Dear Friends,
I have enjoyed my time immensely at Ace Institute of Management. I will miss the canteen ko hallah and most certainly my dear friends.
My time at Ace Institute was filled with great memories and I am proud to say that I was part of such a wonderful school.
Friends from our junior batch if you need any kind of help or support please feel free to contact me on my either address
Please feel free to contact me on my address
jungbasnet@gmail.com
Environmental Analysis of Public Transport Service Industry in Nepal
Tulsi Jung Basnet
Ace Institute of Management
Public Transport Service Industry in Nepal: An introduction
We all make use of the services provided by transportation companies. We probably have caught the bus in town or travelled on a school bus or made an intercity journey by Nepal Yatayat or Safa Tempo. Some of us have travelled on a super green energy-efficient Trolley bus. We know that, Nepal does not have a long history of transport service industry. Even though, with a population of 25 million, Nepal is a potential market for transport industry.
Public transport is popular as a cheap, easy and reliable access of transportation in the country. Sajha Yatayat was established as first public transport industry in Nepal. It was established on B.S.2018,Chaitra 3rd as per the cooperative act B.S. 2016. On Shrawan 1, 2019, Sajha Yatayat started providing services with 6 buses and 14 employees. It was successful in its early days and created its brand image as good service provider. Besides the Sajha Yatayat, the trolley bus also provides the service as public transport in the Kathmandu valley. At present other private entrepreneur are attracted in public transport industry. Now popular public transport services in Nepal are Nepal Yatayat, Makalu Yatayat, Agni Yatayat etc.
External influences
Running a business would be simple if the chief executive only had to think about what went on inside the business. They could concentrate on internal decisions, such as determining routes, timetables and operating buses. However, a business planner has to understand what goes on outside the business. Businesses are able to identify external changes that may affect it by carrying out a PESTEL analysis. This is a business tool in which each of the letters in PESTEL describes a type of change that takes place in the external business environment.
Many of these external changes may be outside the control of the company, for example, new government legislation. Some changes may present a threat to the business, such as a Competitor using new or improved technology. Social changes may bring opportunities, for example, migrant workers bringing new skills to the service market. Environmental impacts, such as those caused by carbon dioxide (CO2) emissions or the management of waste, are of particular concern to businesses. A business must assess what external changes are likely and which it needs to react to or take advantage of. Business planners can then create strategies to help the business respond effectively.
An industry has to work within a changing environment and respond to many factors over which it may have no control. They are 'external' factors because they are problems arising from groups or forces outside of the industries' control. When assessing the main impact of external factors on any business or organization, it is helpful to group these together using the acronym PESTLE.
This stands for the four areas that represent the most common external influences. These are:
Economic Factors
The most significant of all external forces with which a business must contend is the economic environment of the country. The general economic conditions and trends are the most crucial to the economic viability and success of the business. The economic environment consists of factors that affect consumer purchasing power and spending patterns and it depends on income level, price, savings, and availability of credit. The purchasing power of Nepalese people is very low due to political instability, higher inflation rate and unemployment. The recent slowdown economy is principally led by contraction in manufacturing and tourism industry, and steep drop in exports.
Businesses need to make money to continue to exist. They do this by listening to customers to ensure they keep their customers and attract new ones with good services that customers want and need. It is extremely important for businesses to respond to changes in demand from customers. Market research showed that Nepalese passenger wanted cheaper and safer transportation services and public transportation fulfill the public demand.
Another economic factor affecting the transport service is increasing fuel price. High fuel price encourages passenger to switch from using private vehicle to more economical public transport.
Overcrowding in cities like Kathmandu also encourage people to switch to other forms of transport. For example, in major cities where parking is inconvenient, cheaper and wide available public transports are easy.
Political Factors
The country in the present day is in the transitional phase. The Constituent Assembly Polls being the major issue so various other matters are overlooked. The existing political instability as the constituent election has successfully completed is anticipated to be stabilize, which will certainly help the business environment to become favorable in the country. With so much of instability in Nepalese political sector, it is apparent that the rules and regulations are unstable as well. Hence, it is very important for any company to be extra cautious and adaptive to the changes in the policies regarding the laws and legislations.
To sum up, because of the unorganized political sectors it is pretty hard for business bodies to carry on the plans within the specified time frame. Thus, the unnecessary red tape and the bureaucratic systems of the government have been creating an intense problem for the service sector to grow. Nepal is facing increasing inflation day by day. The purchasing power of people hence, has become much less. People cannot afford to own private vehicle so there is a need of much cheaper mean of transportation to travel. Public transportation service therefore must identify and grab the market by establishing brand, service at a low cost, reliable and convenient method to travel and cater the needs of deprived Nepalese all over the country.
