data for underdeveloped countries; however, the consumption in the developed countries has risen from 20kg to almost 28kg per capita per year. In the underdeveloped countries, the protein intake from the consumption of fish can form 20% of the total intake. In the developed countries and in the Southeastern Asian countries, the consumption is much higher (Hart Reynolds, 2004). The top ten countries which are the largest catchers of the total fish catches include China, Japan, India, United States, Russia and Indonesia. However, China is the largest catcher of fish as the total amount stands to around 12 million tons of fish (FAOSTAT online database, 2010). The demand of fish is stable at the moment but as the population rises, the demand for fish will also rise. It has been revealed that the people in the developed countries are more prone to eating fish as their per capita consumption is higher than people living in underdeveloped countries. Another point of concern is that the population is rising at a very high rate in countries such as India, Pakistan, Indonesia and the Middle-East where the catch of the fish is also the highest. Figure 2 Impact of Global Fishing on the Environment Today, the exploitation of the fishery resources and reserves has become a major environmental factor of concern for the scientists and environmentalists. The worldwide declines in the population of fish species have been blamed to the excessive commercial fishing and unrestrictive recreational fishing. A recent study has revealed that the total fish harvest from recreational activities may contribute up to almost 12% of the total catch of fish globally (Cooke, Steven, Cowx, 2004). Fish has been one of the most important food consumption resources that are at risk because of limitless recreational activities and commercial fishing. The potential contribution of fishing to the marine environment and the ecological system of the world has caused many problems in the environment already. Currently, the fish production is meeting the requirements of the population in the countries, but at a great environmental cost. The marine life is not only being endangered by the fishers but their breeding grounds have also been invaded by the commercial companies. These breeding grounds are the safe places for the fish. Though the fish are being bred in huge numbers, but their homes are being destroyed which does not allow the fish to be born. Although a fish can give birth to hundreds of its offspring in one season, but if these offspring are dead before they are born, then the ecological system in the waters is seriously disturbed. According to a research, the increasing pressure of fishing and exploitation of resources in marine life has caused a change in the ecological structure and the ecosystem. The fully developed fish and adult members of the fish are more fondly searched by the commercial and individuals as they render more profits and meat for the production. Therefore the adult population which is responsible for breeding and generating offspring are in great danger by the human activities in the seas. Climate change has also been attributed to the changes in the ecosystem which affect the marine life and decrease their population. In the future, therefore, the fish population, available for human consumption, is anticipated to fall and cause demand supply problems. The primary reasons for this are the attack of the humans on the marine life for consumption, recreational activities of the human individuals and the change in the global climate which is changing the living habitat of these fish (Planque, 2010). Aquaculture Production The term aquaculture is used for the farming of the fish and other marine species including aquatic plants, crustaceans and mollusks in an artificial environment which is fit for their breeding. This is done in order to protect the species of the fish which are getting extinct or for sustainable farming of fish. This practice is very good for the sustainability of the fish in free water as they are not hunted in their breeding grounds. When grown and fully ready, these fish are harvested by a company or an individual who has owned them throughout the period of growth and development (European Commission, 2007). This practice is the only option for meeting the demand of the human for fish consumption. Fishing for recreation has proved to be disastrous for the marine life and the water environment. The whole ecological system is disturbed because of excessive fishing. Aquaculture is mostly being performed for the human consumption but does not addresses the issue of recreational fishing. Aquaculture is also used to presence the dying species by providing the required temperature, environment and food for their existence. Many of these fish could be released in to the wild waters so that they could be used in the recreational activities (Stickney, 2009). Conclusion In order to keep the demand consistent with the supply for fish in the global market, the practice of aquaculture will have to be adopted. The main issues that the fish face are the recreational activities of the human, commercial