JWI 530 Finance I, week3 summary, 1/27/13
What a fantastic week this was ! We took a deep dive and I found a door
to the fascinating world of finance. I had a Alice in Wonderland moment
many times over. To know that the four key statements - Balance sheet,
income statement, shareholder's equity and cash flow - make the
foundation of financial reporting itself is a revelation to me. This
gives a neat structure with which to analyze financial health of firms. I
will now be able to look at annual reports of firms in greater detail and see factors impacting the bottom line and top line.
The lectures held our hand and walked us step by step through finance
statements, demystifying the meaning of the finance terms and explaining
why each kind of statements are important, how to read them, how to
evaluate them and what to look for when analyzing a firm in the context
of time and environment.
Numerous take aways this week as given below. I have waited for a very long time to get these insights...thrilled to
be in this class and learning with such a bright community
Dr DP
JWI 530 Financial Management I, week3 summary
***********************************************************
The four basic statements in an annual report are:
Balance sheet - assets & liabilities; what firm owns & owes; snapshot in time
Income statement - bottomline; results of operations over a period of time
Shareholder's equity or Stockholder's equity - retained earnings between balance sheet dates
Cash flow statement - cash flow from operating, investing, financing activities
1. BALANCE SHEET (Week3, Lecture1) - What firm owns/owes
**************************************************************************
Balance Sheet - assets & liabilities; what firm owns, what firm owes;
snapshot of company's financial condition at a single moment in time;
in constant flux and evolution as cash comes in, debts are repaid, investments are made
Use this to assess firm's ability to generate profits, withstand bumps in the road
is the firm getting better ? how is the business changing ? Year over Year analysis, Quarter over Quarter analysis
Assess company's ability to collect on credit sales and manage inventories
Financial statements feed into or are derived from balance sheets
Gauge overall fiscal health of company
How much cash firm has ?
how much debt it maintains ?
how well it turns over inventory ?
*******************************
Assets = Equity + Liabilities
*******************************
Assets are ranked by liquidity
***********************************
Cash equivalents
Accounts receivable (completed sales; must be collected from customers before they become cash)
inventory (value of merchandise yet to be sold, held in warehouses or
stores; must be converted into goods and or sold to become cash)
other current assets (prepaid expenses, deferred tax expenses)
long lived assets eg plant, property,equipment, buildings, warehouses,
forklifts, trademarks, prepaid leases for stores (net of accumulated
depreciation)
Goodwill
Long term investments
Liabilities are ranked by due dates
*****************************************
Short Term Liabilities = Current liabilities = Accounts payable bills
due to suppliers within 15-90 days + income taxes to pay within 1 year
Other - gift cards to be redeemed
Portion of long term debt due within that period
Long term liabilities eg money borrowed from banks, bonds issued, taxes
owed in future, rent due later on, long term debt, other financial
obligations
Equity = book value = value of company once it pays off everything
How much cash does the firm hold? Cash + Cash equivalents + Short Term investments
Trends in last few years ? Rising or falling ? Comparison vs other
businesses with similar operating needs ? Cash vs future strategy ?Is
Cash position increasing over years ? Hoard => avoid short term
funding problems
Stock holder's equity ie book value
*****************************************
Amount left over for stockholders
Retained earnings = total value of money the firm has accumulated over years in the form of profits
Treasury stock - value of company stock that firm has at its disposal
Banks
********
Assets = Loans given out
Liabilities = deposits owed to customers
2. INCOME STATEMENT - Business Operations (financial engine diagnostics)
******************************************************************************************
- how money trickles through a business eg revenues from sales, costs & charges, profits?
- how revenues and expenses are changing with time?
- how much profit is the firm making ?
I. Revenues
***********
Total revenue = Net sales
II. Cost of Revenue
********************
Cost of Goods Sold (COGS) = cost of producing the products or services sold
- cost of raw materials
- cost of manufacturing
- shipping & handling costs to receive raw materials and deliver finished goods
III. Gross Margin
********************
Gross Profit = Total Revenue - Cost of Revenue
Gross Margin = Gross Profit/Revenue
- how effective the business is at sourcing materials vs competitors & peers; what differentiates the leader ?
- For Bed Bath & Beyond, it gives the markup vs wholesale cost
- Highest gross margin does not always mean a superior business
WalMart & Costco gross margins lower 25% vs BBB 41%; but volumes and total revenues are higher
IV. Operating expenses
****************************
overhead = R&D, depreciation, amortization
SG&A selling/general/admin cost: commissions to sales
people, mgmnt & support staff salaries, utility bills, advertising
expenses,
Operating profit = Operating income = Gross profit - operating expenses
Operating margin = operating income/total revenues
- operational effectiveness of business
- ability to manage discretionary costs
- how disciplined with salaries, paying expensive trips, corporate meals
- evaluate with trends and economic context: trend going down - why?
V. Net income
****************
bottomline - how much of every dollar the firm keeps for itself
Net margin = net income/total revenue
- all non-operation items that take a toll on the firm's earning are listed here
VI. Margins - Gross, Operating, Net
*****************************************
Check trends and vs competitors
Look for changes in revenues, SG&A expenses, COGS
- taxes, interest payments on debt, unusual items, currency fluctuations
VII. DQ1- compare balance sheets of 3 different firms
*************************************************************
The industry structure and the firm's position determines the balance sheet
Use percentage to compare across firms rather than absolute dollar value
VIII. DQ2 - SOX Title III effectiveness
********************************************
Sarbanes-Oxley Act of 2002 is a US law that is aimed at reducing
corporate fraud by improving financial accounting through a mandate for
higher standards in corporate governance. With 11 titles, also known as
sections, the law sets standards for ethical behavior of CEOs, CFOs,
Board of Directors, auditors, investment analysts and investment banks
(Brigham &Ehrhardt 2011). Title III stipulates the following:
(i) BoD's audit committee must be composed of independent members
(ii) CEO & CFO - Must take personal responsibility to review the
annual and quarterly financial reports and certify integrity, accuracy
and completeness
(iii) Non-compliance Penalty - In the event of fraud, bonuses and equity
based compensation earned by fraudulent executives can be clawed back
ie. must be reimbursed to the company. Such executives will face $5 million fine and/or 20 years in prison
IX. Other Finance metrics
******************************
Net cash flow = net income + depreciation
Operating current assets = cash, inventory, accounts receivable (short term investments not included)
Operating current liabilities = accounts payables, accruals (short term debts not included)
Net operating working capital = investor supplied funds + working capital acquired
Operating long term assets = plant and equipment (long term investments that pay interest or dividends not included)
Total net operating capital = net operating working capital + operating long term assets
NOPAT = Net operating profit after taxes; measure of operating performance
Free cash flow (FCF) = cash flow amount remaining after a company makes asset investments necessary to support operations
Amount of cash flow available for distribution to investors
=> value of a company is directly tied to its ability to generate free cash flow
Market value added = market value of firm - investor supplied capital
Economic value added = after tax operating profit - cost of capital => value created by management during the year
Capital assets = stocks, bonds, real estate
Sunday, January 27, 2013
Theory of Constraints & Bottleneck Management
JWI 550 Operations Management, week3 summary, 1/27/13
This was a very challenging and rewarding week with exposure to several core concepts that make up the foundation of operations management. THE GOAL proved to be an unusually exciting read for a business text - a cliff hanger that explored brilliant business principles and touching life issues so beautifully that I could not put down. Easily this book is one of the best I have ever read. The concept of dependent events, statistical fluctuations, bottlenecks and ways to manage them all the while keeping the firm focused on THE GOAL, are delightful and insightful.
