Financial Markets Study Questions Essay

Financial Markets Study Questions Essay.

14.1 What are financial markets? What function do they perform? How would an economy be worse off without them?

Financial markets are institutions and procedures that facilitate transactions in all types of financial claims. Financial markets perform the function of allocating savings in the economy to the ultimate demander(s) of the savings. Without these financial markets, the total wealth of the economy would be lessened. Financial markets aid the rate of capital formation in the economy.

The economy would be worse of without financial markets for several reasons.

Savers would not be able to earn a return on their savings. People who need capital wouldn’t be able to get the funds from other people and so would have to rely only on their own money. The inability to get capital from others would slow the growth of businesses and reduce the purchases of consumers because they can no longer get loans. These would lead to decreased demand for products and services as well as a decrease in available jobs both of which would harm the economy.

14.3 Distinguish between the money and capital markets

Money Markets facilitates transactions using short-term financial instruments; whereas, Capital Markets facilitates transactions using long-term financial instruments.

A money market is a market for short term debt securities such as banker’s acceptances, commercial paper, repos, negotiable certificates of deposit, and Treasury Bills with a maturity of one year or less and often 30 days or less. Money market securities are generally very safe investment which returns a relatively low interest rate that is most appropriate for temporary cash storage or short-term time horizons. A capital market is where debt or equity securities are traded.

14.4 What major benefits do corporations and investors enjoy because of the existence of organized security exchanges?

Organized stock exchanges provide for:

• A continuous market. This means a series of continuous security prices is generated. Price changes between trades are dampened, reducing price volatility, and enhancing the liquidity of securities.

• Establishing and publicizing fair security prices. Prices on an organized exchange are determined in the manner of an auction. Moreover, the prices are published in widely available media like newspapers.

• An aftermarket to aid businesses in the flotation of new security issues. The continuous pricing mechanism provided by the exchanges facilitates the determination of offering prices in new flotation’s. The initial buyer of the new issue has a ready market in which he can sell the security should he need liquidity rather than a financial asset.

Financial Markets Study Questions Essay

Taxes and Credit Essay

Taxes and Credit Essay.

Taxes and Credit Essay

Instructions

Save this file in your course folder, and name it with Assignment, the section number, and your first initial and last name. For example, Jessie Robinson’s assignment for Section 1 would be named Assignment1JRobinson.

Type the answers to the assignment questions below. Use complete sentences unless the question says otherwise. You will have more than one day to complete an assignment. At the end of each day, be sure to save your progress.

Review Lesson 4 of the Course Overview for instructions about turning in your assignments.

Assignment Questions

In Section 5, you learned about taxes and credit. Now, you’ll apply what you learned.

TIP: If you want, you can practice filling out the 1040EZ tax form in your course folder, but don’t turn the tax form in to your instructor. The information on that form is personal and should be kept private.

1. How does payroll withholding help a company’s employees? (1-2 sentences. 2.0 points) Payroll withholding is when a company sets aside part of a companys paycheck for certain purposes such as taxes or retirement.

2. List at least three types of tax that a company may have to withhold from employees’ paychecks. (1-3 sentences. 3.0 points) Social security, medicare, and income taxes are all types of taxes companys can withhold from employees paychecks.

3. What are the two main types of tax forms a company provides to employees so the employees can fill out their 1040 tax form? (1-2 sentences. 2.0 points) A w-2 or a 1099 tax form.

4. List at least two tips for using credit wisely. (1-2 sentences. 2.0 points) Use your credit card regularly, but not for more money than you have, and pay all biills on time.

5. Why is a bank more likely to offer you credit if you have a co-signer with good credit? (1-4 sentences. 3.0 points) Because they know that the person helping you wouldn’t want their credit affected by your bad choices and are responsible so they are more likely to make sure your bills are paid on time.

6. Describe at least three things a bank would consider about you when deciding whether to give you a loan. (1-3 sentences. 3.0 points) Your credit score/ history, the collateral or assests, and your personal income are all things banks consider when deciding to give you a loan or not.

7. Write at least two policies that a company could use to decide which customers to offer credit to. (1-2 sentences. 2.0 points) They will look at your cash flow. Businesses may offer credit to customers to encourage them to buy goods, but want to make sure they have enough money to actually pay it back, which is installment credit. if they pay it back immedietley it is non-instalment credit.

8. Which type of credit requires that borrowers carefully manage the debt so it doesn’t get out of control? Explain why this type of credit requires more careful management. (1-5 sentences. 3.0 points) Revolving credit requires more management because there isn’t a set date fo the debt to be paid off so it can get out of control quickly.

Taxes and Credit Essay

Case Analysis Massey Ferguson Essay

Case Analysis Massey Ferguson Essay.

Massey Ferguson Limited an International producer of Farm machinery and diesel engine started its operations way back in 1847 and by the end of 19th century they had operations throughout 31 countries of the world. In 1978 Company had financial loss of US. $262.2 million .

Massey’s Strategies:

1) Product-Market Strategy:

Massey’s product line consisted of tractors, combine harvesters, balers, forage harvesters, agriculture implements, farmstead equipments and other equipment for agricultural use. Industrial line consisted of Industrial tractors, loaders, rough terrain forklifts, skid steer loaders, utility loaders and skidders.

In 1980 Massey was holding

17% market share worldwide in tractors.
14% market for combines.
13% in Industry machinery.

History shows that Massey had been strong in Market outside North America and Western Europe. Massey Production facilities were also across the different region of the world (Exhibit 5). Largest facilities were located in Canada, France, England, and Australia. In less developed countries like Pakistan, Peru, Egypt, Iran, Libya, Turkey, Saudi Arabia, Sri Lanka, Sudan and Mozambique Massey was quite successful in carrying out the contracts and operations.

It is quite obvious as Massey got $360 million contract to update Peru’s tractor and diesel engine industry.

In 1980 Massey purchased diesel engines from Perkins Engine Group which was the producer of diesel engines in England. 50% of Perkins’s diesel engine export worldwide was to Massey’s subsidiaries and affiliates. Because of rising gasoline prices there was huge shift to diesel engines, so it was bringing in an effective market to Massey as well

2) Financial Strategy:

During 1960’s and 70’s Massey was aggressively involved in expanding its operations and building up new assets which was majorly financed by Debts that of short term nature .By 1978 Massey’s Debt/Equity ratio= 214% (Exhibit 4) Same year Massey lost US. $ 262.2 million, management associated this loss to following reasons:

High Interest rates

Imposition of Monetary policies and credit restrictions in Argentina and Brazil, which ultimately causes sales to decline. Decline in North American natives’ income and higher prices of products.

Beside this loss company laid off their employees from 68,000 to 47,000, reduced inventories from US $.1083.2 to US $.988.9 million, 24 plants were closed. Despite all these moves there were continuous losses all around the world especially on operations that was approx US $35.4 million or US $.2.38/share. At the end of first 3 quarters of 1980 company had unfavorable loss of US $ 62 million including currency adjustments of U.S $ 37 million.