overexploitation and the change in climate of the world. These problems are changing their habitat environment and hence these fish are getting endangered. However, we should keep in mind that all of the fish species are not being caught for human consumption. Hence, aquaculture will not be able to address this issue. Other strict rules and regulation will have to be implemented by the governments in order to stop the recreational killing of fish. Only the hunting of those fish should be allowed which are abundant in the waters. Aquaculture could be used to breed those fish which are primarily used for the consumption of human through providing an artificial environment where the fish can grow up in a protected way. Bibliography Cooke, Steven, Cowx, I. (2004). The Role of Recreational Fishing in Global Fish Crises. BioScience , 54 (9), 857-59. European Commission. (2007). Eurostat. Retrieved May 9, 2010, from Eurostat Pocketbook: http://epp. eurostat. ec. europa. eu/cache/ITY_OFFPUB/KS-DW-07-001/EN/KS-DW-07-001-EN. PDF European Commission. (2009, September). Eurostat. Retrieved May 9, 2010, from Fishery Statistics: http://epp. eurostat. ec. europa. eu/statistics_explained/index. php/Fishery_statistics FAOSTAT online database. (2010). NationMaster. Retrieved May 9, 2010, from Environmental Statistics: http://www. nationmaster. com/graph/env_mar_fis_cat-environment-marine-fish-catch Hart, P. , Reynolds, J. (2004). Handbook of fish biology and fisheries. Oxford: Blackwell Publishing company. Planque, B. (2010). How does fishing alter marine populations and ecosystems sensitivity to climate? Journal of Marine Systems , 403-417. Stickney, R. (2009). Aquaculture an introductory text. Oxfordshire: Cambridge University Press.

The length and resistance Essay Example for Free

The length and resistance Essay The aim of this investigation is to find out how changing the length of a piece of wire will affect its resistance. Prediction I think that increasing the length of a wire will increase its resistance. This is because in a conductive metal, the electrons in the outer shell of each atom are free to move around. An electrical current is where all these electrons are caused to move in the same direction through the metal. Resistance is the property of a substance that restricts the flow of electricity through it, and is often associated with heat. As the electrons are passing through the metal, they are constantly colliding with the atoms of the metal, causing their course to be slowed down. The collisions cause changes of direction which dissipate energy as heat, which is why more resistant metals heat up more than metals which let electrons pass through more easily. It is easier for electrons to pass through metals in which the atoms are small and far apart, because the free electrons can pass through with less collision to slow their path. It is most important for the metal to contain a lot of free electrons. Fewer collisions mean that less energy is transferred to heat: this is low resistance. As the length of the wire is increased, there will be more fixed atoms for the free electrons to collide with, thus slowing their course. The length of the wire and the resistance of the wire will be directly proportional. If you double the length of the wire, the resistance will also double. This is because there will be double the amount of atoms in the wire for the electrons to collide with. The fact that it would take twice as long for the electrons to pass through in a metal twice the length is of almost irrelevant consequence because electrons move close to the speed of light, and so there is no point in taking this into consideration. If the resistance of the material is increasing, then it will need an increasingly large force to push it through: This is the voltage. The resistance (R) is how much voltage (V) is needed to drive a given current (I). R = V/I Based on my prediction, I would expect my graph to look like this: Resistance (? ) is also equal to the resistivity of the wire(?cm) multiplied by its length(cm), and then divided by its cross sectional area(cm2). Resistance (? ) = resistance of the metal(? cm) x length(cm)   cross sectional area (cm2) The cross sectional area of the wire is constant, and so is the material I am using. It is only the length that will be changing, so as you can see from the formula, the length and resistance must be directly proportional. Planning My experiment shall be set up as follows: I shall use the following apparatus:  connecting wires The power supply will be permanently set to 2volts, but it is important to keep the amperage below 1A so that the wire does not overheat. We will do this using the rheostat. The nichrome wire has a resistivity of 103 x 10-6, and a diameter of 0. 2285mm (0. 