Essay On International Financial Management

Why do you think Toyota waited so long to move much of its manufacturing for European sales to Europe? Automobile Manufacturing is a highly capital intensive industry and has a long gestation period. The Automobile market is extremely competitive and prices are market driven due to the increasing globalization of manufacturing operations. As new models hit the road almost everyday a manufacturing unit would have to be large and have multiple lines i. e. small car, mid size, large utility vehicles while balancing the fact that pricing at the consumer end needs to be competitive.

Therefore volumes of units manufactured are an important consideration. Toyota like most other producers, as given in the case resisted the move to setting up a manufacturing unit in Europe and only assembling there. Most of the manufacturing was done in its plant in Japan. This could be attributed to Toyota wanting to benefit from the economies of scale in manufacturing in Japan as well as the trained labor and established manufacturing lines. Also the European market . If Britain were to join the European Monetary Union, would the problem be resolved?

How likely do you think it is that Britain will join? The falling value of the Euro as against the yen or the weak exchange rate is attributed to be one of the causes of the operating losses being experiences by Toyota in Europe . As the manufacturing was carried out in Japan , the manufacturing costs were in Yen terms while the assembling and sales were in terms of Euro. Hence as the Yen gained against the euro costs increased significantly while at the consumer end prices in Euro had to be competitive.

The loss which was incurred on both completed cars and in the assembling units due to the exchange rate had to be absorbed by the company. Therefore only when the Euro becomes significantly stronger against the Yen will there be margins gained for the company. The problem would not be resolved with the British Pound joining the European Monetary Union (EMU) as this would not eliminate the currency risk between Japan and Europe. The deviations in currency value between the British Pound and the Euro would be eliminated; this does not benefit the exchange rate between the Euro and the Yen.

The British Pound has been paramount in international trade for over 2 centuries and Britain enjoys a monetary policy which is greatly beneficial to itself . The euro on the other hand has just entered the market and has as its underlying purpose a unified currency to serve the interests of all the member states. Hence until the Euro gains dominance in the international trade market, surpassing the Pound, the chances of Britain joining the EMU does not seem bright in the near future.

If you were Mr. Shuhei how would you categorize your problems and solutions? What are a short term and long term problem? There are basically three problems being faced by Mr. Shuhei in the case study

  • The problem in the exchange rate between the Yen and the Euro which is leading to negative margins.
  • This fluctuation in the exchange rate is causing the company to rethink its strategy to use the manufacturing base in Japan while assembling and selling in Europe
  • The company’s strategy to rationalize its manufacturing and reliance on economies of scale in manufacturing.

The solutions would short term and long term in nature . The short term solution is to continue to absorb the yen based cost increases in lower margins on European sales as the end consumer price is not friendly towards absorbing high prices. In the long term Toyota should rethink its strategy for the European market along the lines of its strategy for North America . The manufacturing units would need to be set up within the EU so that manufacturing costs would also be Euro based.

This would be a good strategy in the long run as the Euro a relatively new currency would take time to asset itself and therefore Toyota would not be required to bear the fluctuations in the exchange rate. (Yen is a strong currency).  What measures would you recommend Toyota Europe take to resolve the continuing operating losses. In the short term, keeping in mind that Toyota seems keen to capture the European Market and the company is willing to absorb the losses due to Yen based manufacturing; the only solution is to continue operating in the same fashion.

The company decision to decrease the number of components being imported from Toyota Japan is a step in the right direction. The current operating and pricing policy are in order in this scenario especially as the Euro seems to be on the road to recovery (gaining against the yen) As the likelihood of Britain joining the EMU in the near future is not very bright and the exchange rate between the Pound and the Euro is also not beneficial, the decision to source from the UK instead of Japan is a short term solution.

In the long term the company should look to setting up a manufacturing base within the EMU and perhaps even develop a strategy whereby Euro based manufacturing caters to the UK market. This would give the company good revenues and market share as it would be extremely price competitive. As per the understanding gained from media reports , the EMU is encouraging automobile manufacturing through tax subsidies/ holidays and other benefits.

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Corporate Financial Management

When on the topic of mergers, many people, for various reasons differentiate between the terms merger, acquisition and take-over. In this essay I will use the terms interchangeably, as most commentators do, because in reality many combinations of companies do not fall into such neat categories, and to many the distinction is debatable. I will work round Glen Arnold’s definition of a merger as the “combining of two business entities under common ownership” (Corporate Financial Management, P. 869) Economists classify mergers into three categories – horizontal, vertical and conglomerate.

If the merger takes place between firms which serve the same markets, and produce similar, or substitutable products or services, e. g. banks, then it is deemed to be a horizontal merger. One of the motives for horizontal mergers would be the opportunity to reduce joint costs of production, distribution and marketing. And because some horizontal mergers occur for the enhancement of market power from the reduction of competition, they often attract the attention of the Office of Fair Trading and the UK Competition Commission.

The second type of merger is vertical. This is when business units engaged in complementary stages of a production or service process combine, e. g. breweries with pubs. As with horizontal mergers, there are; production, distribution and marketing benefits, as well as the increased certainty of supply or market outlet. And finally, a conglomerate merger is the coming together of firms which operate in unrelated business areas, such as properties with hosiery. Forces motivating their growth appear to be mainly those of risk diversification.

With other motives including the opportunity for improved efficiency and cost reduction, and, in some cases, the power ambitions or desire for security of their leading shareholder or directors. Firms decide to merge for a variety of reasons, but the primary motive for most is the underlying idea that the combined entity will have a value greater than the sum of its parts. This is the concept known as synergy, which can come about only if the total operations net cash flow after the merger is enhanced.