3) Comparative Strategy:

Massey Competitors in farm and industry sector included:

Large multinational companies with full product lines

Medium and small enterprises, conducting business locally with restricted range of products.
Named: Deere & co and International harvesters. Massey was traditionally ranked 3 rd in sales of farm equipment behind Deere & Co and International Harvesters. However in 80’s Massey occupied 2nd position in market for small tractors and combine harvesters. In contrast with its competitors, Massey Ferguson chose to finance its expansionary agenda primarily through debt offerings and short term credit lines. This type of structuring had very detrimental implications for Massey Ferguson. The use of so much leverage would increase the risk of the projects they were undertaking beyond the industry standard. Firms in the same industry such as Deere and International Harvester throughout the 1976-1980 period maintained debt/capital and STD/capital percentages consistently lower than Massey Ferguson (a trend that exacerbated as time went on).

Therefore if the farm equipment market were to weaken, relatively, Massey Ferguson would find itself in a less favorable position. Along with the increase of risk on projects, the heavy use of debt financing also restricted Massey Ferguson’s financial flexibility. Massey Ferguson’s debt finance structure is spread out among 21 different lending institutions in over nine countries. Each one of these lenders having debt covenants of their own with the arrangement that if one of these covenants were to be broken all of Massey Ferguson’s debt becomes callable.

These types of restrictions can impede company financial options during down times (as they did when Massey Ferguson attempted an equity issuance in 1978). The emphasis on short term credit lines was also a questionable choice of finance structuring. Expansionary/market penetrating strategies typically pan out by taking losses in the short term in order to realize larger gains in the long term. Along with an expansionary strategy, Massey Ferguson was also increasing spending in R&D for production of higher horsepower tractors to market in North America and for diesel engine production.

What went wrong?

1) Market-wide problems:

High interest rates after the 1973 oil crisis and the 1979 energy crisis, the US economy was affected by stagflation. In an effort to fight excessive inflation, the Fed adopted a tight monetary policy, raising interest rates (as an illustration, the federal funds rate increased from 11% in 1979 to 20% by June 1981).This affected all players as it led to a plunge of stock market prices, on the one hand, and an economic recession, on the other. Furthermore, Massey was particularly hit hard: since it mainly financed its operations with short-term debt, its financing cost went up dramatically.

2) Low demand

The above-mentioned monetary policy pushed the American economy into recession. Massey’s renewed drive into North America (by 1978, it had introduced a new range of large, high-horsepower tractors and an improved baler line) unfortunately demand went down and MF had to suffer

3) Exchange rate:

High exchange rates were another area of concern which damaged the MF as the pound sterling rate was increasing. MF cost of goods sold also had a direct impact which ultimately cut the profit of the company and company lost its competitive edge.

4) Capital structure:

• Massey’s financing choices over the years brought with them many problems, which aggravated the already grim situation in the product markets. First, during its expansion in the1970’s, Massey levered itself immensely. Compared to its two main competitors, it systematically had the highest Total Debt/Capital ratio (in 1980: 80.85% compared to 53.56% for International Harvester and 40.28% for Deere & Company). While this might have been justified by the growth strategy, it turned out to be very damaging for the company in view of the current situation.

What was more unusual was the fact that it used short-term debt to finance its business operations, fixed asset capital maintenance, and long-term principal and interest repayments. As a result, Massey was much more affected by the increase in interest rates than that of its competitors where MF lost its edge. Cost of debt of MF in 1980 was 229.9 million $ compared to net income of 225.2 million $ that shows the real story.

Alternatives Available:
The major alternatives available to MF are:

1) Merger:
Under the current scenario, no company will be ready to merger with MF as:
Company’s shares worth was around $100 million but at the same times additional capital of $ 500 million was required to carry on operations which was not possible under the current circumstances.

Companies short term debts were about to mature which was another additional burden on the part of company. MF had 100 million $ of receivables in this recession era. Additional 100 million $ inventories were there in demand decreasing market scenario.

2) Divestitures:
Another option that MF has, to cover up its loss by selling any of its unit but financial side of the company and Product-market position doesn’t make this option viable.

3) Liquidation:
If MF goes for Liquidation option same situation remains that:
Stakeholders will not get anything out of it as already company’s financial value is very much down to $5 from 25$ $ 1 million receivables and inventories will not be going to pay at their full that is again loss for the stakeholders. Under the current financial circumstances MF value will further go down if liquidation option is to be considered.

4) Refinancing:
The last considerable option to MF was refinancing the capital structure so as to bring in the balance between the equity and debt structure. But under the circumstances bringing in stocks will not be easy consideration as investors will not be ready to finance such project which is already close to be defaulted. So company can consider

Converting debts to equitie
Government Guarantee
Sweeteners with new debts.

Financial Advice :
Refinancing is an alternative that is best to be considered, our suggestion to MF are:
MF should convert their debts to equity on immediate basis as debt holders will not get anything if company gets default and by getting shares they will be the part of company’s board of directors as well. On immediate base they can request their stake holders to hold on for certain time frame. Company will pay them interest with betterment in finance positions. Sweeteners or warrants are other option they can offer to debt holders that will bring in something positive to opt for as MF has good chance to come up with finances. Government being the key stakeholder is ready to guarantee the new equity investment in Massey as if company closes its operations ultimately thousands of employees will be direct burden on the govt.

Learning From the Case Study:
The major learning’s from the case study are:

Organizations should not aggressively opt for aggressing financing when they are dealing in highly cyclical market where risk is high or highly uncertain. Aggressive debts in good times are not a good financial strategy, organization should create a balance between capital structures and bring in equity financing when in good time. Interaction of product market and financial risk should be carefully considered while carrying on various long term strategies for the organization.

Competitors strategies should be monitored while designing financial structure, don’t act short sighted.

Case Analysis Massey Ferguson Essay

Internal and External Sources of Finance Essay

Internal and External Sources of Finance Essay.

I will explain the different sources of finance, some of which are internal and external to the Loxford Business unit. I will state the advantages and disadvantages of each of the sources of finance. Loxford Business Unit use both internal and external sources to get money in order to run the Business Unit successfully.

Source of Finance

Definition
Internal or external
Advantages
Disadvantages
Applicable to the Loxford Business Unit
Retained Profits
An amount of money saved aside from the business earning to be used when necessary.

Internal
The money doesn’t have to be repaid and there is no interest. Also they are flexible as management -have complete control over how the money is reinvested and what portion is kept rather than paid as dividends. The disadvantages are:

There will unhappy shareholders as they will receive lower dividends. Also retained profit is not available for new business as they main aim will be to survive and break even, so therefore they will either make no profit or little profit.

The Loxford Business will only use retained profit if the amount is large enough, if not then there will be no need to use the retained profit.

Owners Savings

Money from the owner’s personal savings.
Internal
Cheap – because there is no interest that has to be paid.
Flexible – the money can be used for whatever reasons the owner please.

The disadvantages are:
It is risky – as you may waste your money.
Not enough money – The money may not be enough.

The Loxford Business Unit may use the owners fund if there is enough available however in order for the business to expand successfully the owners fund may not be enough.

Overdraft
A loan arrangement under which the bank extends credit up to a maximum amount.

External
Flexible- there when needed, Efficient – allows a business to make essential payments and maintains cash flow.