Heizer & Render (2011) helped look at the firm through the theory of constraints and provide the basis for a sound process strategy. Gray & Leonard (1995) discussed the fundamental building block of operations management by going over the definition of a process and key metrics to manage a system of processes. Garvin (1981) presented the types of business processes that are suited for various products starting from projects for high value end and ending with continuous process for low cost commodities.
Numerous take aways this week.
This is an amazing class with world class training in OM.
Dr DP
I. Heizer & Render, Chapter 7: Process Strategy
*******************************************************
(i) Goal of Process strategy: To build a production process that meets customer requirements within cost and managerial constraints
********************************
(ii) Four basic process strategies are:
*******************************************
(a) Process focus (Job Shops)
- many inputs, many different outputs; low volume, high variety; Low utilization, high variable costs; eg hospital
(b) Repetitive focus (Modular & Continuous process)
- Raw material & module inputs, many outputs; assembly line eg. Harley Davidson
(c) Product focus (product oriented)
- few inputs, output varies - size, shape, packaging; high volume, low variety, continuous process eg. Frito Lay potato chips
(d) Mass customization focus (changing customer needs)- many components inputs, many output versions; high volume, high variety; rapid low cost production
postponement - technique to delay customization as long as possible in production process
Build to Order (BTO) - produce to customer order rather than to a forecast
(iii) Process Analysis & Design Techniques include:
***************************************************
Flowchart
Process mapping (Time function mapping)
Value stream mapping (VSM)
Service blueprinting
(iv) Services process matrix (Customization, Labor)
****************************************************
Low, Low - Service factory eg. No frills airlines, fast food restaurants
High, Low - Service shop eg. Hospitals
Low, High - Mass Service eg. Retail boutiques
High, High - Professional Service eg. Private banking, Orthodontics
(v) Techniques to improve service productivity
**********************************************
Separation - structure service to get customers to go where service is offered
Self service - supermarkets
Postponement - customize at delivery
focus - restrict offerings
module - pre-packaged food modules in restaurants
automation - ATMs
scheduling - airline ticket counter
training to clarify service options - after sale maintenance
(vi) Equipment & Technology selection metrics
**********************************************
Quality, Cost, Capacity, Flexibility
Flexibility - ability to respond to customer needs with little penalty to time, cost or customer value
(vii) Process redesign
***********************
rethink business process fundamentally to bring dramatic improvements in performance
(viii) 4Rs of Sustainability
*****************************
Resources - used by production process eg. Ritz Carlton does laundry at nights to save electricity cost
Recycling - of production materials and product components eg. Standard Register recycles paper & metal scraps
Regulations - hospitals need to follow HazMat storage & disposal rules
Reputation - Ben & Jerrys social responsibility; Body Shop environmental sensitivity; Frito Lay solar power
II. Heizer & Render, Chapter 7s: Capacity and Constraint Management
**********************************************************************************
(i) Capacity (throughput)
*****************************
- number of units a facility can hold, receive store or produce in a period of time
- capacity decision determines capital expenditure & fixed cost
- facility size must be chosen to achieve high levels of utilization and high ROI
- long range plan (>1 year), intermediate range (3-18 mo), short range (<3 mo)
- Design capacity: maximum theoretical output in a given time
- Effective capacity: expected output given the plant's product mix, scheduling, maintenance, quality standard
- utilization: actual output as a percentage of design capacity
- efficiency: actual output as a percentage of effective capacity
(ii) Bottleneck analysis
*************************
Capacity analysis: Determine throughput capacityu of entire system of work centers
Bottleneck: Determine the limiting factors or constraints in the system
Process time of a station: TAT
Process time of a system: TAT of the slowest/longest process flow through the bottleneck => determines capacity
Process cycle time: raw process time without waiting
(iii) Theory of Constraints
***************************
(a) Identify the constraints
(b) develop a plan for overcoming the constraints
(c) focus resources to overcome constraints
(d) reduce effects of constraints: offload work, expand capanbility, communicate to all who impact the constraint
(e) repeat to identify new constraints
(iv) Break even analysis
*************************
The point at which cost = revenues
(v) Capacity expansion approaches
*********************************
- lead strategy
- lag strategy: delay cap ex
- straddle strategy: delay cap ex
III. Goldratt & Cox , Chapters 11-20
*************************************
Dependent events & statistical fluctuations are key factors that shape the throughput of a plant
************************************************************************************************
Dependent events - an event or a series of events must occur before another can begin
****************
statistical fluctuations - information that cannot be precisely predicted
************************
Bottleneck equipment dictate the throughput of a plant
*******************************************************
Bottleneck management techniques include:
(a) release work orders to the system at the pace set by bottleneck's capacity
(b) Drive equipment down time to zero eg. ensure coverage; change lunch rules as needed.
lost time at bottleneck represents lost capacity for the whole system
(d) increase capacity of bottleneck as it increases capacity of the whole system
(c) increasing the capacity of a non-bottleneck station is a mirage
(e) Put Quality Control Checks ahead of bottleneck machines - eliminate defective pieces ahead
(f) train all people to give special care to bottleneck parts
(g) activate additional equipment to increase capacity
(h) assign best people to work on bottlenecks
(i) increase or decrease batch sizes as needed
(j) implement plant-wide priority to manage flow towards THE GOAL
IV. Grey & Leonard, “Process Fundamentals”
*******************************************
OM: Design, Manage, Improve a set of activities that create products and services and deliver them to customers
Process Flow diagram: process is the basic building block of an operating system; takes input and creates output of greater value to customers
To define the process determine the tasks and flows of information and goods through a process flow diagram
Determine capacity: Analyze each task, compare and check if balanced, identify capacity of slowest task
Measure performance of a process:
Capacity, thruput time, efficiency, flexibility, quality, cycle time, bottleneck, Idle time,
Capacity utilization, batch size, set up time, run time, direct labor content, work-in-process
Throughput time: raw process time; function of how process is managed
Flexibility: how long it will take to change the process so that it could use different set of inputs and create a different output
Direct labor content: amount of labor contained in the product
Balanced process: every step in process performs consistently over time with no variability; theoretical construct - not achievable in practice
Imbalanced process: Idle time at non-bottleneck process
Management Decisions: Design choices, Operations decisions, process improvement decisions
Management complexity: process variability and uncertainty in inputs
V. David A. Garvin, "Types of Processes"
******************************************
Once the firm's leadership has identified the target market and defined the corporate strategy, managers swing into action.
