IMPACT OF GLOBAL FINANCIAL CRISIS ON THE AVIATION INDUSTRY Essay Example For Students

IMPACT OF GLOBAL FINANCIAL CRISIS ON THE AVIATION INDUSTRY Essay Outline1 Abstraction2 Chapter 1: Introduction3 1.1 Overview4 1.2 Background Information5 Impact on Aviation sector6 Importance With Respect To The World7 Importance With Respect To Pakistan8 1.4 Research Question9 Chapter 2: Literature Reappraisal10 Literature Review11 Chapter 3: Methodology12 Methodology13 Research Type:14 Data Type and Research Period:15 Beginnings of Datas:16 Theoretical Model17 Operational Definitions:18 Techniques:19 Datas Analysis:20 RESEARCH HYPOTHESIS21 Chapter 4: Consequences and Analysis22 Consequences and Analysis23 Consequence24 25 26 27 28 29 30 31 32 Arrested development Analysis33 Crude Oil Monetary values:34 I ± =0.01,35 technetium = 2.53936 t-stat=5.4438 gt ; 2.53937 GDP Growth % :38 I ± =0.0139 technetium = 2.53940 Inflation %41 I ± =0.0142 technetium = 2.53943 Unemployment44 I ± =0.0145 technetium = 2.53946 Interpretation of the Variables:47 Crude Oil48 GDP growing %49 Inflation %50 Unemployment rate %51 R square52 R2=53 Decision Abstraction The basic purpose behind to carry on a research analysis on the affects of the planetary fiscal crisis with specific to the air power industry. The research will assist to really analyse the after affects of the fiscal crisis. As we all know that air power is one of the most of import pillars of the planetary economic system of the universe. And besides this sector provides 1000000s of occupations globally and contributed to a great extent in the planetary GDP. This sector is besides the most of import and the most efficient manner of transit. It provides the transit services all over the universe. So as the planetary fiscal crisis which was born due to the failure of the major fiscal establishments caused the drastic impacts on the universe economic system. And as the air power is the of import portion it besides got affected to a great extent by the crisis. Due to which this air power sector which is one the fastest turning industry has to confront negative growing rate. Besides th e air power sector has to confront immense losingss. Some air power companies was able to bare such immense losingss but there is a large figure of those air power companies who do have capacity to bare such immense losingss so they go bankrupt after the planetary fiscal crisis. Chapter 1: Introduction Introduction 1.1 Overview The planetary fiscal crisis was triggered in 2007 8 chiefly in developed states like United States of America. After that the crisis entered in the European states and after a few yearss the crisis merely take the whole of the universe under its impact. Almost all of the states in the universe got affected by this fiscal crisis straight or indirectly. This fiscal crisis was born due to the failure of the major fiscal establishment of these developed states. These fiscal establishments include Bankss like Lehman Brothers, Bear Steams and etc. These chief fiscal establishments of the United States are the chief ground behind the fiscal crisis. Te planetary fiscal crisis caused impacts on about each and every industry of the universe. The key concerns which were demoing good places and were sing good growing experienced negative growing because of the fiscal crisis. Besides the consumer wealth faces the one million millions of dollars loss due to the fiscal crisis. That is why this pla netary Financial Crisis is thought to be the worst fiscal crisis after the great Depression of 20th century. The chief ground behind the failure of the fiscal establishments was the unreal bubble of the lodging sector of U.S.A. This unreal bubble got height in 2006 and all of a sudden it burst in twelvemonth 2007 8 and caused the values of the securities which were tied to the Americas existent estate to monolithic diminution. This caused the miss balance in the fiscal establishments of U.S.A as about 50 % of their progresss were given on the lodging sector. As the value of the existent estate falls and so make the fiscal establishments. And as consequence of which these fiscal establishments has au naturel losingss of around $ 2.3 trillion. This is besides the chief ground that the most strongest fiscal establishments go bankrupt after baring such immense losingss. As air power is one of the most of import pillars of the planetary economic system of the universe. And besides this sector provides 1000000s of occupations globally and contributed to a great extent in the planetary GDP. This sector is besides the most of import and the most efficient manner of transit. It provides the transit services all over the universe. So as the planetary fiscal crisis which was born due to the failure of the major fiscal establishments caused the drastic impacts on the universe economic system. And as the air power is the of import portion it besides got affected to a great extent by the crisis. Due to which this air power sector which is one the fastest turning industry has to confront negative growing rate. . Besides the air power sector has to confront immense losingss. Some air power companies was able to bare such immense losingss but there is a large figure of those air power companies who do have capacity to bare such immense losingss so they go bankru pt after the planetary fiscal crisis. 1.2 Background Information The planetary fiscal crisis hit the universe economic system in 2008 and left drastic affects on the universe economic system, particularly the turning industries. The crisis arose foremost in U.S.A and Europe due to the failures of the chief fiscal establishments. This failure of some fiscal establishments, lead to the biggest fiscal crisis after the great depression. The chief ground behind the failure of the fiscal establishments was the unreal bubble of the lodging sector of U.S.A. This unreal bubble got height in 2006 and all of a sudden it burst in twelvemonth 2007 8 and caused the values of the securities which were tied to the Americas existent estate to monolithic diminution. This caused the miss balance in the fiscal establishments of U.S.A as about 50 % of their progresss were given on the lodging sector. As the value of the existent estate falls and so make the fiscal establishments. And as consequence of which these fiscal establishments has au naturel losingss of aroun d $ 2.3 trillion. This is besides the chief ground that the most strongest fiscal establishments go bankrupt after baring such immense losingss. Impact on Aviation sector As the planetary economic system was disturbed due to this fiscal crisis of 2008 so Aviation being as one of the chief pillars of planetary economic system, it besides got