Quick – quick and easy to arrange.
Useful temporary cash
The disadvantages are:
Costs- overdrafts carry interest is often at much higher rates than loans, therefore making it expensive for a business for long-term borrowing. Recall – Unless specified in the terms and conditions, the bank can recall the entire overdraft at any time. This may happen if you fail to make other payments, or if you have broken terms and conditions; though sometimes the banks simply change their policies. They are terms and conditions.

The Loxford Business Unit may use an overdraft as its quick process so it will give the business immediate money. Also this type of finance is suitable because the money will be available when needed.

Venture Capital

Money provided by investors to start up firms.

External
Willingness -The investors are more willing to invest.
Gain information – The investors are a valuable source of information, advice and resources. Value added services – such as mentoring, alliances and advice. Provides funding that a business company needs to expand its business.

The disadvantages are:
Control- the investors will expect a say in decisions.
Long process- It can be a long and complicated process. Lots of paper work required to provide such as a business plan, including financial records.
Accounting Fee -The business will have to pay legal accounting fees whether or not they will successful in securing funds.

Loxford Business Unit may use a venture capitalist for professional help and advice about achieving the necessary grades although this process will be long and complicated, it will be worth it in the long-term because it mean that students will achieve good grades overall. Bank Loan

Borrowing money from the bank over a period of time which is then to be paid back with interest.

External
Reliability – Loans are very reliable and secure, you are assured the money for the duration of the loan (unless you break terms and conditions).
Complicated process-
Must have right documentations such as business plan and cash flow forecast. Money will be paid back with interest.
A bank loan will be efficient for the Loxford Baines Unit because they will be given a large sum of money, which is to be paid back slowly and in instalments.

Internal and External Sources of Finance Essay

Other-than-temporary impairment (OTTI) Essay

Other-than-temporary impairment (OTTI) Essay.

Introduction

O.T.T. Incorporated, principally engaged in the manufacture and sale of clothing, has six investments remaining in the department’s portfolio as of December 31. According to ASC, this memo analyzes whether any of its investments are other-than-temporary impaired, and determines the amount of the impairment.

Facts
Investment 1 — Happy New Year & Co.

OTT purchased 11 shares of Happy New Year & Co. stock on at $20 a share 
on Jan. 3, 20X1, and the price dropped to $15 in March and remained steady till Dec.

31, 20X1. OTT management does not believe the decline in price to be permanent and has asserted that it does not intend to sell this investment in the future.

Investment 2 – Beary Beary

OTT held notes of Beary Beary with an amortized cost of $95 and a fair value of $88 on Dec. 31, 20X1. OTT’s investment committee established a policy requiring the sale of this security when the fair value declines below $90.

Investment 3 – Buy-A-Lot Company

OTT held bonds of Buy-A-Lot Company with an amortized cost of $100 and a fair value of $88 as of December 31, 20X1.

The company’s credit rating upgraded from BBB to BBB+ that management has asserted it does not intend to sell this investment.

Investment 4 – March Madness Incorporated

On March 25, 20X1, OTT bought 50 shares of March Madness Incorporated stock 
at $100 a share, classifying its investment as available for sale. As of December 31, 20X1, the price of the stock was $72. On January 31, 20X2, the date the Company’s financial statements are issued, the price of the stock went up to $75.

Investment 5 — Tohoku Toys

OTT held bonds issued by Tohoku Toys with an amortized cost of $25 and a fair value of $5 as of December 31, 20X1. Tohoku Toys is going through a restructuring because it was significantly affected by a severe earthquake in April 20X1. OTT does not believe that the restructuring will ultimately be successful.

Investment 6 — Chatterbox

OTT holds a debt security issued by Chatterbox with an amortized cost of $100 and a fair value of $90 as of December 31, 20X1. The present value of the cash flows OTT expects to receive, discounted at the security’s original effective interest rate is $92 as of December 31, 20X1. OTT intends to sell this security.

Issues

The other-than-temporary impairment depends on two issues:
·Whether the fair value of the investment is less than its cost. ·The impairment is either temporary or other than temporary depending on other guidance when the fair value is less than its cost.

Discussion
Investment 1—Happy New Year & Co.

ASC 323-10-35-32: “A loss in value of an investment that is other than a temporary decline shall be recognized. Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the investment or inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment.” ASC 320-10-35-34: “If it is determined in Step 2 that the impairment is other than temporary, then an impairment loss shall be recognized in earnings equal to the entire difference between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment is made.” Because the share price had a large decline from $20 to $15 and remained steady around $15 in most of time, it seems the share is absence of an ability to recover the carrying amount of the investment. Therefore, other-than-temporary impairment has occurred, and loss of $55 (11*$5) should be recorded.

Investment 2 – Beary Beary

ASC 320-10-35-33A: “If an entity intends to sell the debt security (that is, it has decided to sell the security), an other-than-temporary impairment shall be considered to have occurred.” The company intends to sell the investment because the fair value is below $90. Therefore, other-than-temporary impairment has occurred, and loss of $7 ($95-$88) should be recorded.

Investment 3 – Buy-A-Lot Company

ASC 320-10-35-33F: “Changes in the quality of the credit enhancement should be considered when estimating whether a credit loss exists and the period over which the debt security is expected to recover.” Although the fair value of the investment was lower than the amortized cost, the credit rating had been upgraded from BBB to BBB+, and the investment does not intend to be sold. These evidence show that the bond is expected to recover, so no other-than-temporary impairment has occurred.

Investment 4 – March Madness Incorporated

ASC 320-10-35-34: “The fair value of the investment would then become the new amortized cost basis of the investment and shall not be adjusted for subsequent recoveries in fair value.” Based on ASC 320-10-35-34 I mentioned above, the other-than-temporary impairment should be recoded as $28 ($100-$72) as of December 31, 20X1. On January 31, 20X2, when the price of the stock went up to $75, the other-than-temporary impairment should be recoded as $25 ($100-$75). If the share price was $95 instead of $75 on January 31, 20X2, I think no other-than-temporary impairment needs to be recorded, because there is no material decrease occurred.

Investment 5 — Tohoku Toys

ASC 320-10-35-35: “In periods after the recognition of an other-than-temporary impairment loss for debt securities, an entity shall account for the other-than-temporarily impaired debt security as if the debt security had been purchased on the measurement date of the other-than-temporary impairment at an amortized cost basis equal to the previous amortized cost basis less the other-than-temporary impairment recognized in earnings. For debt securities for which other-than-temporary impairments were recognized in earnings, the difference between the new amortized cost basis and the cash flows expected to be collected shall be accreted in accordance with existing applicable guidance as interest income.” Although Tohoku Toys is undergoing a restructuring because of earthquake, OTT does not believe the restructuring will be successful. Based on authoritative literature mentioned above, the other-than-temporary impairment shall be recognized as $20 ($25-$5) when no addition evidence provided.

Investment 6 — Chatterbox
–Alternative 1:

SAB 320-10-35-34B: “If an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date.” Based on the authoritative literature, if OTT intends to sell this security, the other-than-temporary impairment shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis ($100) and its fair value ($90), which is $10. –Alternative 2:

SAB 320-10-35-34C: “If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment shall be separated into both of the following: a. The amount representing the credit loss.

b. The amount related to all other factors.