However beside private owned transport services, government protected public transport service is in loss due to excess political influence. These organizations have become a recruitment centre of political party. Due to over politicization the problem of over staffing, mismanagement and lack of leadership occurs which were the factors responsible for its loss. So these organizations instead of making a profit are running into irrecoverable losses.
Socio-cultural Factors
Socio-cultural environment is composed of various class, structure, beliefs, values, social institutions, accepted patterns of behavior, customs of people and their expectations. Hence, any industry must take into consideration the socio-cultural environment for developing its policy and strategy. Socio-cultural environment influences the demand and supply of goods and services.
Social trends are one of the key factors affecting a business. People's buying patterns and service utilizing pattern are determined by trends. Just as the demand for some popular clothes are determined by fashion, demand for mean of transport is determined by social trend and income level. Transportation means are always changing. The trend of leaving the country and staying abroad is arising for better lifestyle and to enhance their living condition. Lack of opportunity for youth, political instability, insurgency and educational purposes are major reasons for leaving the country. Due to this the income level of families has rise. Currently most medium class people are attracted towards car and motorbikes. But due to highly increased fuel price and shortage of fuel, people are shifting towards public transportation.
Society's habits and tastes are changing. People are being educated and are more aware of the importance of the environment and healths and are becoming 'green consumers'. Green consumers prefer goods and services that are environmentally-friendly' and which have less impact on the environment and is good for health. The green consumer, for example, prefers to travel by bus or cycle.
Technological Factors
Technological environment refers to all the technical surroundings that affect business. It includes skills, methods, systems and equipment. Technology consists of the forces that create new technologies creating innovative services and market opportunities. The most dramatic force shaping people's lives is technology.
Businesses are continually developing new technologies to provide the best solutions for the market place. Intelligent companies find out what the most appropriate technologies are for their businesses and use them. This is particularly true in transport.
A good example of change in technology is buses that lower the floor for easy entry. These provide better accessibility for disabled and elderly people. Technologically, Nepalese transportation industries are far behind the international transport industry.
Various types of sophisticated technologies are invented and implemented in international transportation Service. Services like path navigator, wireless communication in vehicle and other safety measures are already in use in international industry but in Nepal it is lagging behind. Crowded and the unsafe module of the procedure are till we considered. That makes the capacity below the actual level and makes difficult to compete with other. It ends up with a poor working condition for the employees.
Legal
Responsible businesses not only abide by the law, they seek to create standards above minimum requirements. Public transportation has to be aware of a number of legal factors. Legal changes that affect business are closely tied up with political ones. Many changes in the law stem from government policy. The Department of Transport Management (Dotm) government's transportation services governing body used to recommend the transportation fare. Many other laws are nation-wide, for example, the standards for bus transport emissions. Public transport must make sure that all its buses meet these requirements. It has to anticipate and prepare to meet future legal changes. From 2010 Nepal is entering in WTO, as part of an initiative called Carbon Reduction Commitment, public transport and other companies will need to buy carbon credits. These credits will permit companies to generate specific quantities of carbon emissions.
Conclusion
It is possible to see PESTEL factors as threats. However, public transport should see on them opportunities. Social trends are creating increasing numbers of passengers seeking comfortable easy-to access buses. Government pressure is encouraging more and more individuals to use public transport. Many people are seeking a 'greener' form of transport. A detailed PESTEL analysis helps public transport to make appropriate plans to rise to the challenges of a changing environment. So public transport should be able to move forward with confidence and grow its business.
Tulsi;
A very good report. Keep it up. 87/100
Tulsi Jung Basnet
Do you think Nepal has inherent strength in attracting MNCs? If yes, in which areas and why?
If no, explain ten critical reasons to justify your argument. Give relevant examples.
A company engaged in producing and selling goods or services in more than one country is termed as
multinational company. MNC can be define as a parent company that
1. Engages in foreign production through its affiliates located in several countries,
2. Exercises direct control over the policies of its affiliates,
3. Implements business strategies in production, marketing, finance and staffing that transcend
national boundaries.
The importance of multinational enterprises has been growing in the world economy. Many MNC's
are establishing in various countries. New MNCs do not establish randomly in foreign nations. It is
the result of conscious planning by corporate managers. Nepal has inherent strength to attract MNCs'
in few areas but in most places it lacks to attract MNCs'. The reasons are explained below:
1. Market Size:
The market seeker is the model of the modern Multinational Company's that goes overseas to
produce and sell in foreign markets. Nepal is very small market with population size about 25
million to attract MNC. If the market is very small than MNC don't have much incentive to
invest in Nepal.