affected. As air power is the chief beginning of transit throughout the universe. The crisis had profoundly struck this turning industry. Due to planetary fiscal crisis the air power industry had experienced the negative growing. The impact of the crisis was so immense that a large figure of air hose companies go belly-up and those who survived still had to confront immense losingss. Importance With Respect To The World The planetary fiscal crisis is of great importance to the planetary economic system as it has caused drastic impacts on the planetary economic system. Most of the economic systems of the developed states are to a great extent affected by the crisis. It causes the negative impact on about all of the planetary concerns. The planetary fiscal crisis, brewing for a piece, truly started to demo its effects in the center of 2007 and into 2008. Around the universe stock markets have fallen, big fiscal establishments have collapsed or been bought out, and authoritiess in even the wealthiest states have had to come up with deliverance bundles to bail out their fiscal system The air power throughout the universe faces the losingss in their gross because of the increasing oil monetary values and the planetary fiscal crisis. Many of the little air hoses every bit good as some large air hoses companies go bankrupt. Importance With Respect To Pakistan The Pakistani economic system is non as severely affected as that of other states by the planetary recession of 2007-2008. The planetary fiscal crisis that hit the universe really badly has non left many impacts on the economic system of Pakistan. Just as the economic system has remained safe from acquiring inauspicious impacts, the Pakistan International Airline has non been affected that severely either. However, the twelvemonth 2008 failed to convey any important betterments in the overall and fiscal public presentation of Pakistan International Airlines. The riddles, the issues and the jobs of the old twelvemonth s remained and hindered the advancement. These similar jobs led to farther loss and at the terminal, the company had to bear a higher net loss than the old twelvemonth. A short survey of the twelvemonth 2007 shows that during that twelvemonth, the company went through several unpleasant experiences. It had to confront a figure of fiscal, selling and operational jobs. Ope rating limitations which were imposed by the European Union during the first few months of the twelvemonth, led to great break in the Pakistan International Airlines agendas and besides caused great curtailment in the capacity. During all this, the Pakistan International Airline lost market portion. This made the conditions even more hard for the Pakistan International Airlines. The enormous addition in the oil monetary values, which had neer been seen before, put inauspicious effects on the PIA s underside line. PIA was left with no other pick but to bear the burden and load of paying for the expensive fuel. Furthermore, the addition in the wages if certain classs of forces and depreciation of the rupee towards the terminal of the twelvemonth, both aggravated the state of affairs. The Scope Of Study And Limitation Construction EssayTheoretical Model Operational Definitions: Aviation: means scientific discipline and engineering of flight through air i.e. air hoses 9/11: onslaught on the universe trade Centre. GFC: Global Financial Crisis. Severe acute respiratory syndromes: Severe Acute Respiratory Syndrome. GDP: Gross Domestic Product. Fiscal Markets: is a mechanism that allows people to purchase and sell ( trade ) fiscal securities ( stocks and bonds ) , trade goods ( cherished metals ) and other fungible points of value at low dealing cost. Asiatic fiscal crisis: The Asiatic Financial Crisis was a period of fiscal crisis that gripped much of Asia get downing in July 1997, and raised frights of a world-wide economic meltdown due to fiscal contagious disease. RPK: Gross Passenger kilometre ( RPK ) is a step of a rider traffic for an air hose flight, coach, or train calculated by multiplying the entire figure of revenue-paying riders aboard the vehicle by the distance traveled measured in stat mis Techniques: The technique to be carried out for research will be Regression analysis. Arrested development analysis is a statistical technique which is used to find the relationships between variables. It involves patterning and analysing variables relationships between one dependant variable and several independent variables. Datas Analysis: The statistical package s to be employed for research intent are Minitab, Statgraphics and EViews. Regression for each variable will be run. The research will besides utilize graphs and tabular arraies for illustration. RESEARCH HYPOTHESIS H0: Global Financial Crisis has non cause important impacts on Aviation Industry. Hour angle: Global Financial Crisis cause important impacts on Aviation Industry. H0: Crude Oil Monetary values has non important consequence on Aviation Industry. Hour angle: Crude Oil Monetary values have important consequence on Aviation Industry. H0: GDP growing has non important consequence on Aviation Industry. Hour angle: GDP growing has any important consequence on Aviation Industry. H0: Inflation rate has non important consequence on Aviation Industry. Hour angle: Inflation rate have any important consequence on Aviation Industry. H0: Unemployment rate has non important consequence on Aviation Industry. Hour angle: Unemployment rate have any important consequence on Aviation Industry. Chapter 4: Consequences and Analysis Consequences and Analysis Consequence Multiple Regression Analysis Dependent variable: Registered Carrier Departures Standard T Parameter Estimate Error Statistic P-Value CONSTANT 1.17957E7 1.17689E6 10.0227 0.0000 Crude Oil Prices 36212.5 6652.45 5.44348 0.0001 GDP Growth % -50451.8 93127.7 -0.541749 0.5959 Inflation one-year % -541064.0 104745.0 -5.16555 0.0001 Unemployment % -547932.0 133271.0 -4.11141 0.0009 Analysis of Discrepancy Source Sum of Squares Df Mean Square F-Ratio P-Value Model 2.10578E13 4 5.26444E12 22.98 0.000 Residual 3.4357E12 15 2.29047E11 Entire ( Corr. ) 2.44935E13 19 R-squared = 85.973 per centum R-squared ( adjusted for d.f. ) = 82.2325 per centum Standard Error of Est. = 478588.0 Mean absolute mistake = 323221.0 Durbin-Watson statistic = 1.67531 The StatAdvisor The end product shows the consequences of suiting a multiple additive arrested development theoretical account to depict the relationship between Registered Carrier Departures and 4 independent variables. The equation of the fitted theoretical account is Registered Carrier Departures = 1.17957E7 50451.8*GDP Growth % -541064.0*Inflation 36212.5*Oil