Different from alternative 1, if OTT does not intend to sell the security and it is not more likely than not that it will be required to sell the security, 
the credit loss will be $8 ($100-$92) and other factor loss will be $2 ($10-$8).

Other-than-temporary impairment (OTTI) Essay

College Tuition Essay

College Tuition Essay.

In today’s society, the idea of a college education has become less of an option and more of a necessary requirement and is commonly considered the only way to acquire a successful career and life. There are many careers, in which a college education is not technically necessary, that can often be just as or even more successful. With the cost of college tuition increasing with every passing year, the controversy of whether college is really worth the cost and burden is growing too.

If our society wants to continue displaying a college education as somewhat of a necessity for success, I believe the cost of it should shift to being a more realistic price, suitable for the majority of students striving to go to college.

Most high school students feel pressure by not only the family, but also peers and teaching faculty to go to college because it’s “the smart thing to do”, but some may be hesitant to choose the college route because they believe their experiences will be different and the benefits of getting the job and making all their money back won’t apply to them.

Economic research concludes that more students would gain from college rather than opting out from it, and choosing a different route. Yes, there are many careers that require little or no further education after high school that may be considered successful jobs, such as construction and more hands on jobs, but it is averaged that over a lifetime those who attend college make about $500,000 more than those who do not.

“Seven out of ten college seniors (71%) who graduated last year had student loan debt, with an average of $29,400 per borrower. From 2008 to 2012 debt at graduation … increased an average rate of six percent each year.” (The Project of Student Debt). With all of the debts, not covered by either scholarships or financial aid, accumulated over the course of an individual’s schooling, the amount of additional money made becomes less substantial; if the tuition and fees were to decrease, the additional money made would not be as affected.

The costs to attend two of the leading universities in Oregon, University of Oregon and Oregon State, for four years averages at about $88,000, and that doesn’t even include everyday personal expenses. For non-residents that price is more than doubled that of a resident student. “In 1980, it cost an
average of about $56,000 (adjusting for inflation) to attend a university for four years. This figure includes tuition, fees, and the “opportunity cost,” or income one foregoes to attend school instead of holding a job. (This figure excludes room and board: one must eat and sleep whether she is in college or not.) In 2010, four years of college cost more than $82,000, a nearly 50 percent increase over that 30-year period.”(Brookings Institute). Sure there are many scholarships and financial aid a student is able to apply for, but with so many students applying for such scholarships, you’re chances of receiving them become slimmer.

A lot of scholarships also do not benefit students as a whole and either target minorities, athletes, or financial aid students. Community college is also a viable option for many, but is often looked down upon. You don’t often hear a high school student say “I want to go to a community college” or “I can’t wait to go to a community college” with loads of enthusiasm. Not only do students and their families look down upon going to a community college, but teachers as well think lesser of community colleges and often express their opinions out loud. This makes students look at community colleges as less of a viable option and more of a last option. When applying for jobs, it also looks a lot more prestigious when it is shown that one attended a university rather than a community college.

Although most colleges may not consider ways to lower the costs of college, there are many ways in which a lower tuition and overall price is possible. One direct contribution to the costs of schooling is the professor’s salary. Many college educators do not actually deserve the amount of money they make. Teachers should receive a salary that accurately reflects how affective the professor is at teaching. College fees also include unnecessary additions that are not required and could easily be taken off, such as gym memberships, recreation center memberships, and other additional bonuses that are not essential.

Also, although I’m a student-athlete as well, the amount of money given away in scholarships just to play sports at that school has become a bit ridiculous. If the amount of money for scholarships went back into the school directly, the cost of tuition would decrease, and the need for those said scholarships would decrease as well. It is apparent that student athletes are held to a higher regard than other students. Often, you see students that are all-state athletes that get decent grades receive more money and “special treatment” in comparison to a student that does not do related extra-curricular activities, yet gets exceedingly high grades. This is not fair in any way; the elimination or decrease of athletic scholarships given out would eliminate the inequality commonly displayed throughout colleges.

College tuition is at an outrageous high right now and is not showing many signs of decreasing. The costs of college and sending a student off to college have become much of a burden for many families across America. With how necessary getting a college education is considered, the cost of it all should shift to a more suitable price. The shift would be very difficult to achieve, and would be a very long process, but I do believe it is possible, not only for my generation, but the next several generations of students on the path to attend college.

Work Cited Page:

Greenstone, Michael, and Adam Looney. “Regardless of the Cost, College Still Matters.” The Brookings Institution. The Hamilton Project, 05 Oct. 2012. Web. 31 Oct. 2014. .

“Student Financial Aid and Scholarships.” Cost of Attendance. University of Oregon, n.d. Web. 31 Oct. 2014. .

“Financial Aid and Scholarships.” Cost of Attendance. Oregon State University, n.d. Web. 31 Oct. 2014. .

“State by State Data.” Project on Student Debt:. The Project on Student Debt, 2013. Web. 31 Oct. 2014. .

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College Tuition Essay

How to Make College More Affordable Essay

How to Make College More Affordable Essay.

Many of the protesters occupying Wall Street and other places say they are upset about the rising price of going to college. There is little dispute today that the number of students who have debt has increased, and that the amount of money they have borrowed has gone up (Billitteri). Many students incur large amounts of debt that will never pay dividends in higher wages or greater job satisfaction, and they graduate into a world with weak employment prospects. It’s a betrayal of the American social contract that says if you work hard and invest in yourself through education, you’ll be able to build a better life.

The current system is badly in need of an overhaul, and this paper will present several ways to bring about this needed change.

The seriousness of the current situation has worsened during the last few decades. Since 1982, the average cost of college tuition and fees has increased by 439 percent, while the typical family’s income has increased by a mere 147 percent (_Measuring_, 8).

After adjustment for inflation, students are borrowing twice what they did a decade ago, and total higher-education debt has surpassed credit-card debt for the first time, rising to $1 trillion at the end of 2011 and continuing to climb (Cauchon).

And it’s no wonder students are feeling the pinch, when one understands the diminishing role federal grants have in providing education dollars for today’s students. “Today a federal Pell Grant covers only about one-third of what it costs for a public four-year college in-state,” says Lauren Asher, president of The Institute for College Access and Success in California. “In the 1980s it covered about half; in the 1970s it covered more than 70 percent.” (Abramson).

The reality is that for young people today, it is harder to educate one’s way into the middle class, and college costs are leaving many in this generation without the credentials they need to thrive in the 21st century economy. One radical solution that recently has been proposed is that the federal government should completely cancel student loan debt to stimulate the economy (Caffentzis, 31). However, history has shown that in the case of tax rebate checks, people tend to spend any rebates to pay off other existing debt, or they simply save them. This does little to stimulate the economy, and one suspects that the same would happen with across-the-board loan forgiveness (_Harris_).

However, there are several measures that can be taken to make college more affordable. Let’s start with the student loan and grant system. The government should increase the number of need-based Pell Grants awarded to students, but there should also be more grant money given to the students willing to chose a cheaper public college or start their academic career by attending community college. Most colleges would consequently want to keep their tuition costs low to remain attractive to prospective students. This goes hand in hand with the fact that administration costs at colleges could be cut. One reason tuition never seems to drop is that universities are not getting more efficient the way other industries are.