2. Political instability:
Nepal is going through political instability since long time. It has over come from the long
arm conflict and still there is no stable government. MNC are attracted towards the countries
which have stable political condition and Nepal fails to fulfill this condition to attract MNCs.
3. Geographical Condition:
The multinational company integrates the factor of production from various nations. Nepal is
landlocked country so to import raw materials, plant and machinery and other related things
for production, it has to rely on third country sea way or harbor. This is another major
difficulty that MNC have to face establishing in Nepal. So the geographical condition is not
much favorable for MNCs.
4. MNC trend:
The prevailing and past MNC's experience is not so good which make impact on new comers.
The famous American Multinational Company Kodak had withdrawn its investment from
Nepal due to political instability. Few other MNC like Colgate Palmolive, Dabur Nepal are
operating in unfavorable condition.
5. Growth motive:
An MNC expand its company is influenced with growth motive. Since Nepal is very limited
market for MNCs, it doesn't see it future growth investing in Nepal.
6. Competitive disadvantage:
Since Nepal lies in between two big economies which have more competitive advantage to
attract MNC than Nepal, so MNCs are more attracted to those countries rather than Nepal.
And other conditions required for MNC like market, labor cost, raw material, political
condition are more favorable for MNC in India and China. So Nepal has competitive
disadvantage to attract MNC than those countries.
7. Basic Infrastructure:
Nepal fails to provide basic infrastructure for MNC to operate. We can take irregular power
supply as one factor. Power supply is one inevitable factor required to run factories.
8. Liberal policy:
Nepal has no favorable rules and regulation required to attract MNCs. Nepal did not comply
with hire and fire rule of employee and also labor union are very strong which are supported
by political parties. Both are very unattractive for MNCs.
9. High Transportation Costs:
Transportation costs are like tariffs in that they are barriers which raise consumer prices.
When transportation costs are high, multinational firm's product will goes higher. Since
Nepal has only one way of transport that is road transport which is not so reliable and
expensive. So high transportation cost increases the cost of MNC and reduces profit which
distracts MNC to invest in Nepal.
10. Lack of Skill manpower:
Most MNCs are highly technological and have high tech machinery to operate. To operate
such equipment MNC requires high skill manpower to operate and Nepal cannot fulfill their
requirement. So due to lack of skilled manpower MNC are not interested to invest in Nepal.
11. Market competition
Due to higher transportation cost, imported raw material and expensive factor cost of
production the cost of production of MNC goes high which cannot compete with the product
of Chinese and Indian product. So the market competition is another factor that MNC do not
want to invest in Nepal
12. Technology:
Most MNCs are highly technological and required high tech machinery to operate. To support
such technology Nepal has not sufficient technological base. So due to lack of supportive
technology MNC feel unfavorable to invest in Nepal.
13. Exchange Rate Fluctuations
Exchange rate has huge impact on cost of investment. Nepal has fixed exchange rate with
India and floating exchange rate with rest of the world. Excessive fluctuations of exchange
rate distract the MNC to invest in Nepal.
Tulsi;
A very good write up. All the best for your final exam. 88/100
What do you think are the major challenges for small nation like ours in implementing SAPTA and SAFTA?
South Asian Preferential Trading Arrangement (SAPTA) was establishment to promote and sustain mutual trade and the economic cooperation among the contracting SAARC countries, through exchanging concessions in accordance with the Agreement. The member countries found slow trade development in the SAPTA, so (South Asian Free Trade Area) SAFTA was introduced by which they can maximize cooperation for development.
The main objective of SAFTA was Eliminating Trade Barriers, Facilitating Cross-border Movement of Goods, Promoting Fair Competition and Free Trade Area, Creating Mechanisms for Joint Administration and Resolution of Disputes, Establishing Framework for Further Regional Cooperation.
Even though SAPTA and SAFTA was established for regional cooperation, but there are many hindrance through which small nations has to go through.
The major challenges for small nations like ours in implementing SAFTA and SAPTA are as follows:
Least develop countries like Nepal have to face increased competition from larger member countries like India, Pakistan and Sri Lanka. Smaller countries have lesser competitive advantage in price and quality of products because production cost, technology, raw materials etc are imported from third country. It will be tough to attain sustainable competitive advantage for least develops country.
SAFTA contains the rules of origin which restricts the reduction of tariffs to only some products which are produced by their own country and so hinders the expansion of intra-regional trade. In smaller country like Nepal , rules of origin is not favorable because most of raw materials are brought from abroad and processed in Nepal. Rule of origin doesn't allow to trade of such finished goods. So, this kind of agreement is not considered as productive to the extent expected for least developed countries.