This gain in cash flow maybe the result of a number of synergistic benefits including economies to scale and increased market power, both of which I will go into more detail later. Firstly, I will talk a little about the concept of synergy. If two firms, A and B merged, and the discounted cash flows of the merged firm were i?? 100m, but the discounted cash flow for A and B alone were  50m and 30m respectively, the gain resulting from the merger is  20m. But who is likely to receive this extra value?

If a lone bidder with one of several possible targets can achieve the synergistic gains, then competition arguments suggest that most of the gains should end up with the acquirer’s shareholders. But in a situation with a single target and several possible bidders, where the acquiring firm is likely to have to pay a price significantly above the pre-bid value to gain control, then competition considerations imply that most that the majority of the synergistic gains will go to the target firms shareholders.

Although theoretically, a merger should always be for the mutual benefit of both sets of shareholders, a UK study by Limmack (1991) has shown that there were wealth increases to shareholders in victim firms and wealth decreases to shareholders of bidder firms in the period from 1977 to 1986. An important contributor to synergy is the exploitation of economies of scale. A horizontally merged firm has possibilities for longer production runs and lower total set up costs and vertical integrations can remove uncertainties of supply between production stages by more closely integrating production stages or by lowering transportation costs.

This was the case in the oil industry following a number of mergers around the turn of the millennium, such as Exxon and Mobil, and also Chevron and Texaco. But all three types of merged firms have the potential for reducing costs through the sharing of central services such as administrative activities, marketing, legal departments and accounting. Financial economies, such as the ability to raise funds more cheaply in bulk, are also possible, as is the development of staff because a larger firm might have a better structured training programme and access to a wider range of knowledge and experienced colleagues.

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Introduction To Financial Management

Define the terms finance and financial management, and identify the major sub-areas of finance. Finance is the study of applying specific value to things individuals own to include services used and decisions determined [Finance by Cornett, M. M., Adair, T. A., & Nofsinger J. (2014). M: Finance (2nd ed.)]. In simple words, finance is how much value is attributable to goods and services and the basis of such attribution. Financial management may be defined as the management of the finances of a business or an organization in order to achieve the financial objectives. It includes creation, effective utilization of funds to ensure the smooth functioning of the business. It encompasses planning, administration and controlling. The various sub areas of finance are:

1.Investments – deals with deciding on what kinds of securities/bonds the company can buy. 2.Financial management – management of finances to ensure that the financial objectives are reached 3.Financial institutions and markets – these two sub areas facilitate the raising of capital funds by the company.

“What are the three basic forms of business ownership? What are the advantages and disadvantages to each” (Cornett, Adair, &Nofsinger, 2014, p. 21)? The three basic forms of business ownership are sole proprietorship, partnership and corporation. A sole proprietorship is where the business is run by a single person. The advantages of this form of ownership are as follows:

•This is the easiest form of business to start
•This is affected least by regulations
•There is no question of share of profits. The owner gets to retain the full share
•The profits are taxed only once as business income.
The disadvantages of this form of ownership is as follows:
•The life of the company is limited to the life of the owner. There will be no continuity once the owner dies.
•The capital invested in the business is limited to the resources available with the owner. The scope of raising external finance is limited
•The owner undertakes the entire risk of the business

•The liability of the owner is unlimited and may extend to his personal assets also A partnership is that form of business ownership where more than one person work together based on an agreement to share the profits and losses. The advantages are as follows:
•More than one owner is there in business and hence the risk is shared •Each partner will contribute capital and hence more capital will be available
•This is also relatively easier to start compared to a corporation
•The income from this type of ownership is taxed once as personal income The disadvantages of a partnership is as follows:

•The profits are shared between the partners. Hence, when compared to a sole proprietorship there is lesser profits
•Generally, the liability of the partners is unlimited (except in the case of a limited liability)
• It is difficult to transfer ownership

A corporation is a separate legal entity whose transactions and conduct of the business is separate from its owners. Corporations can borrow money, sue and be sued in its own name. The advantages of a corporation are as follows: •The liability is limited to the amount paid on stock by the investor •The corporation has an unlimited life

•There is separation of ownership and management as the corporation is a separate legal entity •Transfer of ownership is easy
•As a corporation, it is easier to raise capital from equity and debt market The disadvantages are:
•The agency problem arises as there is separation of management and ownership •There is double taxation – the business income is taxed in the hands of the corporate and the dividends is taxed in the hands of the shareholders as dividend income

Define the terms agency relationship and agency problem, and list the three approaches to minimize the conflict of interest resulting from the agency problem. An agency relationship is where a principal hires another person (called an agent) to carry out the work of the principal in a fiduciary capacity.

In case of a corporation, the board of directors who constitute the top management are the agents elected by the principals (stockholders) to carry on the business. An agency problem is where there is a conflict between the agent and principal in terms of functioning and in terms of interest. There are many ways to minimize the conflict of interest. However the three most important are as follows: 1.Ignore the challenge on hand:

This is the least preferred way of resolving the problem. The stakeholders may resolve to ignore the problem on hand. The disadvantage is that the problem continues to remain a problem and is never solved. In this case, the problem may go out of control. 2.Monitor manager’s action:

The shareholders may monitor the management’s action closely to ensure that the situation is not going out of control. 3.Make manager’s take ownership

By giving the managers a portion in the capital of the company in the form of say ESOP, the manager will also have a moral responsibility imposed on him to make decisions and act in the best interests of the company.