Informed managers choose the appropriate set of production processes and arrive at key management tasks,
taking into account total cost over life of production equipment, volume, quality, responsiveness,
inputs including raw materials, energy, labor and management know-how and degree of certainty (Garvin et al, 1981).
Production processes can be classified into five types:
When Performance and Quality matter most
(i) Project - Best suited for highest value products that are unique, one-of-a-kind (OOAK) or low volume,
and expensive eg. a race car from Audi. Key Success Factors (KSFs) are Performance and Quality and Cost considerations are secondary.
Production process is a series of discrete steps, highly flexible and adaptable to changes in design and customer requirements.
Sophisticated planning is done (eg. Critical Path Method - CPM, Program Evaluation and Review Technique - PERT) to sequence and schedule tasks.
Other examples include dams, highways, semiconductor production for super computer chips.
(ii) Job Shops - Best suited for high value and customized specialty products that are needed in small volumes
eg. special order prototypes such as Rolls-Royce cars. As in Project production type, persons who are highly skilled in the art and crafts are needed.
Judgment of such experts play a key role in production. Other examples include Hospital emergency rooms, semiconductor factory servicing a high value client
like the US government's department of defense or NASA that need only a few highly engineered parts made to unique and exact specifications.
When Standardization matters most
(iii) Batch Process - Appropriate for standardized products with limited volume and with commonality across tasks. eg. book binderies,
semiconductor production in "pulse mode" for early user hardware delivery.
When Cost is critical as in capital intensive, standardized commodities
(iv) Line flows - Best fit for price sensitive, undifferentiated bulk commodities that are needed in large volume and at low cost.
Tasks are broken down into repetitive, simple operations and division of labor is highly leveraged. Worker skill level needed is low due to higher
level of automation. Workers specialize in small number of tasks. eg. Ford cars from assembly line, semiconductor factory with new technology transferred
to manufacturing mode.
(v) Continuous flows - Ideal for lowest cost highest volume products with limited differentiation. Automation and Standardization trumps flexibility in production.
Workers have low skill level but broader responsibilities. eg. Steel, Chemicals, oil, semiconductor foundry.
This was a very challenging and rewarding week with exposure to several core concepts that make up the foundation of operations management. THE GOAL proved to be an unusually exciting read for a business text - a cliff hanger that explored brilliant business principles and touching life issues so beautifully that I could not put down. Easily this book is one of the best I have ever read. The concept of dependent events, statistical fluctuations, bottlenecks and ways to manage them all the while keeping the firm focused on THE GOAL, are delightful and insightful.
Heizer & Render (2011) helped look at the firm through the theory of constraints and provide the basis for a sound process strategy. Gray & Leonard (1995) discussed the fundamental building block of operations management by going over the definition of a process and key metrics to manage a system of processes. Garvin (1981) presented the types of business processes that are suited for various products starting from projects for high value end and ending with continuous process for low cost commodities.
Numerous take aways this week.
This is an amazing class with world class training in OM.
Dr DP
I. Heizer & Render, Chapter 7: Process Strategy
*******************************************************
(i) Goal of Process strategy: To build a production process that meets customer requirements within cost and managerial constraints
********************************
(ii) Four basic process strategies are:
*******************************************
(a) Process focus (Job Shops)
- many inputs, many different outputs; low volume, high variety; Low utilization, high variable costs; eg hospital
(b) Repetitive focus (Modular & Continuous process)
- Raw material & module inputs, many outputs; assembly line eg. Harley Davidson
(c) Product focus (product oriented)
- few inputs, output varies - size, shape, packaging; high volume, low variety, continuous process eg. Frito Lay potato chips
(d) Mass customization focus (changing customer needs)- many components inputs, many output versions; high volume, high variety; rapid low cost production
postponement - technique to delay customization as long as possible in production process
Build to Order (BTO) - produce to customer order rather than to a forecast
(iii) Process Analysis & Design Techniques include:
***************************************************
Flowchart
Process mapping (Time function mapping)
Value stream mapping (VSM)
Service blueprinting
(iv) Services process matrix (Customization, Labor)
****************************************************
Low, Low - Service factory eg. No frills airlines, fast food restaurants
High, Low - Service shop eg. Hospitals
Low, High - Mass Service eg. Retail boutiques
High, High - Professional Service eg. Private banking, Orthodontics
(v) Techniques to improve service productivity
**********************************************
Separation - structure service to get customers to go where service is offered
Self service - supermarkets
Postponement - customize at delivery
focus - restrict offerings
module - pre-packaged food modules in restaurants
automation - ATMs
scheduling - airline ticket counter
training to clarify service options - after sale maintenance
(vi) Equipment & Technology selection metrics
**********************************************
Quality, Cost, Capacity, Flexibility
Flexibility - ability to respond to customer needs with little penalty to time, cost or customer value
(vii) Process redesign
***********************
rethink business process fundamentally to bring dramatic improvements in performance
(viii) 4Rs of Sustainability
*****************************
Resources - used by production process eg. Ritz Carlton does laundry at nights to save electricity cost
Recycling - of production materials and product components eg. Standard Register recycles paper & metal scraps
Regulations - hospitals need to follow HazMat storage & disposal rules
Reputation - Ben & Jerrys social responsibility; Body Shop environmental sensitivity; Frito Lay solar power
II. Heizer & Render, Chapter 7s: Capacity and Constraint Management
**********************************************************************************
(i) Capacity (throughput)
*****************************
- number of units a facility can hold, receive store or produce in a period of time
- capacity decision determines capital expenditure & fixed cost
- facility size must be chosen to achieve high levels of utilization and high ROI
- long range plan (>1 year), intermediate range (3-18 mo), short range (<3 mo)
- Design capacity: maximum theoretical output in a given time
- Effective capacity: expected output given the plant's product mix, scheduling, maintenance, quality standard
- utilization: actual output as a percentage of design capacity
- efficiency: actual output as a percentage of effective capacity
(ii) Bottleneck analysis
*************************
Capacity analysis: Determine throughput capacityu of entire system of work centers
Bottleneck: Determine the limiting factors or constraints in the system
Process time of a station: TAT
Process time of a system: TAT of the slowest/longest process flow through the bottleneck => determines capacity
Process cycle time: raw process time without waiting
(iii) Theory of Constraints
***************************
(a) Identify the constraints
(b) develop a plan for overcoming the constraints
(c) focus resources to overcome constraints
(d) reduce effects of constraints: offload work, expand capanbility, communicate to all who impact the constraint
(e) repeat to identify new constraints
(iv) Break even analysis
*************************
The point at which cost = revenues
(v) Capacity expansion approaches
*********************************
- lead strategy
- lag strategy: delay cap ex
- straddle strategy: delay cap ex
III. Goldratt & Cox , Chapters 11-20
*************************************
Dependent events & statistical fluctuations are key factors that shape the throughput of a plant
************************************************************************************************
Dependent events - an event or a series of events must occur before another can begin
****************
statistical fluctuations - information that cannot be precisely predicted
************************
Bottleneck equipment dictate the throughput of a plant
*******************************************************
Bottleneck management techniques include:
(a) release work orders to the system at the pace set by bottleneck's capacity
(b) Drive equipment down time to zero eg. ensure coverage; change lunch rules as needed.