02285cm). We have chosen nichrome wire because its properties are suitable for this experiment. It is quite easy to keep the amperage low, but the experiment must still be started with the length of wire that is long enough so that the amps are not too high, as otherwise, this would result in an increase in temperature which is not related to increased resistance. We have chosen to calculate the resistance of the wire in intervals of 5 cm, starting at 5cm, and going up to 70cm. All our decisions are based on a variety of pre- tests. Fair testing The key variables in this experiment are:   temperature   diameter   type of wire length of wire In order for this experiment to be fair, it is important that these variables are carefully monitored. Temperature: It is important that any change in temperature is a result only of resistance. To do this, the room temperature must be kept the same, and the current running through the wire must be kept below 1amp. If it were to exceed this limit, it would result in an increase in the vibrations of the atoms in the metal. This would cause the free electrons to collide more often with the fixed atoms and would cause an apparent increase in resistance that is not due to the change in the length of the wire. In order to prevent this from happening, we have used a rheostat: using this, we can keep the current very low. If desired, we could keep it at a constant, but this is not necessary. Diameter: The diameter of the wire will be kept constant throughout the experiment. This is important because it affects the overall area of the wire. The resistance is inversely proportional to the cross-sectional area. The only way in which the area of the wire should be changed is in length. An increase change in diameter would affect the number of fixed atoms that the free electrons could collide with and would produce inaccurate results with regards to resistance. The smaller the diameter the better, as it will mean a smaller all-round area which will make it possible for more results to be taken, as the amperage would not have so great an effect on the wires temperature. Also, the larger the diameter, the easier it would be for the free electrons to flow through, just as water flows more easily through a wider pipe than a thinner one. Type of wire: All metals have different properties, and in order to make the test fair, the type of wire used must be kept the same. I have chosen to use nichrome as it has good properties which have been tested in the pre-test. It is also important to keep the wire straight, as this will make it easier to measure. Length of wire: The length of the wire is the variable that I shall be changing. I have chosen to do so in 5cm stages. It is very important that the wire is measured accurately, as otherwise the readings off the ammeter and voltmeter will not be as accurate as they could have been. To do this, we are using a ruler, but one problem that we are likely to encounter is the fact that is will be difficult to measure around the top of the rod on which the wire is fixed. So as not to get inaccurate readings, I am going to disregard the reading at 35cm, as that is the length that falls upon the end of the rod. Pre-test It is important to conduct a pre-test before doing the actually experiment. In this pre-test, I have tested 3 types of wire: nichrome, copper and Constantan, to which is most suitable for the experiment. I did the pre-tests on a computer program. Diameter I tested the three available metals using the computer program to find out how close to the maximum of 1 amp I could reach by adjusting the diameter of the wires. I want the amperage to be as close to 1 as possible because the amps will go down as I do the experiment, and I want to get a lot of results. The amps must not be above 1amp, because this would mean that the wire would get too hot, and the results would be inaccurate, as I have previously explained.

Virgin Atlantic Market Segmentation

Virgin Atlantic Market Segmentation Provide a hypothetical ROMI analysis if Virgin spent an extra  £5m in marketing based on a 25% margin, 10% for costs, against  £500m in sales, what is the break even on the  £5m extra investment, provide the calculations and critical analysis. INTRODUCTION The marketing department is certainly at the heart of any organization, since it is responsible for setting, implementing, and evaluating marketing strategies to meet the customers wants and needs, and to retain customers so as to build profit and sustain the business. Smith and Rapin (2008) stated that marketing success is always driven by a thorough understanding of the market and a set of strong marketing strategies. They have advocated measuring the marketing performances of many companies in recent years. This trend of measuring marketing activities also was noted by McDonald and Mouncey (2009), who observed that increasingly, boards of directors and marketers desire to evaluate market performances to show how marketing boosts shareholder value and whether a firm is accomplishing its marketing objectives. There is a need to understand the business, to develop a framework, and to quantify the performance of marketing objectives and programmes. Furthermore, Ambler (2003) defined the term marketing metrics, which is a measure of the whole businesss marketing performance, and suggested employing a portfolio of metrics to increase the accuracy of the results. Rust et al. (2004) found that a company employing market metrics to forecast future uncertainties and