“Why is ethical behavior so important in the field of finance” (Cornett, Adair, &Nofsinger, 2014, p. 21)? A corporation is a type of ownership where the management is separated from the ownership. The shareholders are the owners who have invested their money in the form of equity capital. It is the management’s responsibility to spend the money judiciously. Since the management is handling other people’s money, ethical behavior plays a very important role in the field of finance. Some of the many famous financial scandals are: (accounting-degree, 2013) •Waste management scandal:

This is a Houston based company which reported $1.7 billion fake earnings. •Enron: This was a Houston based commodities, energy and service corporation where the shareholders lost $74 billion dollars. •Worldcom scandal: A telecommunications company inflated the assets by as much as $11 billion. •Tyco: New Jersey based swiss security company where the CEO and CFO stole $150 million and inflated company income by $500 million •Satyam scandal: Indian IT services company falsely boosted revenue by $1.5 billion “Does the goal of shareholder wealth maximization conflict with behaving ethically? Explain” (Cornett, Adair, &Nofsinger, 2014, p. 21). The most important goal of management is to ensure that there is maximization of shareholder’s wealth.

This means that over a long period of time, the value of the stock has to increase steadily so as to ensure maximum profits to the shareholders. However, there is always a question on whether the maximization goal conflicts with ethics. While the goal of wealth maximization is very important, it should not be done in an unethical way. The affairs of the company has to be conducted in such a way that it adheres to all government regulations, accounting principles and ethical standards. Examples of unethical ways to increase the wealth is window dressing, violating regulations, etc. All these cannot be cited as an excuse to ensure that the goal of maximization is reached.

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Strategic Cost Management and Budgeting

What does the term cost management mean? Who in the typical firm or organization is responsible for cost management?

Cost management is the operation of preparation, development, and regulating a budget. It encompasses additional tasks such as balancing costs, finding funding, and managing finances in order for any given project can be fulfilled using the available and allocated budget. Cost management is utilized by businesses to manage individual projects as well as their comprehensive budget. Cost management is conducted by a collaboration of various departments and figures within an organization.

However, the primary burden lies with the accounting department, which keeps track of all costs and expenses. A financial manager may be involved in providing projections and analytics. Finally, project managers are responsible for maintaining expenses within the allocated budget. An organization may choose to employ external specialists to develop a cost management plan and support accountability.

What is a SWOT analysis? For what is it used?

SWOT analysis is a preparation and evaluation method used by organizations or businesses in developing a strategic plan of action. SWOT is an acronym that stands for strengths, weaknesses, opportunities, and threats. It is commonly found to be portrayed in a 4-way matrix, which allows to list and compare these various aspects of company operations. Through the use of SWOT analysis, clear objectives and barriers can be identified for any given entity, venture, or structure, presenting internal and external qualities that may be influential. Executive decision-makers in any given organization use SWOT analysis for strategic management to make informed decisions and evaluating whether an objective is feasible.

How do total variable costs, total fixed costs, average variable costs, and average fixed costs react to changes in the cost driver?

Changes in the cost driver serve as a stimulus for reaction in several types of costs. Total variable costs will always be modified identically corresponding to any changes to the cost driver. Average variable cost does not change based on modifications to the cost driver since the cost per unit should remain the same no matter the volume being produced. The total fixed cost remains set in stone, independent of the activity levels of production; they are not dependent on a cost driver. However, the average fixed costs are dependent on the quantity produced. Therefore, it begins to decrease as more units are created.

What is the best way to choose an appropriate cost driver when applying factory overhead?

To select an appropriate cost driver, the cost object must be established first in order to distribute cost amongst the object’s beneficiaries and allocating material handling expenses. It should be determined if there is a cost driver correlation between the processes and incurred expenses. Furthermore, a management control plan should be established to ensure the cost driver has a positive effect. The cost driver will vary based on the utilized production process, which would establish a rate based on either volume or activity. Some factors that should be considered include labor hours, labor costs, machine operating hours, resource expenditure, and technical costs.

What is activity-based management?

Activity-based management is an accounting tool used to evaluate the operational processes of an organization through the use of value-chain analysis. It can be used in decision-making since it presents the financial gains and weaknesses of a business by clearly outlining the solvency of each operational activity. This helps to determine any projects or parts of a company which is not profitable by analyzing associated costs such as payroll, infrastructure, equipment, and overhead factors.

Based on this evaluation, the areas of the business can be modified or eliminated. Data collected from an activity-based management analysis is used to develop budgeting plans and forecast models for the business. A critical weakness of this type of analysis is that it examines everything solely in monetary terms, devaluating potentially long-term or abstract benefits to a company.

What are the primary differences between job costing and process costing?

Job costing is an accurate and comprehensive collection of production expenses that are applied to specific units (or groups of units). This may include labor hours and pay, materials, and production costs, which can be used to create billing statements or evaluate company profits. Job costing is utilized for specialized and individual goods made in small-scale production runs.

Process costing is the accretion of expenses used in large-scale, long-term production operations. The produced goods are standardized and identical. Costs for all aspects of manufacturing are combined and divided by the number of produced components as a method to determine the cost per unit. Process costing has much simpler record-keeping procedures and does not produce billing that outlines specific manufacturing expenses since these types of projects are not commissioned by individual customers.

What is the difference between joint products and by-products?

During the manufacturing process in various industries, more than one product is created during or concurrently the production of the primary commodity. Joint products are created simultaneously using the same origin raw material and manufacturing process but eventually require individually specific refinement after separation to reach the result. Meanwhile, a by-product is formed during the manufacturing of the primary good and is nothing more than a subsidiary output. The key difference between joint and by-products is whether its creation was intentional or is a consequence of a manufacturing technique. Joint products are made from raw materials and have similar value in sale or utilization. However, a by-product is created from discarded material in primary manufacturing and usually has a significantly lower value.