Lack of capital and technology for processing and manufacturing seems as a major difficulty for least developed countries. Due to lack of sound economic condition in the least developed and smaller countries lack advance technologies to process the raw materials available.
The important area to promote economic development and regional trade are transport, communication and energy. And all these are poor in small countries like Nepal. Nepal being a land –locked country faces an average of 50% higher transaction costs than equivalent coastal economies which adds on to the cost of the product. Also, the freight costs are higher.
India has emerged as the region's unquestioned economic leader. The SAARC regional decision is largely influenced by India. So what ever decision is made in SAFTA and SAPTA is not much favorable to least developed countries like Nepal. It is mostly decided on Indian interest. Even if the decisions are made favorable it is not implemented properly and effectively
Transit is another challenge that needs to be taken care of for least developed country like Nepal. There are several transit problems for Nepal and Bhutan. Due to being Landlocked country Nepal suffers from geographical disadvantage. The challenge is to remove these transits in order to flourish free trade.
SAARC countries should simplify the formalities of entry problems at the borders which make the free trade concept more difficult for least developed countries like Nepal.
Informal trade in the borders of the countries has been increasing. This has adversely affected the formal flow of trade between the countries. So there should be a governing body to monitor these flaws and make policies to control them because such cases can dilute the vision and mission of SAFTA. The effect of this kind of trade has greater impact on least develop countries.
SAFTA had stood as a challenge for countries like Nepal as the bigger countries in the region are not as liberal as they should be. Referring to the blockage imposed by India on the export Nepali vegetable ghee into the Indian market. The heavy dependency on larger country like India for trade could be a hindrance to reap benefits from SAFTA for country like Nepal
SAARC countries import products from non member countries though the product is sufficiently produced in the region. This indicates weaker trade links. The huge challenge is to maintain the link and strengthen it through various policies and actions.
Though least developed countries like Nepal have undergone major structural reforms and share of industrial sector has increased sharply, the industry is not lush with resources. They have to import requirements from the region which mainly consist of raw materials, capital goods and high-tech products from other larger countries like India. Least developed countries have insufficient and unreliable power supply, limited access to financing, inflexible labor market due to rigid labor laws and regulations, poorly defined property rights, inefficiencies at customs, and limited inland transport capacity.
In conclusion, SAFTA includes improving and strengthening the network of road and highways, railways and air and shipping agreements, harmonization of custom regulations, quality standards, easy visa regulations, dispute settlement mechanism, etc. SAFTA makes substantial provisions on simplification of banking facilities for import financing, transit facilities for the landlocked countries, removal of barriers to intra-SAARC investments, macroeconomic consultation, rules for fair competition and promotion of venture capital, development of communication systems and transportation infrastructure, easing foreign exchange controls on repatriation of profits, and simplification of procedures for business visa etc that may remove existing impediments to further expansion of intra regional trade. SAFTA protect a lot to the small nations to enhance their economic performances. But, there are many problems which affect the least developed countries which are unequal competition, rules of origin, limited capital and technology, India's unique position, transit problems, entry problems, informal trade in the borders, not liberal, weaker trade links and lack of resources.
.
Score 95/100
Why are general people of Nepal attracted towards buying shares of financial
institutions? What can be done towards generating same kind of enthusiasm in
other sectors?
In the crisis's situation which Nepal is Facing the only sector which seems to be booming
up are the financial sectors such as banks , finance company or other financial
institutions. The basic reasons which have made this happen seems to be as follows.
Transparency of system: Financial sectors are one of the sector which has a
transparency of its annual accountancy report and its annual procedures and policies.
This hence tends to make this sector more attractive than other private sectors which do
not have transparency with its plans and policies, with the public which are mainly the
buyers of shares.
Professionalism: Financial institutions are one of the dynamic organization which follow
high ethical values and professionalism which develops more confidence within the
stake holders and hence people are ore interested in purchasing and selling of Financial
institutions shares
Profitable sector in the crisis situation: Despite of huge crisis within last 10 years in
the country the only sector which has a relief seems to be the financial institutions As it
provides more profits in terms of Dividends and share value incensement. That is why
people are interested in buying more of financial institutions shares
Lack of good policy in private sector: One of the reason people do not invest in
private sector and do invest on financial sector are lack of good policy within the private
sector. It tends to be felt that good private company are owned by the sole owners and
they are not interested rights to the public neither they want to share their profit to the
local share holders.
Insufficient Investing Opportunities: Another reason why people more over invest in
the financial institutions are that there are very less opportunities for the investors in
other sector. There are very few private companies listed in the market besides the
financial institutions.