Prices 547932.0*Unemployment % Since the P-value in the ANOVA tabular array is less than 0.01, there is a statistically important relationship between the variables at the 99 % assurance degree. The R-Squared statistic indicates that the theoretical account as fitted explains 85.973 % of the variableness in Registered Carrier Departures. The adjusted R-squared statistic, which is more suited for comparing theoretical accounts with different Numberss of independent variables, is 82.2325 % . The standard mistake of the estimation shows the standard divergence of the remainders to be 478588.0. This value can be used to build anticipation bounds for new observations by choosing the Reports option from the text bill of fare. The average absolute mistake ( MAE ) of 323221.0 is the mean value of the remainders. The Durbin-Watson ( DW ) statistic tests the remainders to find if there is any important correlativity based on the order in which they occur in your informations file. Since the DW value is greater than 1.4, there is likely non any serious autocorrelation in the remainders. In finding whether the theoretical account can be simplified, notice that the highest P-value on the independent variables is 0.5959, belonging to unemployment. Since the P-value is greater or equal to 0.10, that term is non statistically important at the 90 % or higher assurance degree. Consequently, you should see taking GDP Growth % from the theoretical account. Arrested development Analysis Crude Oil Monetary values: H0: I? a†°? 0 Hour angle: I? a†°Ã‚ ¤ 0 I ± =0.01, Cˆtest statCˆ gt ; technetium technetium = 2.539 t-stat=5.4438 gt ; 2.539 Sign of t-stat is non the same as expected. We do non reject Ho as the coefficient of the petroleum oil monetary values is non coming out to be important at 1 % degree of significance. GDP Growth % : H0: I? a†°Ã‚ ¤ 0 Hour angle: I? a†°? 0 I ± =0.01 technetium = 2.539 Cˆtest statCˆ lt ; technetium Cˆo.541749Cˆ lt ; 2.539 Sign of GDP Growth % is non the same as expected. We do non reject H0, as the GDP Growth is non coming out to be important at 1 % degree of significance. Inflation % H0: I? a†°? 0 Hour angle: I? a†°Ã‚ ¤ 0 I ± =0.01 technetium = 2.539 Cˆtest statCˆ gt ; technetium Cˆ-5.16555Cˆ gt ; 2.539 Sign of tstat is the same as the expected mark of HA We reject H0, as one-year rising prices is coming out to be important at 1 % degree of signifance. Unemployment H0: I? a†°? 0 Hour angle: I? a†°Ã‚ ¤ 0 I ± =0.01 technetium = 2.539 Cˆtest statCˆ gt ; technetium Cˆ-4.11141Cˆ gt ; 2.539 Sign of tstat is the same as the expected mark of HA We reject H0 as unemployment rate % is coming out to be important at 1 % degree. Interpretation of the Variables: The no of registered bearer going will be equal to 11795000, if all other independent variables are equal to zero. The Coefficient of the petroleum oil monetary values is coming to be positive, which is non true. This could be because of some unseen factors that are doing positive biasness in rough oil monetary values variable. Crude Oil If rough oil monetary values will increase by $ 1 so the figure registered bearer goings will increase by 36212.5, maintaining all other variables constant. GDP growing % If GDP growing will travel up by 1 % , the no. of registered bearer going will diminish by 504.518 goings, maintaining all other variables constant. Inflation % If the rising prices in the US economic system will increase by 1 % , so the figure of registered bearer goings will diminish by 5410.64 figure of flights, maintaining all other variables constant. Unemployment rate % If the unemployment rate in the us economic system will increase by 1 % the registered bearer will diminish by 5479.32 figure of flights, maintaining all other variables constant. R square The simpler normally used step of tantrum is the coefficient of finding, R2. The coefficient of finding is explained amount of squares to the entire amount of squares. R2= The higher the R2, the closer the closer the estimated arrested development equation fits the sample informations. Measures of this type are called goodness of tantrum steps. The goodness of tantrum explains the fluctuation of Y around A ¶ . R-squared = 85.973 per centum R-squared ( adjusted for d.f. ) = 82.2325 per centum The R-squares of this arrested development is 85.973 per centum which is truly good. Decision The planetary fiscal crisis was triggered in 2007 8 chiefly in developed states like United States of America. After that the crisis entered in the European states and after a few yearss the crisis merely take the whole of the universe under its impact. Almost all of the states in the universe got affected by this fiscal crisis straight or indirectly. This fiscal crisis was born due to the failure of the major fiscal establishment of these developed states. These fiscal establishments include Bankss like Lehman Brothers, Bear Steams and etc. These chief fiscal establishments of the United States are the chief ground behind the fiscal crisis. Te planetary fiscal crisis caused impacts on about each and every industry of the universe. The key concerns which were demoing good places and were sing good growing experienced negative growing because of the fiscal crisis. Besides the consumer wealth faces the one million millions of dollars loss due to the fiscal crisis. That is why this pla netary Financial Crisis is thought to be the worst fiscal crisis after the great Depression of 20th century. As air power is one of the most of import pillars of the planetary economic system of the universe. And besides this sector provides 1000000s of occupations globally and contributed to a great extent in the planetary GDP. This sector is besides the most of import and the most efficient manner of transit. It provides the transit services all over the universe. So as the planetary fiscal crisis which was born due to the failure of the major fiscal establishments caused the drastic impacts on the universe economic system. And as the air power is the of import portion it besides got affected to a great extent by the crisis. Due to which this air power sector which is one the fastest turning industry has to confront negative growing rate. . Besides the air power sector has to confront immense losingss. Some air power companies was able to bare such immense losingss but there is a large figure of those air power companies who do have capacity to bare such immense losingss so they go bankru pt after the planetary fiscal crisis.

The Bulgarian And Soviet Virus Factories Essays - Computer Viruses