lost time at bottleneck represents lost capacity for the whole system
(d) increase capacity of bottleneck as it increases capacity of the whole system
(c) increasing the capacity of a non-bottleneck station is a mirage
(e) Put Quality Control Checks ahead of bottleneck machines - eliminate defective pieces ahead
(f) train all people to give special care to bottleneck parts
(g) activate additional equipment to increase capacity
(h) assign best people to work on bottlenecks
(i) increase or decrease batch sizes as needed
(j) implement plant-wide priority to manage flow towards THE GOAL
IV. Grey & Leonard, “Process Fundamentals”
*******************************************
OM: Design, Manage, Improve a set of activities that create products and services and deliver them to customers
Process Flow diagram: process is the basic building block of an operating system; takes input and creates output of greater value to customers
To define the process determine the tasks and flows of information and goods through a process flow diagram
Determine capacity: Analyze each task, compare and check if balanced, identify capacity of slowest task
Measure performance of a process:
Capacity, thruput time, efficiency, flexibility, quality, cycle time, bottleneck, Idle time,
Capacity utilization, batch size, set up time, run time, direct labor content, work-in-process
Throughput time: raw process time; function of how process is managed
Flexibility: how long it will take to change the process so that it could use different set of inputs and create a different output
Direct labor content: amount of labor contained in the product
Balanced process: every step in process performs consistently over time with no variability; theoretical construct - not achievable in practice
Imbalanced process: Idle time at non-bottleneck process
Management Decisions: Design choices, Operations decisions, process improvement decisions
Management complexity: process variability and uncertainty in inputs
V. David A. Garvin, "Types of Processes"
******************************************
Once the firm's leadership has identified the target market and defined the corporate strategy, managers swing into action.
Informed managers choose the appropriate set of production processes and arrive at key management tasks,
taking into account total cost over life of production equipment, volume, quality, responsiveness,
inputs including raw materials, energy, labor and management know-how and degree of certainty (Garvin et al, 1981).
Production processes can be classified into five types:
When Performance and Quality matter most
(i) Project - Best suited for highest value products that are unique, one-of-a-kind (OOAK) or low volume,
and expensive eg. a race car from Audi. Key Success Factors (KSFs) are Performance and Quality and Cost considerations are secondary.
Production process is a series of discrete steps, highly flexible and adaptable to changes in design and customer requirements.
Sophisticated planning is done (eg. Critical Path Method - CPM, Program Evaluation and Review Technique - PERT) to sequence and schedule tasks.
Other examples include dams, highways, semiconductor production for super computer chips.
(ii) Job Shops - Best suited for high value and customized specialty products that are needed in small volumes
eg. special order prototypes such as Rolls-Royce cars. As in Project production type, persons who are highly skilled in the art and crafts are needed.
Judgment of such experts play a key role in production. Other examples include Hospital emergency rooms, semiconductor factory servicing a high value client
like the US government's department of defense or NASA that need only a few highly engineered parts made to unique and exact specifications.
When Standardization matters most
(iii) Batch Process - Appropriate for standardized products with limited volume and with commonality across tasks. eg. book binderies,
semiconductor production in "pulse mode" for early user hardware delivery.
When Cost is critical as in capital intensive, standardized commodities
(iv) Line flows - Best fit for price sensitive, undifferentiated bulk commodities that are needed in large volume and at low cost.
Tasks are broken down into repetitive, simple operations and division of labor is highly leveraged. Worker skill level needed is low due to higher
level of automation. Workers specialize in small number of tasks. eg. Ford cars from assembly line, semiconductor factory with new technology transferred
to manufacturing mode.
(v) Continuous flows - Ideal for lowest cost highest volume products with limited differentiation. Automation and Standardization trumps flexibility in production.
Workers have low skill level but broader responsibilities. eg. Steel, Chemicals, oil, semiconductor foundry.
Sunday, January 20, 2013
Cost of Capital, US Treasury Note, Debt/Equity Ratio
JWI 530 Financial Management I, week2 summary, 1/20/13
What a fantastic week this was ! I thoroughly enjoyed the finance education covering many core principles, concepts and terms. This education opens my eyes to look at the world in entirely new light.
My takeaways are given below.
JWI 530 Week2 Summary, 1/20/13
****************************************
I. The goal of a finance manager
**************************************
Maximize reward while minimizing risk (Week2, Lecture1)
Principle of Risk-Reward Equilibrium: Always evaluate risk/reward and opportunity cost of an idea with alternatives
Discount rate is the rate of return required by investors.
II. US Treasury Note
************************
DQ1 took us through the history of the US Treasury Note and its role as a global reference that is increasingly in question due to $16 Trillion debt that appears to be growing out of control.
What led to the US Debt $16 Trillion (great links from JB)
******************************************
www.foxnews.com/politics/2012/09/04/who-do-owe-most-that-16-trillion-to-hint-it-isnt-china/
www.policymic.com/articles/15723/obama-and-the-national-debt-president-misleads-public-on-his-role-in-exploding-the-national-debt
http://abcnews.go.com/Business/national-debt/story?id=17159803#all
III. Cost of Capital (Week2, Lecture2)
******************************************
Vehicles of Financing are Bonds, Stocks (including Preferred Stock)
Debt vs Equity - best mix to finance a firm depends on business situation
Cost of Debt: After-tax rate = Pretax interest rate * (100% - tax rate)
Cost of Equity: Capital Asset Pricing Model (CAPM)
Weighted Average Cost of Captial (WACC) - used to determine the hurdle rate for any project or idea that the firm intends to invest in
IV. DQ2 Debt vs Equity Financing - Pros & Cons
*******************************************************
Obtaining adequate capital is mission-critical for firms to grow and succeed in the market place. A firm can get its capital through borrowing (debt financing) or through selling corporate ownership share (equity financing). Each form of capital has advantages and disadvantages.