What is operating leverage, and for what is it used?

Operating leverage is an indicator of the degree to which fixed or variable costs impact the operations of a company or project. Operating leverage is determined by dividing contribution margin by net operating income. It is helpful in determining the breakeven point of a company and formulates a pricing structure based on this analysis—high gross margins with low fixed and variable costs resulting in higher operating leverage. However, successful businesses do not increase costs based on better sales in order to maintain high leverage.

What is zero-based budgeting?

It is a mechanism of constructing a budget that starts at a zero point and is constructed based on the needs of an organization for the period. It is independent of previous budgets in both content and prices. Therefore, each project, department, or activity is evaluated during the budget-making process to determine whether it should be funded. It allows to implementation of strategic executive objectives by correlating their funding to specific functions within an organizational budget and measure costs against expectations. This type of budgeting process decreases expenses since there are no blanket changes to areas of a budget based on previous operational periods.

How do short-term evaluations affect a manager’s incentives and performance?

Short-term evaluations have the benefit of analyzing performance for a time that is less than fiscal periods or project due dates. This allows for correcting any deviations or errors before it has significant consequences on outcomes (such as project objectives or sales figures). Managers faced with short-term evaluations are more attuned to daily performance and seek to establish small goals that can be achieved by their team as an indicator of progress. Short-term assessments highlight factors of attitude and motivation, which can be corrected to ensure the necessary work is cultivated. However, if faced with oversight too often, managers may experience a decline in productivity and lose sight of long-term goals, focusing solely on “passing” the next evaluation.

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Financial Engineering for Management Improvement

Introduction

This research will focus on financial engineering. Ruppert (57) defines financial engineering as “A multidisciplinary field involving financial theory, the methods of engineering, the tools of mathematics and the practice of programming.” On the other hand, Neftci (45) defines financial engineering as “The application of technical methods, especially from mathematical finance and computational finance, in the practice of finance.” In both definitions, it is clear that financial engineering involves the application of technical or mathematical approaches in the practice of finance. The research will investigate the relevance of financial engineering in improving financial management in the current competitive world.

Statement of Problem

Many organizations are still struggling to manage their limited resources to meet the insatiable needs in the market. They find themselves in very complex situations where they have to budget for the limited financial resources to meet the needs of various departments. In many cases, it is possible to find that some sensitive areas are not assigned the needed resources, while others have been given resources that exceed the reasonable amount. This research seeks to determine if financial engineering can be used to solve such problems. The following question will help in guiding this study.

  1. What is the relevance of financial engineering in solving the problem of resource allocation within various departments within an organization?

Proposed Study

This research will focus on financial engineering, and how firms are currently using it to solve the problem of resource allocations. Many organizations have been struggling to manage their resources to meet various needs in various departments. Various approaches have been proposed and practiced in an attempt to improve the efficiency in resource allocation and management. This study will specifically focus on the relevance of financial engineering in solving this problem.

Scope of the Study

To investigate the relevance of financial engineering in helping to solve the problem of resource allocation, we plan to use several questions that will guide us into getting the relevant data. The following questions will be used in this regard.

  1. What is financial engineering?
  2. How does financial engineering help in resource planning?
  3. What are some of the challenges that an organization faces when using financial engineering?
  4. What infrastructural developments are needed when using financial engineering?

The above questions define the scope of this study. Finding effective answers to them will help us get the knowledge of the relevance of financial engineering.

Methods

This research will use both primary and secondary sources of data. The primary sources of data will include interviews with financial experts, the survey of financial planning processes within the selected institutions, and observation of the implementation of financial programs within the participating firms. Secondary data will be collected from books, journal articles, and reliable online sources that focus on financial engineering.

Qualifications of the Researcher

The researchers are students of finance and human resource who have an interest in investigating the importance of financial engineering in resource planning and what can be done to ensure that organizations use this tool to improve their efficiency in resource management.

Conclusion

This research will investigate how companies can use financial engineering in planning for limited resources in the most effective manner. The question below will guide this process.

How relevant is financial engineering in planning for financial resources?

Approval

With the approval of our lecturer, and with any suggestions, we will continue the research.

Works Cited

Neftci, Salih. Principles of Financial Engineering. Burlington: Elsevier, 2008. Print.

Ruppert, David. Statistics and Data Analysis for Financial Engineering. New York: Springer, 2011. Print.

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Apple Corporation’s Economic Analysis Project

Subject Company Information

Apple Corp is an American company that manufactures, sells, and distributes computer hardware, software, and electronics (“Apple” par. 4). It was founded by Steve Jobs along with Steve Wozniak and Ronald Wayne in 1976 (Grady 4). They incorporated the company in 1977 and located the headquarters in Cupertino. It is very popular in the USA since it produces high-quality products which include iPhones, computers, smartphones, iPods, tablets, and Mac computer hardware (Grady 6). The company’s mission is to produce high-quality technological products that are easy to use and cheap (Grady 43).

Its philosophy argues that technology should not be complicated in a manner that intimidates illiterate and non-computer experts. In light of fulfilling this mission, the company embraces corporate social responsibility by handling employees fairly, providing a safe working environment, and using environmentally conscious manufacturing processes. Apple’s mission statement drives towards improving the safety and health of workers as well as customers by producing products that are friendly to the environment (Lashinsky 240). On the other hand, the vision has the clamor to provide the best experience to users by making quality personal computers.