The Bulgarian and Soviet Virus Factories The Bulgarian and Soviet Virus Factories ======================================== Vesselin Bontchev, Director Laboratory of Computer Virology Bulgarian Academy of Sciences, Sofia, Bulgaria 0) Abstract =========== It is now well known that Bulgaria is leader in computer virus production and the USSR is following closely. This paper tries to answer the main questions: Who makes viruses there, What viruses are made, and Why this is done. It also underlines the impact of this process on the West, as well as on the national software industry. 1) How the story began ====================== Just three years ago there were no computer viruses in Bulgaria. After all, these were things that can happen only in the capitalist countries. They were first mentioned in the April issue of the Bulgarian computer magazine "Komputar za vas" ("Computer for you") [KV88] in a paper, translated from the German magazine "Chip" [Chip]. Soon after that, the same Bulgarian magazine published an article [KV89]], explaining why computer viruses cannot be dangerous. The arguments presented were, in general, correct, but the author had completely missed the fact that the majority of PC users are not experienced programmers. A few months later, in the fall of the same year, two men came in the editor's office of the magazine and claimed that they have found a computer virus. Careful examination showed that it was the VIENNA virus. At that time the computer virus was a completely new idea for us. To make a computer program, whose performance resembles a live being, is able to replicate and to move from computer to computer even against the will of the user, seemed extremely exciting. The fact that "it can be done" and that even "it had been done" spread in our country like wildfire. Soon hackers obtained a copy of the virus and began to hack it. It was noticed that the program contains no "black magic" and that it was even quite sloppily written. Soon new, home--made and improved versions appeared. Some of them were produced just by assembling the disassembly of the virus using a better optimizing assembler. Some were optimized by hand. As a result, now there are several versions of this virus, that were created in Bulgaria --- versions with infective lengths of 627, 623, 622, 435, 367, 353 and even 348 bytes. The virus has been made almost two times shorter (its original infective length is 648 bytes) without any loss of functionality. This virus was the first case. Soon after that, we were "visited" by the CASCADE and the PING PONG viruses. The later was the first boot--sector virus and proved that this special area, present on every diskette can be used as a virus carrier, too. All these three viruses were probably imported with illegal copies of pirated programs. 2) Who, What & Why. =================== 2.1) The first Bulgarian virus. ------------------------------- At that time both known viruses that infected files ( VIENNA and CASCADE) infected only COM files. This made me believe that the infection of EXE files was much more difficult. Unfortunately, I made the mistake by telling my opinion to a friend of mine. Let's call him "V.B." for privacy reasons.(1) ................................................................... [(1) These are the initials of his true name. It will be the same with the other virus writers that I shall mention. Please note, that while I have the same initials (and even his full name resembles mine), we are two different persons.] ................................................................... The challenge was taken immediately and soon after that I received a simple virus that was able to infect only EXE files. It is now known to the world under the name of OLD YANKEE. The reason for this is that when the virus infects a new file, it plays the "Yankee Doodle" melody. The virus itself was quite trivial. Its only feature was its ability to infect EXE files. The author of this virus even distributed its source code (or, more exactly, the source code of the program that releases it). Nevertheless, the virus did not spread very widely and even had not been modified a lot. Only a few sites reported to be infected by it. Probably the reason for this was the fact, that the virus was non--resident and that it infected files only on the current drive. So the only possibility to get infected by it was to copy an infected file from one computer to another. When the puzzle of creating a virus which is able to infect EXE files was solved, V.B. lost his interest in this field and didn't write any other viruses. As far as I know, he currently works in real--time signal processing. 2.2)

buy custom Multinational Corporations essay

buy custom Multinational Corporations essay A multinational Corporation (MNC) is a business venture that offers goods and services in two or more countries. MNC has its management headquarter in a home country but spreads its operations in the other host countries. MNC largely influence economies of both the local and international countries across the world. So far MNC is the major factor towards building good international relations and globalization. As much as Multinational Corporations are focused to be constructive to the local societies and to achieve their objectives and potentials, they experience a number of challenges in their business operations. The commonest challege that faces the Multinational Corporations is lack of international legal framework to regulate and safeguard their activities and operations worldwide. Fully aware that trade related affairs are squarely subject to agreement between various stakeholders, countries and regions, MNCs are bound to operate at high levels of integration matchless of law in countries that are not signatories to the World Trade Organization. The reality that a business enterprise based in one country must obey the trade laws in the home country as well as those of their individual host countries results into a complexity of operations by the multinational corporations. In some host counties where there are inadequate laws and policies to regulate international trade, the MNCs should engage the local authorities in the subsequent enactment of trade laws, policies and regulations that are of mutual benefit to them both. The existence of these laws will protect global companies against unpredictable changes in foreign laws and policies that would pose a threat to their future growth and expansion. Secondly, MNCs should restrict their operations in countries that are signatories to the International trade agreements to ensure consistency and standardization of trade. Buy custom Multinational Corporations essay

CAUSES OF RENT ARREARS IN SOCIAL HOUSING -- (A LITERATURE REVIEW) review