directions has enhanced resource allocation, since better decisions can be made by drawing on lessons from the past. Therefore, measuring marketing performance, a company can improve its marketing efficiency and effectiveness, identify its strengths and weaknesses, establish precise insights between the investment in marketing activities and the financial value that investment generates, and so forth. The purpose of this essay is to develop a practical framework of marketing metrics for Virgin Atlantic Airways to measure its marketing efforts and identify its challenges. The essay begins by (1) presenting the business model for Virgin Atlantic Airways, (2) identifying the correct marketing metrics for Virgin Atlantic and evaluating those, and (3) calculating the marketing performance by computing the return on marketing investment (ROMI) of the campaign spending and a break-even analysis of the airlines new offer. PART I BUSINESS MODEL OF VIRGIN ATLANTIC AIRWAYS Company Overview Virgin Atlantic Airways Limited (Virgin Atlantic) is Britains second largest long-haul international airline. Apart from scheduled services, Virgin Atlantic operates cargo transport services, flies to 31 destinations around the world using 37 aircraft, the average age of which is approximately six years (it has one of youngest fleets worldwide), carries nearly six million passengers each year, and employs nearly 9,000 people currently (Civil Aviation Authority, 2009 a; Virgin Atlantic, 2009 c). Virgin Atlantic is a subsidiary company and the best-known business in the Virgin Group Ltd. (Virgin Group), which possesses a 51% stake of it, with the remainder having been sold to Singapore Airlines so the two airlines could operate together as a strategic partnership (Virgin Atlantic, 2009 c). Virgin Atlantic was founded in the U.K. in 1984. Its founder, Richard Branson, was motivated by three problems of the airline industry in that time: flights were expensive, companies lacked innovation, and long-haul flights were monotonous and uncomfortable (Twivy, 1986). Therefore, Richard established Virgin Atlantic and differentiated its brand with other airlines by positioning fun, quality, and innovation as its core brand values. This can be seen from the airlines vision statement: to provide the highest quality innovative service at excellent value for money for all classes of air travellers. Its objective is to fly a profitable airline that people love to fly and where people love to work (Virgin Atlantic, 2009 c). Virgin Atlantic is a company setting a new standard for the industry. It was the first to break the cabin hierarchy from a three- to two-class system, to install individual televisions on the seat backs in economy class, to introduce a fully flat sleeping bed in upper class, and to fly using bio-fuel at 30,000 feet (Twivy, 1986 Virgin Atlantic, 2009 c). Its innovative and unique offerings are great contributing factors to its having won many business, customer service, and trade awards worldwide. To sum up, the offers and value that Virgin Atlantic gives were a marked revolution for the airline industry. Business Map The map above is created by summarising from the student information pack, Financial Information Press Kit Full Press Information Kit 2009 at virgin-atlantic.com. (Notice: The customer section indicated above is only concerned with the passenger market). Appendixes A and B describe Virgin Atlantics current strategies and market segmentation. Industry Highlights The airline industry can be classified as either business logistics or passenger. Those that specialize in air-passenger transport can further divided into scheduled and non-scheduled services. In recent years, the low-cost carriers of the scheduled market have grown rapidly, while the high-cost carriers are continually struggling to grow (Manley, 2009). Many airlines offer three flying classes for its passengers-first, business, and economy class-and they set different prices for the different segments. In terms of the consumer, the purchaser may not be the ultimate user of the service, so it is necessary for airlines to recognise the different needs of decision makers and users. Recently, the industry has been suffering during the economy downturn. In such conditions, more companies tend to downgrade their travel policies, so first and business class flights are being decreased sharply (Shaw, 2007). For airlines to maintain their business, they always have to pay for high operating and fixed expenditures (Civil Aviation Authority, 2009 b). Furthermore, economic, political, and legal changes, weather, and changes of fuel prices can have a significant impact on airlines (Manley, 2009). Many airlines attempt to cooperate with other similar airlines to serve more destinations, to be more convenient for customers, and to retain customer by rewarding with frequent flyer miles. (Appendix C describes Detailed Industry Overview) SOWT Analysis SWOT analysis is a tool that illustrates a companys strengths and weaknesses (its internal environment) related to its competitors and what opportunities and threats it faces (its external environment) (Capon, 2009). Virgin