Debt Financing Pros & Cons
Debt Financing is done through loans that need to be repaid with interest over time. Lenders include banks, government agencies such as Small Business Administration.
Advantages
+ Interest paid on loans is tax deductible
+ Lower cost of capital. Once the loan is paid back the lender has no say ie. Lender does not get ownership rights
Disadvantages
- New businesses with irregular cash flows may find it stressful and difficult to make regular payments
- Firms become vulnerable to interest rate hikes and economic down turns
- A firm carrying too much debt can be perceived by investors as a high risk business, limiting the future ability to borrow.
- If the firm defaults, bondholders have the first right to get paid back with available assets (JWI 530, Week2, Lecture2)
Equity Financing Pros & Cons
Equity financing is done through money obtained from investors in exchange for ownership share. Friends & family, Angel investors and Venture Capitalists could be the source of such capital.
Advantages
+ The firm need not stress about repayment of the capital and instead can focus on growing for the long term
+ High profile investors can increase credibility of the business
Disadvantages
- Ownership dilution and loss of autonomy. Equity investors want to be partners over and above being investors. As part owners of the business, equity investors will invariably want a say in major business decisions
- Higher cost of capital. Equity investors will demand higher return with a risk premium of 4-6% (JWI 530, Week2, Lecture2)
Depending on the short term and long term objectives, a firm - whether it is a start up or an established firm - must decide on the optimum debt to equity ratio. Start ups, for instance, want to weight equity higher and achieve a debt equity ratio in the range of 1:2. An established firm may want to achieve a 1:1 ratio. During recent financial crisis it became clear that many financial services firms were heavily leveraged with Debt/Equity ratios in the range of 1:30 and so such extremes should be avoided.
this is an exciting course for sure
Dr DP
Reference
http://www.enotes.com/debt-vs-equity-financing-reference/debt-vs-equity-financing
What a fantastic week this was ! I thoroughly enjoyed the finance education covering many core principles, concepts and terms. This education opens my eyes to look at the world in entirely new light.
My takeaways are given below.
JWI 530 Week2 Summary, 1/20/13
****************************************
I. The goal of a finance manager
**************************************
Maximize reward while minimizing risk (Week2, Lecture1)
Principle of Risk-Reward Equilibrium: Always evaluate risk/reward and opportunity cost of an idea with alternatives
Discount rate is the rate of return required by investors.
II. US Treasury Note
************************
DQ1 took us through the history of the US Treasury Note and its role as a global reference that is increasingly in question due to $16 Trillion debt that appears to be growing out of control.
What led to the US Debt $16 Trillion (great links from JB)
******************************************
www.foxnews.com/politics/2012/09/04/who-do-owe-most-that-16-trillion-to-hint-it-isnt-china/
www.policymic.com/articles/15723/obama-and-the-national-debt-president-misleads-public-on-his-role-in-exploding-the-national-debt
http://abcnews.go.com/Business/national-debt/story?id=17159803#all
III. Cost of Capital (Week2, Lecture2)
******************************************
Vehicles of Financing are Bonds, Stocks (including Preferred Stock)
Debt vs Equity - best mix to finance a firm depends on business situation
Cost of Debt: After-tax rate = Pretax interest rate * (100% - tax rate)
Cost of Equity: Capital Asset Pricing Model (CAPM)
Weighted Average Cost of Captial (WACC) - used to determine the hurdle rate for any project or idea that the firm intends to invest in
IV. DQ2 Debt vs Equity Financing - Pros & Cons
*******************************************************
Obtaining adequate capital is mission-critical for firms to grow and succeed in the market place. A firm can get its capital through borrowing (debt financing) or through selling corporate ownership share (equity financing). Each form of capital has advantages and disadvantages.
Debt Financing Pros & Cons
Debt Financing is done through loans that need to be repaid with interest over time. Lenders include banks, government agencies such as Small Business Administration.
Advantages
+ Interest paid on loans is tax deductible
+ Lower cost of capital. Once the loan is paid back the lender has no say ie. Lender does not get ownership rights
Disadvantages
- New businesses with irregular cash flows may find it stressful and difficult to make regular payments
- Firms become vulnerable to interest rate hikes and economic down turns
- A firm carrying too much debt can be perceived by investors as a high risk business, limiting the future ability to borrow.
- If the firm defaults, bondholders have the first right to get paid back with available assets (JWI 530, Week2, Lecture2)
Equity Financing Pros & Cons
Equity financing is done through money obtained from investors in exchange for ownership share. Friends & family, Angel investors and Venture Capitalists could be the source of such capital.
Advantages
+ The firm need not stress about repayment of the capital and instead can focus on growing for the long term
+ High profile investors can increase credibility of the business
Disadvantages
- Ownership dilution and loss of autonomy. Equity investors want to be partners over and above being investors. As part owners of the business, equity investors will invariably want a say in major business decisions
- Higher cost of capital. Equity investors will demand higher return with a risk premium of 4-6% (JWI 530, Week2, Lecture2)
Depending on the short term and long term objectives, a firm - whether it is a start up or an established firm - must decide on the optimum debt to equity ratio. Start ups, for instance, want to weight equity higher and achieve a debt equity ratio in the range of 1:2. An established firm may want to achieve a 1:1 ratio. During recent financial crisis it became clear that many financial services firms were heavily leveraged with Debt/Equity ratios in the range of 1:30 and so such extremes should be avoided.
this is an exciting course for sure
Dr DP
Reference
http://www.enotes.com/debt-vs-equity-financing-reference/debt-vs-equity-financing
View Operations Management as Strategy
JWI 550 Operations Management, week2 summary, 1/20/13
I. View Operations Management As Strategy - Jack Welch Video
****************************************************
An Operation that has a clear focus and understands it as a strategy
is so different than those that just try it as a tactic
In South West airlines & WalMart - they are committed to be low cost suppliers
Apple - operations management strategy is excellence in quality and timeliness
Those who use OM as a Tactic go after quick fix this week and another next week; they do not use OM as a strategy eg. let's lower inventory to get costs down - will be a momentary hit; let's have quick delivery of sales
OM strategy means employees understand what truly matters:
eg. Delivery of products on time (Apple), low cost always (WalMart), committed as low cost supplier of air transportation (South West)
II. THE GOAL - Eliyahu Goldratt (2012)
***********************************
The Goal of a manufacturing firm is to make money (Goldratt, 2012).
The three critical measurements of achieving The Goal are Throughput, Inventory and Operating Expense.
The Goal is achieved by (a) increasing throughput while simultaneously reducing both inventory and operating expense and (b) ensuring the value/price of the product is higher than investment in inventory and operational expense per unit of sale.
(1) Throughput - is the money coming into the firm
It is the rate at which the firm generates money through sales (unlike through production as in traditional definition).