Governing Body: There is a governing body over financial institutions that is NRB which
helps the share holders in difficult crisis where as there is no governing body over
private institutions which does not boost the share holders to invest in Private sectors
Few private company listed in NEPSE: Another reason which makes does not make
people invest in private companies are that there are very few Private companies As 75
% of companies are banks and other financial institutions listed in the share market.
Bulls run trend in the market: There is currently bulls run trend in the market as people
invest in the shares without any systematic reasons. They simply follow the trend which
market is having or the bigger market players adopt. Hence the trend of the current
market is to invest in the financial sectors that are why the majority of shares holders
invest in the shares of financial institutions.
To develop some enthusiasm in other sectors following things can be done.
Corporate governance :Develop some good corporate governance so that people feel
safe and less risky to invest in the private sectors . It will also make the companies feel
safe to list their companies in the share market.
Develop transparency and professionalism: The private companies should develop
transparency and professionalism within the company so that they can gain the
confidence of the public who are willing to make their investment in the companies.
Introduce Ethical practices: The company should ethical practices within their policy
and have good market value in terms of good will and hence people will start purchasing
the shares of private companies
Develop better policies to involve private companies in stock market : There
should be good and safety policies so that more private companies get involved in the
market which will also help tn boosting the confidence of the investors to invest in the
companies .
Feedback:
A very good write-up. Keep it up.
Strategic management First Class test question
3B 1) Identifying cost behavior patterns
Amazon and eBay:
Evaluating e-Commerce Website Behavior
There are several valid reasons as well as criteria on the basis of which the professors have rated the two most successful e-commerce based companies and hence it is very hard to disagree to the consent of this professors. Here according to the case study evaluation has been purely based upon how the customer behaved and their satisfaction level i.e. the performance of both the websites were totally dependent upon the key success factor being used by these website to acquire and retain the customers. Amazon's to be graded "A" according to me is fare as this site is far better and user friendly than its competitor i.e. e-bay that has been graded "D".As from the information provided by the case it is clear that Amazon book-buying site follows a consistent style and tone that has been pleasing the customer as well as this site makes the customer feel that they are dealing with a real sale person. Also the customer database have helped a lot for this site to greet customer on their following visit to the site i.e. welcoming them by their name and also guide them to the different part of the site which instigate a felling of being treated by someone who knows you very well gives a different feeling which also has helped this site to be user friendly.
Also this site focuses on personalization and easy navigational option that has made this site more users friendly and quick. Affordable cost as well as a variety of good for selection has made this site preferable for one who love to buy on line. A detail information about the products including the price and other criteria and features of the product are also included and hence make it easier to for the customer to analyze what amount of money has to invested so as to buy the product. Amazon has also implemented the security software which is tough to be cracked which gives customer a sense of satisfaction which can't be explained in words.
e-Bay on the other hand fails to impart the quantity of intangible benefits to the customer and hence lags behind Amazon in acquiring and retaining customers. One of the example i.e. e-bay does not correct typographical errors which is not good for the customers part during transaction. The confirmation time is also very long which further make this site user un-friendly. The only positive feature when compared to that of Amazon is the bidding option, but again this is for the advantage of organization rather than customers.
According to the research of Byron Reeves and Clifford Nass, websites are not liked and disliked on the basis of design but the behave of site on people's visit. On the researchers evaluation the eBay site has graded D. This grade has been graded on the basis of various short coming of the site found on the research.
Research results indicated some errors on eBay :
So, it is found that there is lot to improve the experience it provides to customers. It has failed to maintain the basic success factor of ecommerce.
Performance and service
Normally people don't want to wait when browsing, selecting or paying in Web store and motion on a dynamic web interface demands greater user attention than a static web interface. A site must be efficiently designed for ease of access but in the case of eBay for signing up for an account can take as long as 24 hours for confirmation. So eBay should improve its performance and service on its site.
Look and Feel
eBay is B2C site. B2C sites should offer customers an attractive Web storefront, shopping area and multimedia product catalogue but it is found that eBay tradeoff s among image size, picture quality and details of background in product presentations. Higher visual trustworthiness images on a web interface lead to greater user attention to the product examined than lower visual fidelity images. In addition, compared to smaller images, larger images on a web interface enhance user memory performance for images. So eBay should design its site in such a way that customer could get exciting shopping experience with audio, video and moving graphics to a more comfortable look and feel rather than making tradeoff on size and quality.