Atlantic strengths are its strong brand image, its innovation for setting a new industry standard, its excellent customer service products, its close interactions with its customers (Virgin Atlantic, 2009 a), and its strategic alliances with other quality airlines that offer more destinations (Virgin Atlantic, 2009 c). Its weaknesses are that it is too reliant on Branson (a sharp drop in sales occurred after Bransons death), weak in the economy class-leisure market, and offers only limited destinations. Its opportunities are to target new segments of customers due to the aging of the population, to improve its service quality to become a five-star airline in Skytrax, and to reach more destinations to increase its market share. It is vulnerable  (threats) to losing its customers due to the open-skies agreement (less regulation of flights between the E.U. and the U.S.), to intense pressure from the rapid growth of low-cost carriers, recession, new industrial regulations, terrorist attacks, and soaring oil prices. (Appendix D and Appendix E discuss PESTEL analysis of the airline industry and Competitors analysis for Virgin Atlantic) PART II MARKETING METRICS FOR VIRGIN ATLANTIC AIRWAYS After reviewing of Virgin Atlantic, I would recommend a number of crucial marketing metrics, which can be categorised into the following four performance aspects: financial-related (or shareholder), market-related, brand-related and customer-related. The following paragraphs explain why these were selected and discuss the measurement needs and impacts on the decision-making process of each metrics. Finally, recommendations and limitation of the framework are drawn. Profit is the most important factor for a company to survive. Kerin and Sethuraman (1998) pointed out that marketers always monitor financial performance because increasing earnings and cash flow turnout increases shareholder values made, and all marketing activities are funding by it. Therefore it is need to measure the financial-related performance which at least three metrics can used to monitor Virgins profit and cost how efficiency of Virgin spend and generate profit-return on marketing investment (ROMI), return on sales (or profit margin), and net sales contribution. Firstly, return on marketing investment is the percentage of net profit generated by marketing activities divided by total marketing expenditures. ROMI measures how marketing expenditures contribute to profits and is used to insight into the profitability of Virgins marketing activities. Secondly, return on sales is the net profit as a percentage of the sales revenue, which measures how company efficiency generates profits from sales turnovers and downplays spending, since net profits are equal to sales revenue minus total cost. Virgin Atlantic can use the above metrics to understand itself and the market by comparing these metrics against its key competitors or industries. Other important indictors related to financial performance include sales, gross profits, profit before taxes, and liquidity ratio, which do not require metrics since they can be easily obtained from the companys financial statements. Ambler (2003) observed that managers always concern the financial performance, and ignore other non-financial activities, for instance, sales is driven by customers indeed. Therefore customer is definitely needed to measure. Before marketing department is responsible for attracting and retaining customers-without customers, identifying who target customers are is also important, how they generate profit to Virgin. So, retention and churn, customer profitability, customer lifetime value, and net sales contribution can include. Firstly, retention rate is the percentage of customers a company is able to retaining over time, which also measures customer loyalty, while churn measures the percentage of customers lost. If the retention rate is low, the company has to spend more effort to retain its customers since it costs less than attracting new customers. If it is high, marketers should investigate the profitability of its relationships; to measure this, customer profitability can be emp loyed. Customer profitability is the profitability of customers based on the differences in customer revenue and cost, helps the company identify the most profitable customers. Farris et al (2006) suggest a process to calculating it: sorting customers net profits, grouping customers by the customers profits in 10 deciles, then it can show the distribution of profit generated by each group. Normally, the profitability of the top group is between 150 to 300% (ibid). Fourthly, customer lifetime value is an estimation of the customer value in the number of years the customer is expected to purchase a given product, which measures the worth of a customer as a loyal purchaser of the companys products or services. It is important to be aware that metrics are rough estimations since input data is difficult to predict and may change over time. Fifthly, net sales contribution is the sales generated from a specific segment divided by total sales. It measures how well the segment performed with in all segments