CAUSES OF RENT ARREARS IN SOCIAL HOUSING -- (A ) - Literature review Example This is usually due to the low income that the renter is on, but there are other reasons which will be discussed in this essay. The causes of rent arrears in social housing is important because knowing the causes can help show why people have problems, if social housing rental prices need to be lowered, and how the agencies involved can help social housing tenants. Reducing the causes of rent arrears could lower the amount of rent arrears, causing less stress for the tenants and less financial burden on the government or supplying agency. Rent arrears might also lead to homelessness in cases when people have no other option, and this is something that needs to be avoided. The information is also interesting because it will help illustrate some social problems that these people have and this could be used in a wider context to understand social housing and perhaps rent arrears in general. The literature used in this review will be mainly found in housing journals, but some information will be found from other journals if they contain relevant information. Using this information, the essay will uncover the main reasons why people go into arrears on their rent in social housing by finding the key themes in the literature. This review is limited to research since the year 2000 because the most recent research is usually the most relevant to the situation, and the 21st century is interesting in many ways. Key Themes in the Literature One of the main themes in the literature is that rent arrears are a really important reason for many peoples homelessness. Crane (2000) suggests that 7% of all homeless men are homeless because they were evicted for rent arrears from social housing and a 29% more of these were in arrears to other companies. This suggests that many people struggle with financial management in social housing and this one of the main reasons why people get into rent arrears in social housing. There are suggestions that the government should sponsor some ed ucation for financial management (Collier, 2005) because this would help reduce one of the main causes of rent arrears. Research by Anderson & Christian (2003) also suggests that a number of people are homeless because they had gotten into rent arrears and often this was in social housing, although it does not give the specific causes of the rent arrears. A related theme is that some people in social housing may just not be able to afford it. Although the government or another agency does subsidise the cost of the rent, it may still be too expensive for some people. These people may have several children, no benefits, no job or many other things. This topic is found in the work of Milligan (2003) who suggests that the problems in Australia with rent arrears are mainly due to these factors and that work needs to be done on providing the housing at an even lower cost if possible. This will be the only way that rent arrears will be less common. This problem was also found in the United Kingdom and talked about by Hills (2007), who again suggested that the costs need to be lowered to make rent arrears less common in the UK. Priemus & Dieleman (2002) show that rent arrears due to the high cost of social housing are found throughout Europe and that prices are rising. More evidence from Yates & Wulff (2000) suggests that the amount of low cost social housing is being reduced meaning that more people are forced to take on housing which is too expensive for them and this

Iegal concept working in restaurant Term Paper Example | Topics and Well Written Essays - 2000 words

Iegal concept working in restaurant - Term Paper Example It will seek to show what is legal under the law, the rights of the employee and the client under the law, and circumstances that can lead to claims from the customer. Basically, the Hospitality law encompasses a wide array of laws including the law of tort, contract law, real estate law, the law of anti-trust, among others (Barth, 2001). The degree to which this law relates to such laws has continuously evolved and changed accordingly to meet the dynamics of the hospitality industry. Nevertheless, this law is used greatly to set standards and guidelines that hospitality operators and employers use in offering goods and services to their customers. Typically, this law covers the history of how hospitality law came into being, the impact that state civil rights and federal laws have on the hospitality industry, and discussion of contract law such as how a customer enters into a contract with the restaurant employees or issues regarding reservations and overbooking (Langford, 2011). With the use of internet to make reservations and orders being on the rise, the Hospitality law has evolved to include such issues, as well. In addition, in the current world both the customers and the employees know their rights and the channels that they can use to launch complaints or make claims. In this regard, the Hospitality law has continually evolved as new and better knowledge keeps on emerging. In the recent past, cases of food poisoning and awareness of food illness have been on the rise with more people being interested in getting information about the restaurant that they eat from. This has brought the Hospitality law in restaurants at the front center of public conscience. In matters related to restaurant and food services, terrorists’ attacks against hotels have raised the importance of having hospitality law that will govern international affairs especially in the quest of protecting

Target Corp - Strategic Management - 5 forces - value chain Essay

Target Corp - Strategic Management - 5 forces - value chain - Essay Example Operating in a dynamic business environment, companies often have to change their strategies to suit the industry requirements. Technological environment keeps on changing, so does customer tastes and preferences as well as government policies. The environment an organization was operating in five years ago, and the challenges faced then, are a very different from the challenges faced today. Five years from today, this scenario will be different. Thus, strategic management as a process does not end at any particular time; rather, it is an evolutionary process. As the business environment keeps changing, the management in most cases has to implement changes that will ensure that it successfully meets its goals and objectives. Failure to implement such changes whenever they fall due means that the organization falls short of its goals and objectives. Thus, it fails to live up to its vision, mission and does not achieve its target. As a destination, strategic management aims at achievin g particular goals and objectives, defined by the mission, vision and objective statement