Today, administrators and staffers safely outnumber full-time faculty members on campus. College administrations frequently tout the fiscal advantages of using part-time, “adjunct” faculty to teach courses. They fail, however, to apply the same logic to their own ranks. Unlike businesses, which cut losing operations, colleges simply hike their tuitions (Ginsberg). In addition, private student loans could require school certification, be abolished outright, or private loans could be required to offer the same interest rates and repayment options as federal student loans. There should also be an increase in the income limits for student loan deductibility, and changes in the repayment rules.

Second, we could move the country’s tax rates back to 1950s levels. This would increase the tax burden on the wealthy, which would help to fund student grants. According to the Tax Policy Center (a joint venture of the Urban Institute and Brookings Institution), from 1950 to 1963 individuals paid 91% or 92% of their income above $200,000 to the federal government. The current rate is around 35%, where it has been for the last decade. (“_Historical_”).

Our current American business model is based upon short-term gains by building capital, and industry has successfully lobbied Washington for lower tax rates for years. However, this is arguably not sustainable in the long term because technology-based business ventures will be forced to shift back to more industrial ones if they don’t have a readily available educated workforce. Corporations that do not pay their share of taxes will eventually suffer the consequences as their ability to hire a tech-savvy, educated workforce diminishes.

Third, we currently have a bankruptcy system that does not allow student loans to be discharged, and there is no statute of limitations on collections of student debt. The government can legally garnish money from a low-income student borrower’s Social Security benefits and Earned Income Tax Credit. Garnishing money from low-income students contradicts the stated U.S. policy goal of reducing poverty, and is therefore hypocritical. Most other kinds of debts can be discharged, but not student loans. Since the beginning of the federal student loan program in 1965, the freedom to change lenders in order to find better interest terms for a loan has also been denied (Caffentzis, 35).

To single out education loans as the one type of debt that our system specifically prohibits from standard bankruptcy is wrong. Unless education debt can be forgiven through bankruptcy proceedings, as most other debt can, the system will never be fair to student borrowers. There’s no reason to treat student loan debt differently from other types of debt, other than as a gift to the banks. After all, how many other loans carry a guarantee from the federal government for payment and restrict the borrowers’ options in the way student loans do?

Lastly, colleges need to use their resources more efficiently. This includes outsourcing resources such as food operations, IT services, building maintenance, student bookstores, and recreation centers. Collaborative purchasing could be used as well. Private companies like Wal-Mart already use their enormous purchasing power to negotiate low prices from suppliers. Colleges that band together to buy goods and services can often obtain lower prices on goods and services used, than if they buy separately.

On the teaching front, more classes could be taught online. Not all instruction can be offered effectively on-line, but large numbers of students can benefit from the savings by reduced commuting and room-and-board costs. In addition, libraries could be encouraged to digitize their holdings, and professors could be required to select textbooks that are also available in e-book format and are usually cheaper (“_25_”).

We need to re-evaluate our country’s spending priorities, and recognize that global competiveness will be increasingly based around our ability as a nation to compete in a technologically advancing world. The current cost of higher education puts our future prosperity as a nation at risk. If our populace is not educated, we will not remain competitive in an increasingly global marketplace. Many other countries already provide free or heavily subsidized inexpensive university education. In order to be competitive in a global economy, the US must do the same.

Works Cited

Abramson, Larry. “Why Is College So Expensive?” _NPR.org_. National Public Radio, 25 Nov. 2011. Web. 26 Nov. 2011.

Billitteri, Thomas. “Student Debt,” _CQ Researcher_ 21 Oct. 2011: 877-900. Web. 26 Nov. 2011.

Caffentzis, George. “The Student Loan Debt Abolition Movement in the United States.” _Reclamations Journal_ Aug/Sept. 2011: 31-41. Web 27 Nov. 2011.

Cauchon, Dennis. “Student Loans Outstanding Will Exceed $1 Trillion This Year.” _USA Today_ 25 Oct. 2011: B1. Web. 26 Nov. 2011.

Ginsberg, Benjamin. “Administrators Ate My Tuition.” _Washington Monthly_ Sept/Oct. 2011. Web. 25 Nov. 2011.

_The Harris Poll®_ September 10, 2008, “Rebate Checks: No Economic Stimulus” Web. 2 Dec. 2011.

_Historical Top Tax Rate_. Chart. Tax Policy Center. 31 Jan. 2011. Web. 25 Nov. 2011.

_Measuring Up 2008_. The National Center for Public Policy and Higher Education_._ Web. 26 Nov. 2011.

_25 Ways to Reduce the Cost of College_. The Center for College Affordability and Productivity. Web. 1 Dec. 2011.

How to Make College More Affordable Essay

Pacific grove case study Essay

Pacific grove case study Essay.

EXECUTIVE SUMMARY

By 2015, Pacific Grove (hereafter referred as “PG”) will reach a 55% ratio of interest/bearing debt to total assets and their equity multiplier will be 2.77 which is consistent with Peterson’s expectation. I must be noted that over the next 4 years, PG’s interest coverage is forecasted to increase suggesting that they will gradually be building up more earnings to cover its debt payment which is a good sign for the banks.

Dilution of shares seems have to have little impact on the EPS of PG shares.

Therefore, it is expected that PG shareholders would accept the issuing of shares. However, this information has to be clearly communicated by PG’s management to its shareholders in order to gain support of this share issuance.

It is also fairly safe to say that it is a good decision for PG to enter into the television deal. It is noted that the project would yield a positive NPV at 10%, 15% and 20% discount rates.

The project also requires only a modest initial investment

The loss of confidence in credit by the overall market had left PG with no choice but to obey the demands of their bank as it would be difficult to obtain credit from other institutions during the time. In addition to that PG was also in the midst of a bearish stock market. This is justified by the fact that investors were anxious about the market and only willing to offer $27.50.

A number of recommendations are given to help PG reduce their debt levels. These include improving their supply chain efficiency and forecasting so that they can reduce their inventory levels, negotiating with suppliers to reduce the rate they are paying for inventory and can extending the length of their accounts payable.

Overall, it is recommend that PG accepts the investment group’s offer of $27.50 and issue 400,000 common stock to raise $11M for reasons mentioned earlier in the report. The extra funds will give PG more capacity to fund the television program in addition to reducing its debt to meet their bank’s requirement, as well as purchasing an underpriced High Country.

1.0 DEBT

According to the forecast in Exhibit 1, PG seems to be on course in meeting their bank’s demand of 55% Debt to Total Asset ratio and 2.7 equity multiplier. Table 1 in the appendix illustrates a number of ratios relating to PG’s debt. Just by following their expected future growth plans they will almost reach the requirements of the bank within 4 years. Using the information provided from their forecasted financials, by 2015 Pacific Grove will reach a 55% ratio of interest/bearing debt to total assets and their equity multiplier will be 2.77 which is consistent with Peterson’s expectation.