and insights which segments contribute the most to sales. The metrics mentioned above are valuable to mangers to identify profitable customers and which marketing programs can be developed to reinforce the customer relationship with them (Davis, 2007). Other important indictors related to customer performance include purchase frequency, average amount per transaction or sales, and the number of customers or new customers from transaction support systems. Market performance and trends directly link to financial result, and are indictors for manger since they would know how potential of the market. No surprising, the measurement of market-related aspects is also needed. The break-even analysis, market share and growth, and category share, can be included. Firstly, break-even analysis is a tool for projecting the use of a new product or service, which measures how many units will be required at a certain price to reach the break-even point. It can show how changes in price affect sales levels or how many years it will take to break even (Paek, 2000). Therefore, if the market size is not big enough, it is probably not to serve. Secondly, market share is the percentage of Virgins shares owned within the whole market which can calculate by the number of customers or sales value. Market growth is similar to market share but shows the percentage increase of this year compared with previous years. Thirdly, category share is the percentage of the number of customers who purchased an item of a specific brand divided by the number of customers who purchased an item under a specific category, measuring the popularity of a brand. Over time, market share, market growth, and category share provides marketers insight about Virgins performance sales against its competitors by monitoring the growth of the company and its competitors and consumer trends within the market, but category share shows more details about category growth, for example, whether customers were acquired from competitors or if total users were gained under the same category. According to McDonald, M. and Mouncey, P. (2009), brand account for at least 20 % of the companys asset, it helps customer to distinguish the company and its product among competitors, so it is indispensable to measure, but the challenges are many approaches available and difficult to qualify. The measurement of brand-related for Virgin can include brand awareness and loyalty, and customer satisfaction. Firstly, Brand Awareness measure the proportion of potential customers and consumers recognised the brand while brand loyalty is measured by usage, how was the frequency customers purchased a brand. Awareness, loyalty top of mind (the first brand in a customer mind within a given category), attitudes (the degree of customer belief towards a given brand) can simultaneously be measured by conducting a survey. Those can insight the brand location in the customers heart which influences customer purchasing behaviours and the sales. More importantly, recognizing consumer and non-consumer g roup is needed since results of them is always different (Gupta Lehmann, 2005). Secondly, customer satisfaction is a rating to measure customers experiences on specific aspects, also measured by a survey. It shows how well of their offers meets customers expectations. However, the selection of survey respondent should be careful, high satisfaction may not mean all the customers are satisfied; some disappointed customers may simply leave from the company to competitors before the company noticed. Measuring marketing metrics is a continuous process, which should be done regularly (Patterson, 2005). Over time, metrics can illustrate the effectiveness of marketing strategies and tactics and market changes. More importantly, the measurement methods of metrics also changes over time; methods currently employed are considered state-of-the-art. Although Virgin can use the above models, still reminding other intangible factors cannot be measured, such as relationships, reputation and trust, culture and values, skills and competencies, knowledge, and processes and systems. These are important because of generating value for a company, and account for the majority of a companys assets (McDonald and Mouncey, 2009). In conclusion, the metrics recommended to asses Virgins marketing outcomes involve the following performances areas: financial-related (or shareholder), market-related, brand-related and customer-related. Working with these metrics Virgin can monitor its revenue and spending, identify and retain the valuable customers, identify the chance expanding its market, insight customer perception towards the brand. PART III MARKETING CAMPAIGN FOR VIRGIN ATLANTIC AIRWAYS Marketing Challenge and Strategy Virgin Atlantic feared that the E.U./U.S. Open Skies Agreement, introduced in March 2008 (Stewart, 2007), would have a negative impact for the future of its market share. Virgin Atlantic may lose part of its customers, since 40% of Virgin Atlantics business class-travel now is between the U.S. and Europe (Foresight, 2008). No doubt Virgin Atlantic needs to retain its customers or to expand into other new