of the firm. A destination establishes a journey; not until the company reaches the defined destination, then strategies will keep on changing, through the review process. b. All companies currently must have a strategic plan to survive in the highly competitive business environment. Every organization, serious enough in achieving its goals and objectives needs to have plans on what it hopes to achieve. Even if it lacks a mission statement, then it ought to have a vision of the goals it hopes to achieve in the long term. A strategic management statement defines the vision and the mission, establishes goals and objectives to achieve. These are the underlying factors in a strategic plan of a company. Target Corporation has a vision, a mission and a target objective, the key elements defining a mission statement of a company. Laying out its plans in a well-defined way and manner, with a comprehens ively started goals and objectives, Target Corporation qualifies as a strategic management organization. While defining what it plans to achieve in future, Target Corporation plans to be the leading firm in the retail industry. Coming second from Wal-Mart retail chain in terms of market share and revenue collection, Target Corporation management hopes to become the leading firm, by passing Wal-Mart. the probability of this vision becoming a reality in absence of strategic management plans is zero. Therefore, Target has to lay down a framework that would help it achieve these goals and objectives. To achieve this strategy, the company plans to embark on an aggressive growth and expansion plan. Its long-term plans involve internal and external growth plans on areas identified through the SWOT analysis plan. Externally, it hopes to expand its operations internationally through establishment of more branches. This will not only win the firm a competitive advantage over other firms, but will also help it acquire a larger market share. Another way in which Target shows its strategic management plan is through product diversification and development. Despite offering a range of fashionable products, and enjoying high customer loyalty, the management believes that through product differentiation and diversification, it can win more customers,

Role of Debt in Capital Structure of Firms

Role of Debt in Capital Structure of Firms Capital structure has got importance in the literature of corporate finance. It provides insight about the role of debt in the capital structure of a firm. It is believed that firm endeavors to uphold optimal capital structure. In existing literature, however, there is no consensus among researchers about the level of optimal capital structure because of variation in proxies used to measure the same attribute, variation in industry norms (size, location and technology), agency cost (management ownership and competence) etc. The main objective of a firm is to maximize its profit and to give maximum return to its shareholders. For this purpose the company should use Optimal Capital Structure so as to achieve the desired targets, but usually when the time comes for the generation of capital, firms go with the more easiest way. The study investigates the relationship between the weighted average cost of capital (WACC) with Debt / Equity ratio of the firms in the Fertilizer Sector through , cross sectional analysis for the financial year 2010. The present study depicts that firms always keep in mind the tax shield. They usually prefer debt due to tax shield but some firms go with the more easiest way to raise capital, and the concept of optimal capital structure is set aside. In Pakistan, the interest rates are usually high as compared to developed countries. That is why, big firms usually prefer to raise funds through equity instead of debt. Since, financial institutions offer loans to profitable firms, at low rate keeping in view their credit rating and riskiness of operations, so these firms like fertilizer companies also include debt in their capital structure. The results are constructed with the literate review concluding that there is no consensus among researchers about the level of optimal capital structure because of variation in proxies used to measure the same attribute, variation in industry norms (size, location and technology), agency cost (management ownership and competence) etc. Further, maximization of stock return for different firms is debatable. Introduction Capital structure theories provide insights about the role of debt in the capital structure of a firm. In corporate finance literature, it is believed that firm endeavor to uphold optimal capital structure. In existing literature, however, there is no consensus among researchers about the level of optimal capital structure because of variation in proxies used to measure the same attribute, variation in industry norms (size, location and technology), agency cost (management ownership and competence) etc. Further, maximization of stock return for different firms is debatable. Various decisions taken by management include operating, financial and non- financial decisions. Financial structure (capital structure) decisions have gained importance in corporate finance, strategic management and financial economics literature. These decisions have implication for shareholders value. Capital structure comprises of debt and equity, the choice of which is associated with different levels of benefit and controls. There have always been controversies among the researchers about the optimal capital structure of the firm because of significant variation with regard to capital structure of the firm because if significant variations with regard to capital structure existing in different industries and among firm within the same industry. Further, the different proxies may be used to measure the same attribute of a variable. Selection of these proxies may create biasness. Conventional determinants of capital structure in existing literature include collateral value of ass et, non-debt tax shield, growth, uniqueness, industry classification, size volatility, and profitability. Use of debt in capital structure of a firm acts as a monitoring device over managerial actions. Use of debt puts pressure on managers to enhance the performance of a firm so that sufficient cash flows are generated to retire loan obligations. The main objective of business firm is to maximize the wealth of shareholders in the long run, the management should only invest in projects which give are turn in excess of cost of funds invested in the projects of the business. The difficulty will arise in determination of cost of funds, if it raised from different sources and different quantums. The various