(2) Inventory - is the money currently tied as investment inside the firm that can be sold (unlike all stocks - some of which cannot be sold - as in traditional definition)
- the manufacturing plant
- undepreciated value of machines
- knowledge that can be sold eg. patents, technology licenses
(3) Operating Expense - is the money going out of the firm
It is the money taken out of the firm to make payments and enable throughput
- employee time (direct, indirect, idle or operating time)
- any money lost eg. depreciation of machines
- cost of parts needed to run the machines eg. oil
- waste created eg. scrap
- cost of carrying (WIP - work in progress)
- knowledge to turn inventory into throughput
III. Operations Management (Heizer, Render, 2011)
*************************************************
1. Job of an OM Manager (Heizer & Render, 2013)
************************
Implement OM strategy, provide competitive advantage, increase productivity
2. Ten Strategic OM decisions are
******************************
(i) Goods and Services Design
(ii) Quality
(iii) Process and capacity design
(iv) location selection
(v) layout design
(vi) Human Resources and Job Design
(vii) Supply chain management
(viii) Inventory
(ix) Scheduling
(x) Maintenance
3. Techniques for OM Strategy Analysis
**************************************
Resources view: check compatibility of strategy & available resources - financial, physical, human, technological
Value chain analysis: identify activities that add value; determine strengths & weaknesses and opportunities to develop competitive advantage
5 forces: immediate rivals, potential entrants, customers, suppliers, substitute products
4. OM issues vary by stage in Product Life Cycle
*************************************************
Introduction
*************
Corporate strategy: Best period to increase market share
OM strategy: Critical R&D, product design
Issues: frequent design changes, short production runs, high productions costs, limited models, quality
Growth
*******
Corporate strategy: Practical change price or quality image, strengthen niche
OM strategy: Critical to forecast, process reliability, competitive product improvements, increase capacity, product focus, enhance distribution
Maturity
*********
Corporate strategy: Poor time to change price or quality, competitive costs critical, defend market position
OM strategy: standardization, only minor changes allowed, optimum capacity, increase stability of process, long production runs, product improvement, cost cutting
Decline
*******
Corporate strategy: Cost control
OM strategy: Little product differentiation, cost minimization, overcapacity in industry, prune low margin products, reduce capacity
IV. OM Strategy Development & Implementation
*********************************************
Start with Environmental analysis, then determine corporate mission and finally form a strategy
(a) SWOT
(b) KSF - Key success factors to achieving competitive advantage
(c) Core competencies - particular set of skills and talents and activities that firm does really well
(d) Activity Map - graphically link competitive advantage, KSF, support activities
V. Global Operations Strategy
*******************************
MNC - firm owns and controls facilities in more than one country
International strategy - firm has cross border transactions; penetrate global markets through exports and licenses; Little local responsiveness & cost advantage
Multidomestic strategy - operating decisions decentralized to each country to enhance local responsiveness; significant local responsiveness; little cost advantage
Global strategy - operating decisions centralized; HQ coordinates standardization and learning between facilities; little local responsiveness but significant cost advantage
Transnational strategy - combines benefits of global scale efficiencies with benefits of local responsiveness; significant local responsiveness & cost advantages
Dr DP
Sunday, January 13, 2013
Operations Management - Guts, Competitive Advantage, Strategy & Money
JWI 550 Operations Management, Week1 Summary
The concept of using operations management as a strategic lever is refreshingly new to me. I have only perceived operations being used as a tactic. I will use this insight gainfully to energize my organization.
Dr DP
JWI 550 Operations Management, Week1 Summary
******************************************
I. Operations Management (Heizer, Render, 2011, Chapters 1 & 2)
- Operations Managers create goods and services and improve productivity.
- A firm can achieve differentiation and create competitive advantage in three strategic ways:
(a) delivering higher and better value, (b) providing lowest cost or (c) flexible, speedy, reliable response.
II. Jack Welch & Suzy Welch video
****************************************
OM is the fundamental guts of how the company operates.
It's an ability to deliver/source products, design services.
It's everything that gets from you to customer; from your suppliers to you to customer and every element of it.
it is how you come to work in the morning to deliver.
it is how companies go from idea to delivery of a product/service - with all the things that need to make it happen.
III. The Goal, Goldratt & Cox (2012) , Chapters 1-5
***********************************************************
Trick to make a factory more efficient and productive begins with goal clarity.
The goal of a manufacturing organization is to make money.
IV. Week1 Lecture1
**********************
(i) Operations management, or OM, is the guts of a company
It fuels an organization's ability to design, source, and deliver products and services--everything that gets what you make from your suppliers to the customer.
(ii) OM is a critical element of strategy - a powerful source of competitive advantage
(iii) Operation Managers Assess each step in a process to determine optimal mix of equipment, labor, tools, facilities, materials, energy, information that going into an operating system.
OM's find solutions that are simultaneously effective, efficient, global, sustainable, responsible
OM's drive Quality management & control, capacity planning, purchasing, supply chain and inventory management, scheduling, cost reduction
OMs responsible for productivity in operations, social responsibility of organizations, global reach
(iv) Customize products and services, shorter product and service life cycles, satisfy more informed and quality conscious consumers, reduce operating margins, exploit promises
and potential of new technology
(v) IKEA - OM used as a lever for generating competitive advantage
(vi) OM Concepts
Process Mapping
Capacity Analysis
Quality Improvement
Six Sigma
Lean Systems
Inventory Management
Supply-Chain Management
Sustainable Operations
V. OM must be a source of competitive advantage and is part of strategy rather a tactic.
Operations support strategy in winning organizations.
Wal-Mart
every day low prices
outstanding logistics excellence to keep costs low; Flexible, speedy and reliable service - super stores open 24x7 except for Christmas day
Southwest Airlines
lowest airfare cost for short hop flights
eliminate frills to keep costs low and conserve at every step of value stream
Starbucks
better coffee experience
with music and great ambiance elevate coffee experience
Pizza Hut
flexible, speedy, reliable response
superior logistics with technology
IBM
higher value through breakthrough innovation
superior R&D; focus on patents; culture of discoveries
Apple
higher value through innovative design & reliable delivery
innovative design, on time delivery
Fed Ex
always on time
outstanding logistics, hub layout, location
The concept of using operations management as a strategic lever is refreshingly new to me. I have only perceived operations being used as a tactic. I will use this insight gainfully to energize my organization.
Dr DP
JWI 550 Operations Management, Week1 Summary
******************************************
I. Operations Management (Heizer, Render, 2011, Chapters 1 & 2)
- Operations Managers create goods and services and improve productivity.
- A firm can achieve differentiation and create competitive advantage in three strategic ways:
(a) delivering higher and better value, (b) providing lowest cost or (c) flexible, speedy, reliable response.