markets. According to the World Tourism Organization, the route that serves the most passengers between the U.S. and London airports is between London and New York (ibid.). Virgin Atlantic plans to offer frequent business travellers an exclusive private luxury flight experience, operating a twice daily flight between London and New York, and pricing the ticket at  £1000. Virgin Atlantic also decided to initiate a marketing campaign by using TV commercials and outdoor advisements near the airports to raise Virgin Atlantics brand awareness among business travellers who fly often between New York and London. The target audiences are frequent flight business travellers or upscale leisure passengers (those who fly an average of ten times a year), male, aged 25 to 65, with more than  £50,000 income per year. The following section employs two metrics, the break-even analysis and return on marketing investment, to forecast and measure Virgin Atlantics marketing performance. Assumptions: the objective profit margin for the campaign was expected to be 25 %; the 10% overhead on its sales generated; the extra sales generated by the campaign are  £15 million; the operational and variable cost for flights twice a daily per year is  £24 million; the extra marketing expenditure for the campaign is  £ 2 million; the price of a flight is  £1,000; the average number of flights per consumer is ten per year; the net profit contribution is 24 %; the year of customer loyal and purchasing the tickets 10 times a year is 5 years. Calculation of Break even for new business-classes flights Customer Equity per year= price of flight * average flight times a year =  £1,000 * 10=  £ 10,000 Customer Lifetime equity= Customer Equity per year * period of year remains as a frequent flight business travellers =  £ 10,000*5 = £ 50,000 Customer Lifetime net profit= Customer Lifetime equity * Net profit contribution = £ 50,000 * 0.25= £ 12,500 Number of customers need to Break-even= operational and variable cost for flights twice a day per year / Customer Lifetime net profit = £ 24m /  £12,500 = 1,920 If Virgin Atlantic can have 1,920 frequent flight customers who purchase the flight for 5 years, and 10 times per year, then this project will reach break even points. Calculation of ROMI Campaign profits = assumed profit margin * extra sales generated = 25% * £15 million = £3.75 million However, the campaign was overhead 10% in the  £15 million sales, Extra cost for campaign= overhead percentage * extra sales generated = 10% * £15 million sales = £1.5 million Net profit generated from the campaign = Campaign profits -Extra cost for campaign =  £3.75 million- £1.5 million =  £ 2.25 million. ROMI = (Net Profit generated from the campaign / Campaign cost) *100% = ( £ 2.25 m /  £ 2 m)*100% =112.5 % The result of ROMI is positive which means that marketing spending is deemed. As the extra cost  £ 2 million is needed for the campaign, the break even point will be changed as follows: Calculation of Post-Break even for new business-classes flights with extra cost in marketing. Customer Equity per year= price of flight * average flight times a year =  £1,000 * 10=  £ 10,000 Customer Lifetime equity= Customer Equity per year * period of year remains as a frequent flight business travellers =  £ 10,000*5 = £ 50,000 Customer Lifetime net profit= Customer Lifetime equity * Net profit contribution = £ 50,000 * 0.25= £ 12,500 Total cost for flights twice a day per year = operational and variable cost for flights twice a day per year + extra marketing cost =  £ 24 million + £ 2 million = £ 26 million Number of customers need to Break-even= Total cost for flights twice a day per year / Customer Lifetime net profit = £ 26m /  £12,500 = 2,080 The break-even analysis indicated that Virgin Atlantic will need 2,080 frequent flight customers who will purchase the flight ten times per year for five years to reach the break-even point for the whole new route with the new marketing campaign in play. After reaching 2,080 customers, the company will start to make a profit. The break-even analysis is computed twice to show the different outcomes if extra marketing spending is added. In fact, as the costs increase, the number of customers needed increases as well. Therefore, if the managers believe it is easy to reach the break-even point, the airline is likely to launch this route. As the break-even analysis uses customer lifetime equity for the calculations, it is possible for that the break-even point may fail to be met in the short term, but for long-term outlooks and for retaining customers, it still can be profitable (Dwyer, 1999). The positive ROMI indicates that the activity is healthy. If ROMI is equal to 100%, this means the marketing campaign will break even. To compute the ROMI, the cost is needed, as Amber (2003) mentioned that sales revenues may not increase immediately after advertising begins, and it is difficult to determine whether the costs belong to the marketing department. Furthermore, spending decreases can result in maximizing the ROMI, so balancing expenses with marketing expenses with ROMI is also important (Lenskold, 2004). (3392 words)