sources of funds to the company are in the form of equity and debt. The cost of capital is the rate of return the company has to pay to various suppliers of funds in the company. There are variations in the cost of capital due to the fact that different kinds of investment carry different levels of risk which is compensated for by different levels of return on the investment. There are two main sources of capital for a company: shareholders and lenders usually debenture holders and financial institutions. The cost of equity and cost of debt are the rates of return that need too be offered to these two groups of suppliers of capital in order to attract funds from them. The cost of capital consist of four elements: Cost of Equity (Ke), Cost of Retained Earning (Kr), Cost of Preferred Capital (Kp) and Cost of Debt( Kd).The funds required for the project are raised from the equity shareholders which are of permanent nature. These funds need not be repayable during the life time of the organization. Hence its a permanent source of funds. The equity shareholders are the owners of the company. The main objective of the firm is to maximize the wealth of the equity shareholders. Equity share capital is the risk capital of the company. If the companys business is doing well the ultimate beneficiaries are the equity shareholders who will get the return in the form of dividends from the company and the capital appreciation for their investment. If the company comes for liquidation due to losses, the ultimate and worst sufferers are the equity shareholders. Sometimes they may not get their investment back during the liquidation process. The following methods are used in calculation of cost of equity. First is Dividend Yield Method. The Dividend per share is expected on the current market price per share. As per this method, the cost of capital is defined as â€Å"the discount rate that equates the present value of all expected future dividends per share with the net proceeds of the sales (or the current market price) of a share. This method is based on the assumption that market value of shares is directly related to the future dividends on the shares. Another assumption is that the future dividend per shares is expected to be constant and the company is expected to earn at least this yield to keep the shareholders content. Second method is Dividend growth Model in which shareholders will normally expect to increase year after year and not to remain constant in perpetuity. In this method, an allowance for future growth in dividend is added to the current dividend yield. It is recognized that the current market price of a share reflect expected future dividends. The dividend growth model is also called as â€Å"Gordon dividend growth model. Third model is Price Earning Method which takes into consideration the Earning per share(EPS) and the market price of the share. It is based on the assumption that the investors capitalize the stream of future earnings of the share and the earnings of a share need not be in the form of dividend and also it need not be disbursed to the shareholders. It based on the argument that even if the earning are not disbursed as dividends, it is kept in the retained earnings and it causes future growth in the earnings of capital, the earning per share is divided by the current market price. Forth model is Capital Asset Pricing Model which divides the cost of equity into two components, the near risk-free return available on investing in government bonds and an addition risk premium for investing in a particular share or investment. This risk premium in turn comprises the average return on the overall market portfolio and the beta factor (or risk) of the particular investment. Putting this all together the CAPM assesses the cost of equity for an investment. Literature Review The empirical study done by Modigliani and Miller (1958) depicts the basis of capital structure. Under the assumption of market perfection, they argued that the value of firm is independent from its mode or source of financing. They believe that cost of capital had no influence on the capital structure, so according to them there exists no capital structure. The level of leverage may be different in the firm or within the same industry. In their point of view, the value of firm is not determined by however, the firm finances its assets but by the real assets possession is the actual value of a firm. Researchers have relaxed the unrealistic assumptions in Modigliani and Miller proposition. In real life there exists information asymmetry. Debt payments are subject to tax shield. Agency costs reflect a tradeoff model where decrease in agency cost of equity will cause an increase in agency cost of debt Jensen and Meckling (1976) They argue that agency costs, however, reduce because use of debt restricts issuance of equity, which in turn strengthens managerial ownership. It helps to reduce agency conflicts. Myers and Majluf (1984) argue that use of debt reduces agency problems. Further, leverage also bring its own agency cost that generates a conflict between agency cost of debt and equity. Jensen (1986) argues that use of debt constrains the free cash flow explanations give birth to its fixed nature of obligations. Since managerial compensation had controlled the positively related firms to grow, therefore, investors may invest available cash flows optimally or utilizes the available cash flows to pay dividends or profits. When profits are paid at low rate due to some reason, it extremely impacts the shares market price. Use of debt generate limits to the managerial discretion to use such cash flows fully because of non-payment of profit on debt may take a firm bankruptcy. Further, firms that use debt faces extreme scanning by debt holders. These facts indulge managers to utilize their resources optimally which ultimately enriches firm value. The theoretical framework of capital structure begins with the seminal paper of Modigliani and Miller (1958) who postulate that capital structure of a firm is irrelevant in perfect capital markets. By using net operating income approach, they argue that the overall capitalization rate remain constant for any level of financial leverage. That is, the total risk of security holders of a firm remains unaffected for any change in capital structure. Therefore, value of a firm is independent of the capital structure of a firm. Their theory is based on unrealistic assumptions of no income taxes, no transaction costs, no information asymmetry, no bankruptcy and agency cost etc. They believe in the conservation of investment value. The researchers have relaxed the assumption of perfect capital market assumed by Modigliani