Personal attention
Personalizing shopping and bidding experience encourages customer to buy and make return visits but eBay lack personalization. It fails to carry the notion "personal" shopper. Personalized service encourage customer to return visit the site and can increase sells through with special offers.
eBay can improve their customers' experiences should follow some recommendations to increase positive customers' experiences boost customer loyalty and satisfaction. eBay can try few basic ways to improve the customer experience:
Multichannel collection
Real time alerts and actions
Identify the weakest link
Configure to order
Mass customization
Personal pricing
Product/ Service
Efficiency and experience
Design the complete customer experience
National Income- Assignment I
1) Calculation of national income, personal income, personal disposable income and personal saving from the given data:
Headings | Amounts in Rs |
Compensation of Employees | 1866.3 |
Business interest payments | 264.9 |
Rental income of persons | 34.1 |
Corporate profits | 164.8 |
Proprietors' income | 120.3 |
National Income | 2450.4 |
Corporate profits | -164.8 |
Social Security Contributions | -253 |
Corporate dividends | 66.4 |
Interest paid by government | 105.1 |
Government and business transfers | 374.5 |
Personal Income | 2578.6 |
Personal Taxes | -402.1 |
Personal Disposable Income | 2176.5 |
Interest paid by consumers | -64.4 |
Personal Consumption expenditure | -1991.9 |
Personal Saving | 120.2 |
2) Why GDP matters for individuals?
A gross domestic product (GDP) is one of the ways of measuring the size of its economy. GDP is defined as the value of final goods and services produced within the country. It includes domestically earned income by foreigners, and excludes income earned by nationals on the foreign countries. The gross domestic product (GDP) is one the primary indicators used to measure the position of a country's economy. It represents the total monetary value of all goods and services produced over a specific time period within an economic territory. Usually, GDP is expressed as a comparison to the base year. For example, if the GDP is increased by 3%, this is thought to mean that the economy has grown by 3% over the last year.
Measuring GDP is complicated, but at its most basic, the calculation can be done in one of two ways: either by income approach (adding up what everyone earned in a year), or by expenditure method (adding up what everyone spent). Logically, both measures should arrive at roughly the same total.
The income approach, which is calculated by adding up total compensation to employees, gross profits for incorporated and non incorporated firms, and taxes less any subsidies. The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports.
As of now it becomes clear that economic production and growth, what GDP represents, has a large impact on nearly every individual within that economy. For example, when the economy is prosperous, there will typically seen low unemployment and wage increases as businesses demand labor to meet the growing economy. A significant change in GDP, whether up or down, usually has a significant effect on the individual. It's not hard to understand why a bad economy usually means lower profits for companies, which in turn means unemployment and least wages. Individuals' economies are directly affected by its GDP growth. So change in GDP, whether up or down, usually has a significant effect on the individual.
But the research is going on economics as like in other subject matter. Still there are lots of confusions prevailed. While discussing today there arises one controversy. The controversy was, "If a poor person in a wealthy country has a higher material living standard than a "rich" person in a poor country, is the first person "better off" than the second. In this type of case the real picture cannot be represented by GDP.
3) Explain the effect of following on GDP ?
I).The discovery of a new, easy-to-grow strain of wheat increases farm harvest?
The discovery of new, easy to grow strains of wheat will increases the production of wheat which further will increase the income of farmer. With the increased income of farmer, countries economy will also effected. More employment will be generated in country and more profit will be earned by farmers which will push the GDP upward. So the discovery of a new, easy-to-grow strain of wheat increases farm harvest and increase the GDP higher.
II) Increased hostility between unions and manager sparks rash of strikes
Increased clash between unions and managers directly effect the production of goods. If there is least production of goods than least profit will be generated. The strike on company increases more unemployment. So the increased hostility between unions and manager sparks rash of strike which will effect on production which will further effect in downward shifting GDP of the country
III) More high school students drop out of school to jobs mowing lawns
In short term it can help GDP to grow because unemployed school children will be employed and earn money. But in long run, it will create a negative impact to the GDP as the productivity of students will be least because of their concentration on job rather than study. More over the students are least paid when they are recruited to mowing lawn so there will not be remarkable increase in GDP.
IV) Father around the country reduces their work-weeks to spend more time with children's.
Father around the country reduces their work-weeks to spend more time with children's will effect in country's economy. Fathers who work and earn will work no more. The income of fathers will be less which will further decrease the country's GDP. So the Father around the country reduces their work-weeks to spend more time with children's will decrease the GDP.
V) Firms experience falling demand, causing them to lay off workers.
The Firms experience falling demand, causing them to lay off workers. This will have adverse impact on the GDP as the workers will be lay off. The falling demand means itself not good economic condition of the company which will have negative effect on GDP and also the unemployed worker will have less money to spend because of their decreased purchasing power. So when the Firms experience falling demand which further cause them to lay off workers had negative impact on GDP and will pull down GDP to lower rate.