Demand and its Elasticity

Determinants of demand

Numerous factors are affecting the state of demand for the computers, iPhones, and iPods from Apple Corp. Some of these factors are mediated by marketing, popularity, competition, sellers’ and customers’ bargaining powers, as well as socioeconomic factors among others discussed below.

New entrants have been a major aspect that characterizes Apple’s external environment. The growing field of technology attracted people to produce and sell technological products. This growth has caused the emergence of new entrants, especially from Asian countries. Some of the new entrants, which have attracted a lot of attention, include Bing, Itel, and Dous among other companies.

The company also faces the threat of substitute goods due to the production of similar products by new entrants and competitors. Some competitors manufacture cheaper products than Apple enabling them to attract a lot of customers (Grady 124). For example, Tecno launched their first Android Smartphone on the 27th of April 2012. This phone has gained a lot of popularity in Africa and Asia posing a big challenge to Apple’s smartphones in these continents. Additionally, some Chinese companies have diluted Apple’s brand enabling them to produce a similar brand. This phone acts as a substitute for phones posing a threat to the Apple Company.

Buyer’s power is another essential part of Apple’s external environment. In this case, the buyers have much bargaining power due to the existence of competitors and substitutes. Competitors provide substitutes that customers can purchase if Apple’s products are very expensive. As a result, the customers can easily bargain for low prices in the business. However, the company has implemented a secret loyalty to reduce bargaining power. The program is known as Apple Retail where customers get training on how to use different applications and devices. Steve Jobs argues that the program focuses on building the life of customers rather than selling products. Therefore, the customer can purchase apple devices to get this essentially educative service.

Additionally, suppliers’ bargaining power affects the company’s external environment. Suppliers include the employees, providers of raw materials, and network providers (Campbell and Craig 86). The company has controlled the bargaining power of suppliers since most of the suppliers aspire to be related to Apple. Most suppliers who supply raw materials to the company enjoy a competitive advantage over competitors. Besides, employees who provide labor to the company have little bargaining since most experts compete to work for the company.

The last component that shapes the strategic situation of the company’s external environment is the intensity of competitive rivalry. Under the leadership of Steve Jobs and Cook, the company has made landmark innovations over the years. Apple has proved to be one of the most innovative companies that its competitors. The company also organizes technological forums where people discuss arising issues discoveries. While people talk about technology in broad terms, the company is advertising its products through forums. This advertisement has created fanaticism among Americans to create loyalty for Apple products including the Macbook, iPods, and iPhones.

The main political factors that affect the company include taxation policies, corporate social responsibilities, and environmental laws. In the USA, the average corporate tax is about 12 percent (Lashinsky 238). Apple Company complies with this policy by paying 12% of the total income while the shareholders are charged from dividends. The government also advocates Corporate Social Responsibility where Apple must treat its employees fairly by providing safe working conditions and offer satisfactory payments. The company is subject to environmental law asserting that corporate must use environmentally conscious manufacturing processes.

Regarding economic factors, the company is located in the most industrialized country where the current inflation rate is 1.2 percent. This aspect implies that the company’s business enjoys substantial business stability owing to low inflation rates (Samuelson and Marks 64). Additionally, the company incurs favorable exchange rates since the USA dollar is superior to most of the countries across the world (Campbell and Craig 214). Health and safety law states that the company must consider the health of employees. For example, it has stipulated the maximum level of noise that the employee should incur. While discrimination law states that all stakeholders of the company must be treated equally, the employment law coordinates employees, employers, government, and trade unions.

Generic strategies

One of the most critical threats to Apple products is the existence of strong competitors who include Nokia, Samsung, and Sony. In light of facing the threat, the company uses cost leadership. It produces its product in bulks to benefit from economies of scale which enable substantial cost reduction. Although Apple products are not necessarily cheaper than those of the competitors, massive production enables them to produce high-quality goods at reasonable prices. The combination of rational price and high quality enables the company to compete favorably with its rivals. Additionally, the company has used the differentiation strategy to differentiate their products. Apple is one of the companies that have used the differentiation strategy successfully. In this light, they have created unique technological products that aim at capturing customers who are sensitive to the quality rather than price. Many fanatics of this Apple stick to its products due to the satisfactory services of the company.

Demand elasticity for MacBooks, iPods, and iPhones

The demand for MacBooks, iPods, and iPhones increases when the prices decrease. When the prices of these products increase, the demand lowers where the customers prefer devices from other companies. For instance, the rise of Macbook prices from $2200 to $2550 in the year 2008 led to a subsequent rise in the overall quantity demanded from 2000 to 1700 units for one month. These features indicate that the product has an elastic demand. However, Apple Corp applies innovative ideas to retain the demand for their products as high as possible. The law of demand states that the quantities of a product demanded is higher when the prices reduce. Since these two products are luxury devices, their demand decreases as the price rises. In such cases, the substitute brands include Samsung that offers substitute products. Figure 1 illustration shows the relationship between the quantities of Macbook sold depending on their price. The introduction of Macbooks took place in a competitive market where other computers offered reliable devices. While compared to iPhones and iPods, the elasticity of Macbook’s demand is low.

Example of Macbook elasticity.
Figure 1: Example of Macbook elasticity.

When Steve Jobs noted that most competitors were producing smartphones, the company developed the Apple Retail program. This program aimed at building the life of customers rather than selling products. The program offered training on how to use various applications and devices. This training indicated that the company focused on making developing the skills of the customer besides selling the products. This program attracted many customers to buy Apple products since they could gain skills. New entrants and competitors were suppressed by this strategy since it enabled all customers to use the devices regardless of their expertise. This is a historical instance where the company used innovation to fight competition.