II. Jack Welch & Suzy Welch video
****************************************
OM is the fundamental guts of how the company operates.
It's an ability to deliver/source products, design services.
It's everything that gets from you to customer; from your suppliers to you to customer and every element of it.
it is how you come to work in the morning to deliver.
it is how companies go from idea to delivery of a product/service - with all the things that need to make it happen.
III. The Goal, Goldratt & Cox (2012) , Chapters 1-5
***********************************************************
Trick to make a factory more efficient and productive begins with goal clarity.
The goal of a manufacturing organization is to make money.
IV. Week1 Lecture1
**********************
(i) Operations management, or OM, is the guts of a company
It fuels an organization's ability to design, source, and deliver products and services--everything that gets what you make from your suppliers to the customer.
(ii) OM is a critical element of strategy - a powerful source of competitive advantage
(iii) Operation Managers Assess each step in a process to determine optimal mix of equipment, labor, tools, facilities, materials, energy, information that going into an operating system.
OM's find solutions that are simultaneously effective, efficient, global, sustainable, responsible
OM's drive Quality management & control, capacity planning, purchasing, supply chain and inventory management, scheduling, cost reduction
OMs responsible for productivity in operations, social responsibility of organizations, global reach
(iv) Customize products and services, shorter product and service life cycles, satisfy more informed and quality conscious consumers, reduce operating margins, exploit promises
and potential of new technology
(v) IKEA - OM used as a lever for generating competitive advantage
(vi) OM Concepts
Process Mapping
Capacity Analysis
Quality Improvement
Six Sigma
Lean Systems
Inventory Management
Supply-Chain Management
Sustainable Operations
V. OM must be a source of competitive advantage and is part of strategy rather a tactic.
Operations support strategy in winning organizations.
Wal-Mart
every day low prices
outstanding logistics excellence to keep costs low; Flexible, speedy and reliable service - super stores open 24x7 except for Christmas day
Southwest Airlines
lowest airfare cost for short hop flights
eliminate frills to keep costs low and conserve at every step of value stream
Starbucks
better coffee experience
with music and great ambiance elevate coffee experience
Pizza Hut
flexible, speedy, reliable response
superior logistics with technology
IBM
higher value through breakthrough innovation
superior R&D; focus on patents; culture of discoveries
Apple
higher value through innovative design & reliable delivery
innovative design, on time delivery
Fed Ex
always on time
outstanding logistics, hub layout, location
Financial Management, Corporate Social Responsibility & Rational Behavior
JWI 530 Financial Management I, Week1 Summary, 1/13/13
What a week it was ! The excellent quality of instruction, superb lecture, great organization in the text book, high level of engagement from classmates and the high quality of exchanges made this an extraordinary experience. I am grateful for this wonderful opportunity to learn from and with such bright minds.
I have found a new intellectual candy store through this class.
Takeaways below.
Dr DP
JWI 530 Financial Management I, Week1 Summary
************************************************************
I. Week1 Lecture1
**********************
Purpose of the course: How to make effective financial decisions as a business leader
(a) Financial management is all about making smart financial decisions.
- identify and execute opportunities that will maximize shareholder value
- achieve the best possible employee engagement
- deliver the best customer experience
(b) Learn the CFO language
- identify the best financial opportunities for your business
- fund the opportunities with right mix of financial options
- allocate profits that you make from those opportunities
(c) Learn accounting - principles of commerce
2. Financial crisis was caused by
- incorrect assumption that real estate prices will keep going up
- excessive debt
3. Annual Financial Reports 10K; Quarterly financial reports 10Q
Three sources to get to them:
Company -> About -> Investors -> Financials
Securities and Exchange Commission’s Edgar service www.sec.gov/edgar.shtml
Financial websites
II. Week1 DQ1 - Rethinking the Social Responsibility of Business
**************************************************************************
A status quo model for business that works more often than not is presented by Friedman & Rodgers
(a) Perspective of Milton Friedman, Market Economist
**************************************************************
"Social responsibility of business is to increase its profits". By pursuing self interest, individuals promote society's interest more effectively. A bureaucratic system of pursuing public good does not work.
(b) Philosophy of TJ Rodgers, Cypress CEO
****************************************************
Funds diverted for corporate philanthropy are better used through reinvestment in the business itself, thereby allowing shareholders to reap higher benefits with which they can decide how best to help society. Mackey's model will only work in good times and that "altruistic" companies like Whole Foods won't stand a chance during tough times.
A new and updated model for business in current times is presented by Mackey & IBM's institute for Business Value
(a) View of John Mackey Whole Foods CEO
************************************************
The purpose of corporations should not be just about maximizing profits. Corporations should measure success by how much value it creates for all of its constituents - customers, employees, investors, suppliers, community, environment. Corporations have responsibilities to each of these constituents that need to be balanced appropriately.
0% of profits donation to community is too little. 100% of profits donation would mean unsustainable business.
5% of profits donation is, though arbitrary, a reasonable number that is beneficial to corporation and the larger society.
Caring more broadly about constituents is good business.
(b) IBM's view of CSR evolved over 100 years of business experience
*********************************************************************************
Corporate Social Responsibility is no longer viewed as a cost center but as an integral part of corporate strategy to open new markets and achieve sustainable growth in a global marketplace.
http://www-935.ibm.com/services/us/gbs/bus/pdf/gbe03019-usen-02.pdf
III. Week1 DQ2 - Rational Behavior
****************************************
Field of finance is based on the assumption that people will behave rationally, either in their own self interest or for the benefit of society. Learning from recent financial crisis include::
(1) Don't follow the crowd blindly. Question the assumptions. Never be afraid to check the fundamentals.
(2) Beware of conflict of interest between parties - especially those in positions of power.
Stay away from shady players even if they appear well dressed like Lehman Brothers.
(3) People can be short-sighted, self-interested, irresponsible, opportunistic, unethical. But very seldom irrational (Dr Sasha's insight).
Look for incentives for growth that lead to such behavior and see what can be done about changing those.
(4) Even rational behavior (eg. what people do in their self interest) built on faulty assumptions and models can also have undesirable or disastrous consequences at times.
Rational behavior does not mean it is smart behavior.
Quality of information, deadlines and risk tolerance play a role.
Reality check often and course correct.