Although PG’s current future is projected to meet the bank’s demands, the issue that is yet to be known is whether the banks are willing to allow PG 4 years to achieve this. If the banks are reluctant to grant PG such a lengthy time period, PG will need to make smart changes in reducing these ratios. Recommendations for PG in to solve this problem are discussed later in the report. An another note, it must be noted that over the next 4 years, PG’s interest coverage is forecasted to increase suggesting that they will gradually be building up more earnings to cover its debt payment which is a good sign for the banks. This positive factor might help influence the bank to give PG the entire 4 years to meet their requirements.

2.0 SELLING NEW COMMON STOCK

The issue with selling new common stock is that it can create dilution amongst existing shareholders. Shareholder dilution will lower share price in addition to sending a negative signal to the company’s shareholders. PG’s common shares outstanding would increase from 1,165,327 by 400,000 to 1,565,327. PG’s current EPS in 2011 is 2.037. According to the earning figures from the forecast in Exhibit 1, the EPS will be 2.136 after issuing the new shares at year 2012. Table 2 (attached in the appendix) illustrating the EPS from 2012 to 2015 shows that dilution of shares seems have to have little impact on the EPS of PG shares. Therefore, it is expected that PG shareholders would accept the issuing of shares. However, this information has to be clearly communicated by PG’s management to its shareholders in order to gain support of this share issuance.

3.0 ACQUISITION OF HIGH COUNTRY

The enterprise value of High Country was estimated in order to compare whether the acquisition price asked for it is would create impairment in the future. The forecasted financials of High Country is attached in the appendix. The discounted cash flow method gave an enterprise value of $37.56M. Assumptions are given in the appendix as to how this amount was achieved. This amount is way above the asking price of $13.2M (in excess of $24.36M). The excess amount will be recorded on PG’s balance sheet as goodwill if the acquisition occurs. As this goodwill amount is very large, it is expected not to be amortized in the future.

Peterson has noted that PG would not consider the acquisition if it is anticipated that there will be future impairment and write-down of goodwill created by the purchase of High Country. As the book value(37.56M) is so much higher than its current market value ($13.2M), it is very unlikely that the goodwill will be impaired in the future. With that said, there will be no write down of goodwill. It must also be noted that based on the analysis of this report, High Country is heavily undervalued. The acquisition of High Country will be come off as a smart buy for PG. Overall, PG should look into acquiring High Country not only because of the unlikely write-down, but also because it is undervalued for what it is truly worth.

4.0 TELEVISION DEAL

Judging by Exhibit 3, it seems fairly safe to say that it is a good decision for PG to enter into the television deal. It is noted that the project would yield a positive NPV at 10%, 15% and 20% discount rates. The project also requires only a modest initial investment of $1,440,000. Working capital for the following years significantly lowers after the first year of operations from $2,459,543 to $122,977. On top of that, the show’s star is a reputable name in the cooking industry. This will boost PG’s perception in the market relative to its competitors. All these factors contribute to making the television deal an attractive deal for PG to undertake.

5.0 IMPACT OF ECONOMIC CLIMATE

PG is exposed to difficult credit environment as banks are facing pressure from regulators following the financial crisis of 2008. Due to the loss of confidence in credit by the overall market, PG was left with no choice but to obey the demands of their bank as it would be difficult to obtain credit from other institutions during the time. This has impacted PG in the sense that PG might have to make changes in their operations to suit the bank’s needs if the bank demands that their requirements be met before 2015.

In addition to poor confidence in the credit market, PG is also in the midst of a bearish stock market. From the fact that investors were anxious about the market and only willing to offer $27.50, which is below the market price, justifies that market participants have lost confidence in the stock market. Due to this market condition, PG will receive less capital funding if they were to accept the offer from the investment group. Overall, the market conditions are not in PG’s favour. The loss of confidence in both credit and stock market has negatively impacted PG.

6.0 RECOMMENDATIONS

In terms of reducing PG’s debt if the bank want the debt figures lowered to the required levels before 2015 then Pacific Grove must do something more aggressive reduce interest bearing debt levels. It is recommended that the company explore ways to reduce its need for working capital financing. They should see if there are ways of improving their supply chain efficiency and forecasting so that they can reduce their inventory levels. They should look to negotiate with suppliers to reduce the rate they are paying for inventory. PG should also see if they can extend the length of their accounts payable.

Even if they have to pay a slight price premium, if the rate (APR) is less than what the banks are charging them in interest, it could help to both save money and reduce their capital needs. They should also see if they can adjust the credit policy terms with their customers to shorten the number of days before payment. By reducing receivables and increasing payables they should be able to reduce their financing needs from the bank in notes payable and thus lower their interest-bearing debt. Another option to help PG meet the bank’s demand faster would be to accept the offer by the investment and raise funds by selling common stock. This would store up more cash for future usage and PG will be able to reduce their debt levels in the following years.

7.0 CONCLUSION

Overall, it is recommend that PG accepts the investment group’s offer of $27.50 and issue 400,000 common stock to raise $11M for reasons mentioned earlier in the report. The extra funds will give PG more capacity to fund the television program in addition to reducing its debt to meet their bank’s requirement, as well as purchasing an underpriced High Country.

Pacific grove case study Essay

Capital City Bank Case Analysis Essay

Capital City Bank Case Analysis Essay.

Capital City Bank (CCB) was a medium sized commercial bank owned by a small group of shareholders. Its total employee force numbered nearly 1,000 personnel. Because of the company’s poor performance in recent years, the owners decided to sell their equity to a group of new investors who felt that CCB could be turned around with more aggressive management. The transfer of ownership of the bank was followed by basic changes in bank strategy as well as changes in many key personnel, many of them at the top level.

The basic changes implemented by the new management of CCB included a more active pursuit of foreign financing activities as well as a heightened emphasis on lending activities to large corporate accounts. To better implement these changes in basic strategy, CCB was reorganized.

NEW ORGANIZATION

The reorganization of the bank involved the creation of two new divisions, namely, the Corporate Banking Division and the Trust Division (See Exhibit A).

The Corporate Banking Division was given the responsibility of marketing the different loans of the company to large domestic corporations, multinational corporations, as well as to the medium sized companies which had been the traditional clients of the bank.

A wide range of credit lines were offered to these accounts such as Direct Advance Line, Import Letters of Credit, Export Bill Purchases Line, Export Packing Credit Line, Domestic Bills Purchase Line, and others. Mr. Vicente Torres, a new recruit from a similar department in another bank in Metro Manila, headed this new division.

The Trust Division was charged with undertaking trust services for individual and business clients. A major service assigned to this division was the Common Trust Fund. This involved the pooling of funds drawn from various participants, investing this fund in safe and high yielding investments, and sharing the returns from the investments among the participants in proportion to the amounts contributed by each. The Trust Division was however to perform only the investment function. The marketing of this service to corporate and individual accounts was entrusted to the Branch Division. The latter also marketed the services of ten branches of the bank located around Metro Manila.

THE DEPOSIT DRIVE

As a corollary to aggressive selling the various lending and trust services of the CCB, bank management also decided to undertake an effort to increase savings and other deposits in the bank. A deposit drive was launched involving all the employees of the company. A set of rules was drawn up such that all departments and sections of the bank, regardless of whether they performed marketing functions or not, were given points for new deposits brought in to the bank. The drive was to last for six months and the winners would be awarded attractive prizes and bonuses.