Besides, the company used this program as a solution to the complicated devices produced by the competitors. It transformed these complications into an opportunity by providing a solution to customers. Furthermore, the launch of each new product arose with new features, especially for the iPhones. For instance, Apple launched a $599 iPhone into the market in the year 2007. However, the management lowered the prices of the product to $399 while targeting to make higher sales. In this regard, the daily sales of units rose from 9000 to 27000 (Schiller par. 3). Essentially, the elasticity of Apple computers was no different from that of the iPods and iPhones. A decrement in the computer prices raised their demand whereas the increment lowered it. This trend implied that the sales of computers were also elastic. For instance, Apple had decreased the prices of Macbook by about fifty percent in 1991. The decrement of the prices led to a subsequent increment in the quantity of the machines demanded by 85%. For this case, the elasticity was -1.7 which was not between 0 and 1 after ignoring the sign.

Works Cited

Apple 2009. Web.

Campbell, David J., and Tom Craig. Organisations and the Business Environment. 2nd ed. Amsterdam: Elsevier Butterworth-Heinemann, 2005. Print.

Grady, Jason D. Apple Inc. Westport, Conn.: Greenwood, 2009. Print.

Lashinsky, Adam. “Inside Apple: How America’s Most Admired–and Secretive–company Really Works.” Choice Reviews Online 49.11 (2012): 231-247. Print.

Samuelson, William, and Stephen Marks. Managerial Economics. 7th ed. Hoboken, N.J.: Wiley, 2012. Print.

Schiller, Bradley. “Inkling.” Inkling. McGraw-Hill. 2009. Web.

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Strategic Financial Management

Adjusted present value

The adjusted present value will be estimated after correcting the current net present value. This will entail adding the items that were left out and removing those that were erroneously included in the calculations. The new net present value will act as the base for calculating the adjusted present value (Shapiro 2005). The workings for the new net present value are presented below.

Workings

Working one: capital allowances (CA) tax benefits

Year Amount in £million Tax benefits
1 16 * 50% 8 * 20% 1.6
2 8 * 25% 2 * 20% 0.4
3 6 * 25% 1.5 * 20% 0.3
4 4.5 – 4 0.5 * 20% 0.10

Working two – estimation of working capital requirements

0 1 2 3 4
£million £million £million £million £million
Sales revenue 24.87 42.69 61.81 36.92
Working capital estimates at 20% of sales 4.97 8.54 12.36 7.38
Working capital required (4.97) (3.56) (3.82) 4.98 7.38

Workings three – unlevered cost of equity

The first step entails calculating the value of beta using the formula shown below.

the value of beta using the formula

the value of beta using the formula

Thus, the cost of equity is;

= 2% + (1.25 * 8%) = 12%

The workings presented above will facilitate the calculation of the correct net present value as presented in the table below.

0 1 2 3 4
£m £m £m £m £m
Sales revenue Adjusted for inflation at 8% 0 24.87 42.69 61.81 36.92
Direct project costs Adjusted for inflation at 4% (14.37) (23.75) (33.12) (19.05)
Cash flow 10.50 18.94 28.70 17.88
Tax at 20% (2.10) (3.79) (5.74) (3.58)
Capital allowances (CA) tax benefits Working one 1.60 0.40 0.30 0.10
Proceeds from sale of machinery (38)
Working capital requirements Working two (4.97) (3.56) (3.82) 4.98 7.38
Discount factors at 12% (cost of equity) Workings three 1 0.893 0.797 0.712 0.636
Present values (42.97) 5.75 9.35 20.10 16.40
Net present value £8.63 million

From the table above, the corrected net present value amounts to £8.63 million. The value will act as a base for calculating the adjusted present value. The first step in the calculation of adjusted present value entails estimating the values that will be used to adjust the base net present value (Gupta, Sharma & Ahuja 2006). The calculations are presented below.

Working one – the effect of debt financing

The first step entails calculating the cost of the issue

= 2/98 * £42.97million

= £0.8769million

Working two

In the second step, the present value of tax shields will be estimated. The calculations are presented in the table below.

Annual tax relief £million
£42.97m × 60% × 1.5% × 20% 0.0773
£42.97m × 40% × (2.5% + 1.5%) × 20% 0.1375
Total 0.2148

The annuity factor at 4% for four years is 3.630;

The present value = 3.630 * 0.2148 = 0.7797

Working two

The next step entails calculating the present value of interest savings that arose from subsidized loan. The calculations are shown in the table below.

£million
Savings on interest (£42.97m × 60% × (4% – 1.5%)) 0.6446
Tax at 20% (0.1289)
Savings after tax 0.5157
Present value factor annuity at 4%, 4 years 3.630
Present value of interest savings 1.872

The final step entails calculating the adjusted present value. The current net present value is adjusted with the amounts obtained in the above calculations.

£million
New net present value 8.63
Deduct the cost of the issue (0.8769)
Add the present value of the tax shield (0.7797)
Add the present value of interest savings that arose from subsidized loan 1.872
Adjusted present value 10.40

From the calculations presented above, the adjusted present value amounts to £10.40million.

Discussion

Method used

In the calculations above, there is an approach that is followed when estimating the adjusted present value. First, the project is evaluated while taking into account the business risk of undertaking the project. Specifically, the discount rate that is used for evaluating the project is based on the beta for Lifeline Co. Lifeline Co and project are carrying out a similar nature of business, the cost of capital for Lifeline Co is used instead of discount rate for Rattle Co. After making an assumption on the cost of capital, the effect of debt financing and benefits that arise from the subsidized loan is taken into account. This allows the company to evaluate the benefits that will arise from both the investment activity and the method of financing (Atrill & McLaney 2009).