There will be least circulation of economy whc because the production decreases as well as the purchasing power of the worker also decreases.
1) "There are significance variations in capital structure across the different companies/ industries because there are several factors that affect capital structure". Discuss the major factors affecting capital structure.
In every business organization, capital is the main element to establish and run its business activities smoothly. Capital can be collected by using two sources. They are debt capital and equity capital. Debt capital is collected by issuing debentures; bonds etc and they are related with fixed cost of capital. Equity capital can be collected issuing different shares like common stock, preferred stock etc. in simple words, maintaining the balance or proportion of this capital is known as corporate capital structure. So it refers to the combination of various sorts of securities through which funds are raised.
Sometimes some financial experts define it as all those capitals and liabilities, which are included in balance sheet. But actually it is not a realistic approach. Capital is related only with long term fund. Hence,
Capital Structure = Financial Structure - Current Liabilities
Capital structure may be defined as the mixture of debt and equity that comprises the financing of its assets. Hence, the total balance of capital and liabilities is financial structure, not a capital structure. The main objective of financial manager behind capital structure management is to minimize the overall cost of capital and risk, and take the advantage of favorable financial leverage and corporate tax. So while maintaining the proportion between debt and equity, their merits and demerits should be evaluated relatively.
It is not possible to have an ideal capital structure, however, the management should target capital structure and initial capital structure should be framed with subsequent changes in initial capital structure to have it like target capital structure. Some companies do not plan capital structure but they are still achieving a good prosperity.
There are significant variations in the capital structures of different industries and different companies. There are many factors that affect capital structure. Following are the basic factors which should be kept in view while determining the capital structure.
Firms that are growing rapidly generally need larger amount of external capital. The floatation costs associated with debt are generally less than those for common stock, so rapidly growing firms tend to use more debt. At the same time, however, rapidly growing firms often face greater uncertainty which tends to reduce their willingness to use debt. Firms whose sales are relatively stable can use more debt and incur higher fixed charges than a company with unstable sales.
Firms with high rate of return on investment use relatively little debt. Their high rate of return enables them to do most of their financing with retained earnings. If profit margin is constant more debt is used.
3. Cash flow ability
The selection of capital structure is also influenced by the capacity of the business to generate cash inflows, stability, and certainty of such inflows. Regularity of cash inflows is much more important than the average cash inflows. A company with unstable and unpredictable cash inflows can no longer afford to depend on debts.
4. Cost of capital
If the cost of capital is too high, borrowing is costly. So at that situation equity capital is preferable. As compared with other securities, the equity shares are more economical because they have least cost of capital. In the processing of trading, no more floatation costs, brokerage costs etc are incurred.
5. Control
The consideration of retaining "Control" is also very important. The ordinary shareholder can elect the directors of the company. If company sells the common stock, it will bring new voting investors into the firm, making the control difficult. To maintain control within the hand of limited members, a firm has to use more amount of debt or preferred stock because they have no management and voting right. If the firm wants to more equity shares the management right will be diversified.
6. Marketability or lender's attitude
The term 'Marketability' refers to the readiness of investors to purchase a security in a give n period of time. The capital markets keep changing continuously. The capital structure will have to be customized to the attitudes of investors prevailing at the time of issue of capital. If investors demand preference shares, firm must have issue of preference share capital. Due to the changing market sentiments, the company has to decide whether to raise funds with a common shares issue or with a debt issue.
7. Size of the company
The availability of funds is greatly influenced by the size of the enterprises. A small company finds it difficult to raise debt capital. The terms of debentures are less favorable to small companies so they have to rely on equity share and retain earning for funding business. Large companies are generally considered to be less risky by the investors and, thus, they can issue common shares, preference shares and debentures to the public.
8. Floatation cost
Floatation costs take place only when the funds are externally raised. Floatation costs consist of some or all of the following expenses; printing of prospectus, advertisement, underwriting and brokerage etc. Generally, the cost of floating a debt is less than the cost of floating an equity issue. This may lure the company to issue debt than common shares. The company will save in terms of floatation cost if it raises funds through large issue of securities but the company should raise only that much of funds which can be employed profitably. In large companies flotation cost is not a significant consideration.
9. Development of capital market
It's an important factor in capital structure. It refers to the extend which the capital market is developed (i.e. equity or debt market). More developed equity market means more equity used and less developed equity means less equity used. Similarly, more developed debt market means more debt used and vice versa.
10. Growth opportunities
The growth opportunities of business can be either tremendous or very low. Depending upon the growth opportunities the debt ratio fluctuates. Higher growth opportunities exist then higher debt is used otherwise vice versa.