THE ORIENTAL ACCOUNT

Towards the end of the year, one of the account officers of the Banking Division approached Oriental Company with an offer for working capital loan. Because Oriental had been banking with CCB for nearly a year, the account officer offered a P10 million working capital loan to Oriental at 18% rate of interest – at the time considered a “good” rate for favored accounts. Oriental considered to take advantage of the favorable interest rate offered and availed of the loan.

Shortly thereafter, the Branch Marketing group decided to solicit the same account for the Common Trust Fund of the Trust Division. To attract Oriental to participate in the fund, they offered Oriental a 19% return for a P10 million 60-day placement with the Trust Division. The Finance Manager of Oriental was surprised at the disparity between the bank’s lending and deposit rates but decided to take advantage of the Branch Marketing Group’s offer by making the P10 million placement with the Trust Division.

It was not until later in the year that Vicente Torres discovered the odd situation with Oriental. He called the manager of the Branch Marketing Group and asked “How could you allow your traders to offer a higher rate than our lending rate to Oriental? We not only lose money but we also look very foolish to our clients!” The Branch Marketing Group Manager replied that neither she nor her traders knew that the Banking Division had lent to Oriental at 18%.

QUESTIONS:

What were the causes of the “odd” situation in the case?

THE NUMBER ONE CAUSE FOR THE “ODD” SITUATION IN THIS CASE IS THAT BRANCH MARKETING GROUP SOLICITED A CORPORATE ACCOUNT FOR A RETAIL ACCOUNT. IF THEY HAD WANTED TO OFFER THE PRODUCT COMMON TRUST FUND TO THE CLIENT, IT SHOULD HAVE BEEN COURSED THROUGH THE BANKING DIVISION WHO MAINLY TAKES CARE AND HANDLES CORPORATE CLIENTS.

THE ERROR OCCURRED WHEN RETAIL BANKING SOLICITED A CORPORATE CLIENT.

THIS SHOULD HAVE BEEN REFERRED TO THE ACCOUNT OFFICER HANDLING THIS PARTICULAR CORPORATE CLIENT.

What should CCB management do to avoid similar problems in the future?

THERE SHOULD BE DELINEATION OF DEPARTMENTS AND THEIR SCOPE. RETAIL BANKING DIVISION WHICH IS PRIMARILY THE BRANCH, SHOULD NOT SOLICIT ACCOUNTS BEING HANDLED BY THE CORPORATE DIVISION (BANKING DIVISION).

RETAIL BANKING DIVISION SHOULD CONCENTRATE PRIMARILY ON RETAIL CLIENTS EVEN IF A CORPORATE CLIENT HAS AN ACCOUNT IN THE BRANCH. CORPORATE CLIENTS ARE HANDLED BY ACCOUNT OFFICERS.

A CIRCULAR/MEMO SHOULD BE ISSUED STRESSING THE HANDLING OF CORPORATE AND
RETAIL CLIENTS.

NEW ORGANIZATION OF CAPITAL CITY BANK

Capital City Bank Case Analysis Essay

Home Depot Inc. Case Analysis Essay

Home Depot Inc. Case Analysis Essay.

Home Depot was founded in 1978 in Atlanta, Georgia. The company went public in 1981. Their stocks were first traded in OTC (Over-The Counter) and were subsequently listed on the New York Stock Exchange in 1984. The Chain stores were warehouses that had huge amounts of building materials and home improvement products targeting customers that were individual home owners and small contractors.

Their aim was to bring the warehouse retailing concept to the home center industry. This was considered to be the first successful company in Do-It-Yourself (DIY) segment and was famous for providing high quality products with low prices.

Beside providing best quality products, the company’s distinctive feature was that they provided knowledgeable customer services. All sales personnel were required to attend product knowledge training classes.

The home improvement industry in which Home Depot is part of was a large, rapidly growing and competitive industry during the 1980’s. With two wage earners in each household, families were willing to spend more money on home improvement projects and they rather do it themselves.

Therefore the DIY segment grew rapidly. This growing industry attracted many competitors who had a dream of gaining a quick and easy profit.

The success of the first three stores in 1979 encouraged the company to expand its business rapidly and reach the 50th store opening by the end of fiscal 1985. Due to this rapid expansion, the sales grew from $7 million in 1979 to $700 million in 1985. A remarkable part of this expansion plan in 1985 was to acquire nine stores from a competitor store chain which was in financial difficulty, Bowater Home Centers. However, while gaining market shares in the industry, the company’s net earning declined. Furthermore, in 1985, the industry and retailing in general faced a difficult period in which the strongest and most capable companies survived from it but not without being affected. This downward situation also affected Home Depot stock prices.

For the purpose of this report which is considered to be conducted in 1986, we will review the company’s performance during the fiscal years 1983-1985.

Business StrategyThe company’s profitability is determined by its own strategic choices: industry choices, competitive positioning and corporate strategy.

The home improvement industry was growing rapidly with sales of around $80 billion in 1985 and a strong industry growth was expected to continue, especially in the DIY segment. This promising market condition attracted a lot of new entrants. However, not all of them were as successful as Home Depot who was a pioneer in the DIY segment. Home Depot had the first mover advantages such as having exclusive agreement with suppliers due to large scale purchases. The volume of their purchases gave Home Depot the bargaining power in dealing with their suppliers.

Home Depot’s competitive strategies have been a key success factor for the company.

The sources of competitive advantages were cost-leadership, rapid expansion and differentiation strategy with more emphasis on the first two.

To offer low cost products, the company undertook several steps. First, Home Depot stores were also the warehouses with inventory stacked over the merchandise displayed on the racks. This format kept the overhead low. Second, with emphasis on low prices (reduced margin) and higher volume sales, the company gained a high inventory turnover. Third, the managers were in favor of opening stores in existing markets to share advertising cost and operational expenses which resulted in a faster return than stores in new markets. Fourth, The company decided to lease second-use store spaces which would cost $1.7 million instead of acquiring new sites and having stores constructed for them that would cost $6.6 million per store. All these strategies allowed the company to pass these savings to customers by offering low and competitive prices.

Home Depot differentiated itself in the market by providing an exceptional customer service and sales personnel. The employees were trained about the company’s home improvement products and their basic applications, to aid the customers in their home improvement projects. This developed loyal customers who were willing to come back to the stores for their later projects. Also, by offering all sorts of products and materials needed for home improvement at low prices, Home Depot targeted variety of customers, from home owners with no experience in DIY to professional contractors.

Beside all the strategies that the company chose in accordance with its industry and its competitive positioning, Home Depot implemented several other tactics to improve its profitability. To ensure that the right products are stocked at all times, each Home Depot store had 25,000 separate SKU (Stock keeping units). All these items were kept on the sales floor of the stores to increase customer convenience and minimize out of stock occurrence. Moreover, Home Depot pursued an aggressive advertising program through media and direct mail catalogues. The advertising were focused on promotional pricing and helpful sales personnel. Finally, the acquisition of Bowater Home Centers, its competitors, was another step in becoming dominant in the market.