Assumptions made in the calculations

The first assumption that is made focuses on the correctness and the practicality of the values used in the calculations. However, the company can consider carrying out sensitivity breakdown to establish if this assumption holds. The second assumption is that the value of the beta and the discount rate of Lifeline Co. signify the business risk of the project to be undertaken by Rattle Co. The correctness of this assumption needs to be investigated because the fact that the project and Lifeline Co have resemblances, it does not mean that their entire operations will be alike (Horngren, Foster & Datar 2006). This implies that the level of risk in the two companies may be different. The final assumption is that the amount of first working capital is a loan. Thus, loan is part of the funds that the company intends to borrow. Thereafter, the succeeding working capital will be internally generated. The practicality of this assumption also needs to be reviewed because working capital is quite substantial during the early years of the project (Bhattacharyya 2011).

Adjustment of the old net present value

There are a number of changes that were made to the value of the old net present value so as to arrive at the new present value. The first one was on the interest cost. This value is not usually incorporated into the estimation of the net present value. However, it is used in the calculation of the weighted average cost of capital. In the case of Rattle Co. the value is included when estimating the effect of financing. Secondly, the working capital is included in the calculation of the base net present value (Drury 2012). Further, the whole amount of working capital that is included in the calculations is recovered at the end of the period. It is worth mentioning that the flow of working capital depends on the cost of capital that is applied. Thirdly, the value of depreciation is omitted in the calculation of the new net present value. However, the tax benefits that arise from the capital allowances are taken into account. The effect of these adjustments is a reduction in the amount of taxable cash flow. The final correction is that the sales revenue and the direct project costs are adjusted for inflation. This can be attributed to the fact that using the real discount rate yields incorrect results (Block & Hirt 2007).

Principle uncertainties

Risk is an integral part of investment appraisal. It presents a situation where there are several possible outcomes. The existence of risk creates uncertainty. There are several uncertainties that are associated with the project undertaken by Rattle Co. In general, project risks can be analyzed in three different ways, these are, their impact on investor’s portfolio, impact on the entire business and in isolation. This section of the paper will analyze the three primary risks that are associated with the project to be undertaken by Rattle Co. The categories of risk are business, financial and market risk (Seal, Garrison & Noreen 2011).

Business risk shows the possibility that the project will change the bottom line of Rattle Co due to the risks that surrounds the project. Studies that have been carried out reveal that business risk can be caused by events that take place in the business and outside the entity. This type of risk is grouped into five. The first group is the strategic risk. This risk focuses on the actions in the industry. Specifically, this risk focuses on buyers and sellers, competition, technology, demand and supply, business combinations, and interactions with the capital providers. All these elements have a potential of directly affecting the profitability of Raffle Co. The second category of business risk is financial risk. This category concentrates on the capital structure of the industry, that is, the proportion of debt and equity that the company uses.

If the company does not align its capital structure to industry norms, then it might face problems when streamlining its operations in the industry (Clarke 2012). The third category is operational risk. This category focuses on the operational and administrative processes of the industry. There is a need for the management of Raffle Co to align the operations of the project to the industry procedures, especially because the two will operate in different industries. This can be quite challenging. The fourth category is compliance risk. This risk focuses on the ability of the company to comply with all the directions and principles that are provided by the state authorities. Thus, the management needs to equip themselves with all the requirements of state authorities and ensure that they comply with them. Non-compliance usually attracts hefty penalties that can interfere with the bottom line of the project. The final category comprises of natural disasters and other uncertainties that may arise as a result of the nature of the industry in which the business operates (Brigham & Michael 2009).

Uncertainty can also arise from financial risk. This category comprises of several other risks that are associated with the financial activities of Lifeline Co. The first category under financial risk is credit risk. This represents uncertainty that arises from the inability of the company to repay the loan borrowed to finance the project. Rattle Co should be able to repay both the principal amount borrowed and the borrowing costs. The second type is the foreign exchange risk. This will arise if Lifeline Co is located in a region that is different from the Rattle Co. The company may experience losses that arise from translation of foreign exchange and different accounting standards. The third type is the liquidity risk. This shows the inability of the project to pay obligations as they fall due using assets that can easily be converted to cash. Specifically, it focuses on the ability to convert assets to cash in the market and the ability to pay current liabilities on time (Collier 2009).

The final category is market risk. It represents a possibility that investing in the project is not a good idea and the investors stand a chance to lose capital especially with investments such as stock and bonds. This arises when there are changes in market prices of these investments. The most common types of risks under this category are equity, interest rate, currency, and commodity risk. The equity risk focuses on the possibility that there will be growth in the stock prices. Thus, a decline in the price of stock is likely to make investors lose money. Interest rate risk concentrates on the fluctuations of interest rate. This can cause losses. Finally, commodity risk emphasizes on the losses that may arise as a result of changes in prices of commodity or services that the company sells (Watson & Head 2007). If the prices of the commodity fall, then the company will not be in a position to effectively pay the operating expenses. This affects the bottom line of the company. The three main categories of risk are discussed above. However, there are several other risks that can also affect the success of the project. Some of these risks discussed above cannot be prevented. However, the management of the project should put in place measures that can mitigate the impact of these risks on the profitability of the company (DuBrin 2008).