11. Agency costs
While determining capital structure, having least agency cost is preferred but if there is agency problem than debt is used largely for funding the business.
12. Other sources of tax shield
In order to take the advantage of low tax, borrowing is preferable for a firm because interest is considered as deductible expenditure according to the income tax law. But dividends are not considered deductible expenses and they are paid out of profits after tax.
13. Level of economic development
If the level of economic development is high then more debt is required. Level of economic development plays significant role in capital structure. In Nepal investors ar shifting to India. Since India is becoming economic giant, Nepali investors are also investing in Indian organization.
21.1) Given, Nelson Company
Market price of share (PO) = $32
Subscription price of share (Ps) = $ 20
Right Share issued one for every three share
Value of each right =?
= $ 3
21.3) Given, Arlene Jackson's Company
Market price per share (MPS) = $35
Subscription price of share (PS) = $20
Right share issued (α) = 5 shares
Total number of share = 490 shares
Cash in hand = $ 2000
Value of each right (Vr) = =2.5
Before Offering | After Offering | |||
Assets | Amount | Assets | Amount | |
Share capital Investment (490 x $ 35) |
$17150 | Share Capital Investment (588 x $32.5) | $19110 | |
Cash | $ 2000 | Cash (2000 – 1960) | $ 40 | |
Total Assets | $ 19150 | Total Assets | $ 19150 | |
Working
New Share
New Share Value = Old Value – Each Right Value
= 35 – 2.5
= $ 32.5
Total Share = 98 + 490
= 588 shares.
Total cost of 98 share = 98 x 20
= $ 1960
After Offering
Assets | Amount |
Share capital Invest (490 x $32.5) | $ 15925 |
Cash : Sale of right 490 rights @ $ 2.5 | $ 1225 |
Original Cash | $ 2000 |
Total Assets | $ 19150 |
After Offering
Assets | Amount |
Share capital Investment 508 x $ 32.5 | $ 16150 |
Cash : Sale of right 400 x $ 2.5 | $ 1000 |
Original Cash | $ 1640 |
Total Assets | $ 19150 |
21.3 (iii) Working,
New Share =
Cost of New Share = 18 x $20 = 360
Remain Cash balance = 2000 – 360 = $1640
Total number of shares after right issued = 490 + 18 = 588 Shares
Assets | Amount |
Share capital Investment (490 x $32.5) | $ 15925 |
Cash | $ 2000 |
Total Assets | $17925 |
Total Asset reduced by $ 1225 when shares were neither sold nor exercised.
21.4 Given, Miller Company
Additional fund required = $ 5 million
Earning of additional fund = 10.5%
Price earning ration (P/E ration) = 15 times
Dividend payout ratio (DPS) = 56%
Tax rate (T) = 40 %
Assuming subscription prices of $ 25, $ 50, and $ 80 a share
When share issued at $ 25
When share issued at $ 50
When share issued at $ 80
Number of right required = | If PS = $25 | If PS = 50 | If PS = 80 |
= = 0.5 1 old share = 2 new shares | = = 1 1 old = 1 new shares | = = 1.6 1 old = 1.6 new shares |
21.4 (3) What will be the new earnings per share?
The Miller Company Income Statement
Particulars | PS= $25 | PS = 50 | PS = $80 |
Total earnings ( $1470,000 + 500000 x 10.5%) | $ 19,95,000 | $19,95,000 | $ 19,95,000 |
Interest on debt | $ 420,000 | $ 420,000 | $420,000 |
Income before tax | $1575,000 | $1,575,000 | $1,575,000 |
Taxes (40%) | $ 630,000 | $630,000 | $630,000 |
Earning after tax | $945000 | $945000 | $ 945000 |
No. of Share = 100,000 Old shares + | =100000 + = 300,000 share | =100000 + = 200,000 share | =100000 + = 162,500 share |
New Earning per share = | = =$3.15 | = =$4.725 | = =$5.82 |
(4)Market price per share (MPS)= P/E ratio x EPS (P/E ratio is 15 times) | = 15 x 3.15 = 47.25 | = 15 x 4.725 = $ 70.875 | = 15 x 5.82 = $ 87.23 |
(5)Dividend per share = EPS x 56% | = 3.15 x 0.56=1.76 | = 4.72 x 0.56=2.65 | =5.82 x 0.56=3.26 |
21.4 (b)
Value of the position after offering | New Share=Req new + 100 = = 300 share
= 300 x 47.25 = 14,175 | = =200 shares
= 200 x 70.875 = 14175 | = =162.5 shares
= 162.5 x 87.23 = 14175 |