(5) Enter only those businesses you understand (Warren Buffett's insight)
if returns seem to be too good to be true, there must be some risk you are not accounting for (Dr Sasha)
IV. Financial Management (Ehrhardt, Brigham, 2011, Chapter1 Highlights)
*************************************************************************************
(i) 3 types of business organization are proprietorship, partnership, corporation
(ii) primary objective of management is to maximize shareholder's wealth (achieve employee engagement, improve client experience)
(iii) Free cash flow (FCF): cash flows available for distribution to firm's investors, shareholders, creditors
(iv) Weighted Average Cost of Capital (WACC) - average return required by all of firm's investors; function of capital structure, interest rates, firm's risk and market's risk
(v) Value of the firm depends on FCF, timing of flows, risk
(vi) Capital transfers between borrowers and savers takes place through direct transfers, investment bouses and financial intermediaries
(vii) Cost of money is a function of production opportunities, time preferences for consumption, risk, inflation
(viii) Derivatives are claims on other financial securities. Securitization is the process by which new securities are created from claims on packages of other securities
(ix) Major financial institutions are: commercial banks, Saving & Loans Associations, Mutual Saving banks, credit unions, pension funds, life insurance companies, mutual funds, money market funds, hedge funds, private equity funds
(x) Spot market - involves on the spot sale and delivery; Futures market - has delivery at a future date
(xi) Money market - market for debt securities with maturity less than a year; Capital market - markets for longer term debt and capital stocks
(xii) Primary markets - markets in which corporations raise new capital; Secondary market - markets in which existing stocks are traded among investors
(xiii) Orders from buyers and sellers can be matches through open outcry auctions, dealers, Electronic Communication Networks (ECNs).
(xiv) Two types of markets - physical locations exchanges eg NYSE; computer/telephone networks eg Nasdaq
What a week it was ! The excellent quality of instruction, superb lecture, great organization in the text book, high level of engagement from classmates and the high quality of exchanges made this an extraordinary experience. I am grateful for this wonderful opportunity to learn from and with such bright minds.
I have found a new intellectual candy store through this class.
Takeaways below.
Dr DP
JWI 530 Financial Management I, Week1 Summary
************************************************************
I. Week1 Lecture1
**********************
Purpose of the course: How to make effective financial decisions as a business leader
(a) Financial management is all about making smart financial decisions.
- identify and execute opportunities that will maximize shareholder value
- achieve the best possible employee engagement
- deliver the best customer experience
(b) Learn the CFO language
- identify the best financial opportunities for your business
- fund the opportunities with right mix of financial options
- allocate profits that you make from those opportunities
(c) Learn accounting - principles of commerce
2. Financial crisis was caused by
- incorrect assumption that real estate prices will keep going up
- excessive debt
3. Annual Financial Reports 10K; Quarterly financial reports 10Q
Three sources to get to them:
Company -> About -> Investors -> Financials
Securities and Exchange Commission’s Edgar service www.sec.gov/edgar.shtml
Financial websites
II. Week1 DQ1 - Rethinking the Social Responsibility of Business
**************************************************************************
A status quo model for business that works more often than not is presented by Friedman & Rodgers
(a) Perspective of Milton Friedman, Market Economist
**************************************************************
"Social responsibility of business is to increase its profits". By pursuing self interest, individuals promote society's interest more effectively. A bureaucratic system of pursuing public good does not work.
(b) Philosophy of TJ Rodgers, Cypress CEO
****************************************************
Funds diverted for corporate philanthropy are better used through reinvestment in the business itself, thereby allowing shareholders to reap higher benefits with which they can decide how best to help society. Mackey's model will only work in good times and that "altruistic" companies like Whole Foods won't stand a chance during tough times.
A new and updated model for business in current times is presented by Mackey & IBM's institute for Business Value
(a) View of John Mackey Whole Foods CEO
************************************************
The purpose of corporations should not be just about maximizing profits. Corporations should measure success by how much value it creates for all of its constituents - customers, employees, investors, suppliers, community, environment. Corporations have responsibilities to each of these constituents that need to be balanced appropriately.
0% of profits donation to community is too little. 100% of profits donation would mean unsustainable business.
5% of profits donation is, though arbitrary, a reasonable number that is beneficial to corporation and the larger society.
Caring more broadly about constituents is good business.
(b) IBM's view of CSR evolved over 100 years of business experience
*********************************************************************************
Corporate Social Responsibility is no longer viewed as a cost center but as an integral part of corporate strategy to open new markets and achieve sustainable growth in a global marketplace.
http://www-935.ibm.com/services/us/gbs/bus/pdf/gbe03019-usen-02.pdf
III. Week1 DQ2 - Rational Behavior
****************************************
Field of finance is based on the assumption that people will behave rationally, either in their own self interest or for the benefit of society. Learning from recent financial crisis include::
(1) Don't follow the crowd blindly. Question the assumptions. Never be afraid to check the fundamentals.
(2) Beware of conflict of interest between parties - especially those in positions of power.
Stay away from shady players even if they appear well dressed like Lehman Brothers.
(3) People can be short-sighted, self-interested, irresponsible, opportunistic, unethical. But very seldom irrational (Dr Sasha's insight).
Look for incentives for growth that lead to such behavior and see what can be done about changing those.
(4) Even rational behavior (eg. what people do in their self interest) built on faulty assumptions and models can also have undesirable or disastrous consequences at times.
Rational behavior does not mean it is smart behavior.
Quality of information, deadlines and risk tolerance play a role.
Reality check often and course correct.
(5) Enter only those businesses you understand (Warren Buffett's insight)
if returns seem to be too good to be true, there must be some risk you are not accounting for (Dr Sasha)
IV. Financial Management (Ehrhardt, Brigham, 2011, Chapter1 Highlights)
*************************************************************************************
(i) 3 types of business organization are proprietorship, partnership, corporation
(ii) primary objective of management is to maximize shareholder's wealth (achieve employee engagement, improve client experience)
(iii) Free cash flow (FCF): cash flows available for distribution to firm's investors, shareholders, creditors
(iv) Weighted Average Cost of Capital (WACC) - average return required by all of firm's investors; function of capital structure, interest rates, firm's risk and market's risk
(v) Value of the firm depends on FCF, timing of flows, risk
(vi) Capital transfers between borrowers and savers takes place through direct transfers, investment bouses and financial intermediaries
(vii) Cost of money is a function of production opportunities, time preferences for consumption, risk, inflation
(viii) Derivatives are claims on other financial securities. Securitization is the process by which new securities are created from claims on packages of other securities
(ix) Major financial institutions are: commercial banks, Saving & Loans Associations, Mutual Saving banks, credit unions, pension funds, life insurance companies, mutual funds, money market funds, hedge funds, private equity funds
(x) Spot market - involves on the spot sale and delivery; Futures market - has delivery at a future date
(xi) Money market - market for debt securities with maturity less than a year; Capital market - markets for longer term debt and capital stocks
(xii) Primary markets - markets in which corporations raise new capital; Secondary market - markets in which existing stocks are traded among investors
(xiii) Orders from buyers and sellers can be matches through open outcry auctions, dealers, Electronic Communication Networks (ECNs).
(xiv) Two types of markets - physical locations exchanges eg NYSE; computer/telephone networks eg Nasdaq
Subscribe to:
Posts (Atom)