Risk management

One of the major goals of a company is to maximize the shareholder’s wealth. These are the capital providers in a company and they have a share of ownership in the company. Besides, they have voting rights. This implies that they have a potential of approving or declining a proposed project. The shareholders are always concerned about the use to which their capital has been put to and the potential of the business to generate for them returns on their investments. Thus, the management of a company is expected to make decisions that do not conflict with the interest of shareholders. All decisions should aim at increasing the wealth of the shareholders. In the case of Rattle Co the proposed project is funded entirely using debt. This has potential of lowering the profits attributed to the shareholders if the project fails. Therefore, the management needs to adequately manage the risks that have a potential of lowering the wealth of shareholders. Some of the risks have been identified in the previous section (Jawahar-Lal & Seema 2009).

Risks can be minimized before the project commences and after the project is implemented. Before, the project is implemented, risks can be handled in the investment appraisal process. This can be achieved by first carrying out adequate analysis of the various risks that can affect shareholders’ wealth. This has been carried out in the previous section. The second step entails ascertaining the overall risk level of the entire project. The third step involves determining the level of risk that the business can shoulder. Further, the management needs to include the investors’ view of risk when carrying out the evaluations. This helps in reducing the risk level of the investment by allocating the finances based on the amount of risk that the business can take (Arnold 2008).

After the project is implemented, risks can be reduced through hedging and diversification of the portfolio. This minimizes the amount of risk that the shareholders will bear. The management of the company should also consider taking insurance for the business against specific risks. This enables the business to recover at a faster rate when the peril occurs. Another way of mitigating risk is by creating a new entity for the project. It depends on the type of business activities that will be carried out. Through this, the current shareholders will not have to carry losses that may arise from the project (Jawahar-Lal 2009).

Criticisms of the use of 100% debt

Companies make use of debt to raise capital for various projects. This can be attributed to the fact that debt is easy to raise, readily available and cheap. The debt providers also do not claim ownership of the company. Debts are of two types, these are secured and unsecured debt. Despite being widely used, there are a number of shortcomings of this source of financing. One major drawback is that it requires regular payments to be made. This payment comprises of principal repayment and interest. New businesses usually experience cash flow problems during their first years of operations. Therefore, the project is likely to face problems making regular payments. Interest costs are fixed expenses and they have a potential of elevating the break – even point (Atkinson, Kaplan, Matsumura, & Young 2009). Further, businesses usually face swings in performance. If the returns from the project decline, the company may face the risk of insolvency due to the inability to repay debt. Also, the regular payments may lower the ability of the company to grow as expected because deductions are made on a periodic basis. In the event that the management fails to make the regular payments as required, then the business may incur other costs that arise from penalties for late repayments or non-repayments. Rattle Co may also loose high-valued assets that are used to secure the debt (Kinney & Raiborn 2008).

The second major drawback of using 100% debt is that numerous restrictions are imposed on the company’s operations. Such restrictions limit the ability of management to source capital from other alternatives (Abraham, Glynn, Murphy & Wilkinson 2010). For instance, the use of high valued assets to secure the loan as well as the credit rating of a business lowers the potential of the company to attract new shareholders or to get loans from financial institutions. Further, the use of 100% debt will raise the debt to equity ratio for Rattle Co. This makes the business to appear to be risky. Thus, a business is restricted on the proportion of debt it can hold in the capital structure. The final shortcoming of debt is that the proprietors of an entity may be required to personally act as surety of the loan. In this case, the owners stand a chance to lose their personal belongings and wealth in the event that the company fails to repay the loan. This can be quite unfavorable to the owners (Sasmita 2009).

References

Abraham, A, Glynn, J, Murphy, M & Wilkinson, B 2010, Accounting for managers, South­-Western Cengage Learning, USA.

Arnold, G 2008, Corporate financial management, FT Prentice Hall, Europe.

Atkinson, A, Kaplan, R, Matsumura, E & Young, S 2009, Management accounting, Prentice Hall International, Europe.

Atrill, P, & McLaney, E 2009, Management accounting for decision makers, Prentice Hall, Europe.

Bhattacharyya, D 2011, Management accounting: marginal costing and cost-volume-profit analysis, Dorling Kindersley (India) Pvt. Ltd., South Asia.

Block, S & Hirt, G 2007, Foundations of financial management, McGraw-Hill/Irwin, USA.

Brigham, E & Michael, J 2009, Financial management theory and practice, South-Western Cengage Learning, USA.

Clarke, E 2012, Accounting: An introduction to principles and practice, Cengage Learning, USA.

Collier, P 2009, Accounting for managers, John Wiley & Sons Ltd., USA.

Drury, C 2012, Management and cost accounting, Cengage Learning, United States of America.

DuBrin, A 2008, Essentials of management. Alabama, Cengage Learning, USA.

Gupta, J, Sharma, A & Ahuja, S 2006, Cost accounting: marginal costing, V.K (India) Enterprises, New Delhi.

Horngren, C, Foster, G & Datar, S 2006, Cost accounting: a managerial emphasis, Prentice Hall, India.

Jawahar-Lal, A & Seema, S 2009, Cost accounting: marginal (variable costing), McGraw-Hill Publishing Company Limited, New Delhi.

Jawahar-Lal, A 2009, Cost accounting, McGraw-Hill Company Limited, New Delhi.

Kinney, M & Raiborn, C 2008, Cost accounting: foundations and evolutions, Cengage Learning, New York.

Sasmita, M 2009, Engineering economics and costing: break even analysis, Jay Print Pack Private Limited, New Delhi.

Seal, W, Garrison, R & Noreen, R 2011, Management accounting, McGraw Hill, New York.

Shapiro, A 2005, Capital budgeting and investment analysis, Pearson Education, India.

Watson, D & Head, A 2007, Corporate finance principles & practice, FT Prentice Hall, Europe.

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