The strategies chosen by Home Depot seem to have worked effectively to this day. However, if the company continues to ignore the low profit that it is making and just expands the number of its stores, in the long run, the company might fail to achieve its business goals.

Stores ProductivityHome Depot’s expansion from 1983 to 1985 meant that the number of stores grew from 19 in 1983 to 50 in 1985. While sales in the stores were steadily increasing, a decrease in the average amount of sales per square foot was evident (see Table 1). This could be explained with an unchanged number of sales per transaction and also the steady number of transactions per store during the three fiscal years (Table 1). This also could be due to an increase in the average size of the stores.

However, the management was taking note of this decline. It was mentioned in the letters to the shareholders (1985) that the managements had installed computer systems in stores to increase efficiency and improve labor productivity at store level. The computer system was to facilitate the tracking of individual sales in each store to enhance inventory reorder and margin management.

This suggested that while the sales were steadily increasing in individual stores, the productivity of the stores were declining which resulted in lower profitability and hence the company’s profits were not keeping pace with its sales.

Capital ResourcesTo implement its expansion plan, Home Depot needed to generate fund both internally and externally.

Home Depot aims to generate cash internally from its assets. As mentioned in the letter to shareholders (1985), they plan to use the sale-and-leaseback approach to save approximately $50 million for 10 of their stores. Also, the disposition of certain properties and equipment located in Detroit, Houston and Tucson has already led to a net gain of $1,317,000. The company’s cash and carry policy and their strategy of using financing from vendor credit for their inventory meant that they were able to use the cash flow for their operations.

However, beside the internal cash generating efforts by Home Depot, the company needed to rely on the external financing both debt and equity, to further implement their expansion program.

One of the major financing strategies that Home Depot chose was to enter into a new credit agreement for a $200 million revolving credit facility with a group of banks during fiscal 1985. Home Depot invested $88 million dollars of the banks credit in 1985 to open twenty new stores in eight new markets. Further debt financing included the industrial revenue bond of $4.4 million. In addition, a large portion of the firm’s long term debt consisted of convertible subordinated debenture worth of $100,250,000 which is unlikely to be converted to the equity any time soon.

As part of the expansion plan in 1986, if Home Depot wants to acquire new space for its stores made with its own specification, an approximate cost of $6.6 million per store would be required. However, if the company decides to lease second-use-store space, the cost of acquiring the lease would be $1.7 million. The company chose to lease stores in order to save money for future operations. Moreover, for each new store, the company would require approximately $1.8 million of inventory, through vendor credit.

As mentioned above, the company funded majority of its growth in 1985 through debt financing, and intended to finance the growth in 1986 in the same way. However, a drop in their stock price’s in 1985-1986 and having to comply with their debt covenant restrictions, created a difficult situation in their borrowing and expansion capability. The company still has a $112 million unused debt under the revolving credit agreement. However, the interest coverage is likely to inhibit the company from making full use of the credit agreement available funds.

Financial PerformanceHome Depot has had an impressive growth during 1984 and 1985. As the company engaged more in major expansion (opening 20 new stores) in 1985, its revenue rose 62% from $432 million in fiscal 1984 to $700 million in 1985. However, this increase was just a small part of the company’s financial performance.

In 1985, Home Depot experienced a decline in ROE (Return On Equity) which was due to the decline in return on assets (Table 2). The company was increasing its asset base by opening new stores and this would mean that by having more assets and consequently more sales, the company’s profit would rise. However, since the company had low-cost strategy and the costs of expansion were high, the number of sales increased but the profit declined. This resulted in decline both in profit margin (return on sales) and asset turnover which led to a substantial decline in the company’s ROE. On the other hand, the company was using debt financing to support its expansion so the financial leverage increased from 2.4 in 1984 to 3.7 in 1985 (Table 2). Also, the sales profitability (return on sales) declined in 1985. This was due to the increase in the cost of goods sold; selling, general and administrative (SGA) expenses and interest expenses as a percentage of sales (Table 2).

In order to analyze the company’s performance, we compared the financial ratios of Home Depot with one of its major competitors, Hechinger, during fiscal 1983-1985 (Table 3). Hechinger was new in the DIY segment of the industry and had a quite different strategy from Home Depot. Hechinger targeted upscale customers and aimed at high profit margins. Hechinger ROS was significantly better than Home Depot’s margins (Table 3). Their Gross profit margins were higher and their selling costs seemed to be lower than Home Depot. However, Home Depot has a higher asset turnover. Overall, although Hechinger was experiencing a decline in performance, in comparison to Home depot, the decline was relatively small. Hechinger was financially stronger than Home Depot as shown by the difference in their financial leverage (Table 3).

Furthermore, by analyzing the statement of cash flow for both companies, it became evident that Home Depot had an alarmingly negative cash flow from operations between 1984 and 1985 due to a large inventory increase and a high investment in property and equipment. In contrast, Hechinger had a positive cash flow from operations in all three years. Unlike Home Depot, Hechinger relied on equity financing to fund its expansion.

Evaluation & RecommendationsThe company has undermined the profitability of its stores and has mainly focused on the expansion plan and opening new stores. While the sales of the company have been steadily increasing, the profitability has been decreasing and the share prices have dropped by 23%. This suggests that the company is unlikely to be able to rely extensively on equity and debt financing. There are a number of options that the company is able to take in order to stay in the current expansion track. The company is able to further use the method of sale-and-leaseback mentioned in their letters to shareholders to raise funds internally.

However, while this is a possibility, the fixed assets of Home Depot are limited and hence this can be considered as a short term, temporary solution. Another option would be to issue further equity to raise funds. However, this will severally reduce the interests gained by the current shareholders. A further option would be to improve the company’s cash flow from operation. As mentioned earlier, the company works on the basis of cash and carry and their inventory are covered by vendor credit which would allow the company to make excellent use of their cash flows.

By correcting some of the steps that the company has taken and by wisely choosing the right strategies mentioned above, Home Depot can improve its future performance and profitability and be dominant in the market in the years coming.

References:

K. Palepu, ‘The Home Depot, Inc.’, the case, Harvard Business School, 1996Palepu, Healy and Bernard. ‘Business analysis and valuation’, Third edition, 2004Table 1: Stores Productivity198319841985Sales/Store ($million)Transaction/Store (000)Sales/TransactionSquare Foot/Store (000)Sales/Square Foot13.5446307418313.9460307718014.04673080175Table 2: Financial ratios of Home DepotFinancial RatioFiscal Year198319841985Return on SalesAsset TurnoverReturn on AssetsFinancial LeverageReturn on Equity (%)Gross Margin (%)SGA Expense/Sales (%)Net Interest Expense/Sales (%)Tax Expense/Sales (%)4.03.714.81.724.527.320.8-3.43.32.48.02.419.426.420.6(0.3)2.81.22.22.63.79.725.923.21.20.5Table 3: Comparison of Home Depot to HechingerHome DepotHechingerFiscal Year198319841985198319841985ROE (%)24.519.49.719.118.915.8ROA (%)14.88.02.610.78.97.1ROS (%)4.03.31.25.35.24.8AT3.72.42.22.01.71.5FL1.72.43.71.82.12.2AT: Asset Turnover, FL: Financial Leverage

Home Depot Inc. Case Analysis Essay