and Miller. Following theories explain the relevance of capital structure under different market imperfection. Trade off theory relaxes the assumption of bankruptcy costs. It considers the cost of financial distress (bankruptcy cost, reorganization cost and non-bankruptcy cost). It elaborates the impact of financing cost and tax shield on debt. According to trade-off theory, increase in debt is positively related to marginal cost of debt and negatively related to marginal benefit of increase in debt. A firm focuses on trade-off between marginal benefit and cost of debt while deciding about the proportion of debt and equity in its capital structure with a view to optimize the overall value of the firm. A firm should borrow until the marginal tax advantage of additional debt is offset by the increase in present value of the expected costs of financial distress. This theory has been criticized by researchers on different grounds. For instance, Miller (1977) argues that firms pay large taxes frequently, whereas occurrence of bankruptcy is not recurring in nature. So, low weights are assigned to b ankruptcy cost. Further, in reality, firms do not have higher weightage of debt in their capital structure. Pecking Order theory of capital structure is based on the costs of asymmetric information. It assumes relevance of asymmetric information only for external financing. It describes the sequence (internal financing to external financing) that a firm uses to finance its capital expenditures. According to pecking order, a firm having sufficient profits and cash flows use internal funds first. It will go for external financing if internal funds are not sufficient. While deciding about external financing, a firm will issue the safest security like bonds; debenture or term-finance certificates and equity will be used as the last option. Further, in case the internally generated cash flows exceed the capital investment requirements, these excessive cash flows will be utilized to repay debt instead of buying back equity. Milton and Artur (1991) discussed the theory of capital structure grounded on four basic factors. Firstly, agency cost that shows conflicts among managers, equity holders and debt holders. Secondly, there is asymmetric information and it explains the possible capital structure. Thirdly, it is centered on the product/input market interactions with Capital structure. Fourthly, it describes theories driven by co-operate control consideration it shows the linkage between the market for co-operate control and for Capital structure. Peter and Gordon (2005) have discussed the importance of industry to firm-level financing and real its decisions. The findings of this paper were financial structure that depends on a firms position within its industry and In competitive industry, a firms financial control depends on its natural hedge the activities of other firms in this industry, and its status as entrant, current performance, or exiting firm. Financial control is higher and less discrete in concentrated industries, where strategic debt interactions are stronger, but a firms natural hedge is not significant. Our finding shows that financial structure, technology, and risk are jointly determined within industries. These findings are reliable with recent industry equilibrium models of financial structure. The analysis made by Laurence et al (2001), discusses the Capital Structures in developing countries uses a new set of data to assess whether capital structure theory is transferable across countries with different influential structures or not. In this analysis they used 10 developing countries and provided evidence that these decisions are affected by the same factors as in developed countries. However, there are persistent differences across countries, indicating that specific country factors are at work. their findings suggests that although some of the insights from modern finance theory are transferable across countries and much remains to be done to understand the impact of different institutional features on capital structure choices. This paper affirms the arguments on the tax shield valuation as it remains a hot issue in the financial literature. Basically, two methods have been projected to incorporate the tax benefit of debt in the present value computation: The adjusted present value (APV), and the weighted average cost of capital (WACC). This note clarifies the correlation between these two apparently different approaches by offering a formula for the WACC. Firms interest expenses are tax deductible. Therefore, debt increases the cash flows available to stockholders and bondholders by the amount of the tax reduction. Joseph Ignacio (2005), discusses the cost of debt is the market rate or unsubsidized rate for which an investor is willing to pay. In further detail debt creates and sustain its value when tax shield is applied and the rate is sustainable but if the rate of repayment is high then form the loan and at a low market rate then loan will be preferable as it is subsidized debt and no tax is applied, the firm would be a benefited with debt financing, and the unlevered and levered values of the cash flows would be unequal. And the optimal rate of return and WACC can be achieved if a firm follows the rules and take into account all sources of financing. Tom and Timothy (2004) assumes that the use of weighted average cost of capital (WACC) is better then the use of any other calculation because either it may be riskier or will not depict the true picture of the financial performance or the position of the firm. This paper encourages the usage of WACC in all the firms although it is difficult to calculate and had some mathematical complexities but after that it depicts a clear picture of the firm, as by using spreadsheets it is easy to present the findings of the company to its managers, clients, colleagues and shareholders. The WACC is a fundamental concept in corporate finance. Its basic definition is averaging the cost of capital coming from both the equity and the debt by Farber at el (2006) and it looks simple. But the fact is its practical implementation which has raised several questions, they are most likely the distinction between book value and the market value. This paper addresses more in depth the tax shield valuation and establishes a general formula that remains valid for any debt structure. In this context, there contribution allows not only to compare the usual WACC computation in a more rigorous way but also less synthetic one, and helps the firms to adapt the WACC approach to any chosen tax shield valuation model. In this sense, the WACC appears as a powerful and very adaptable concept. Greg (2004), discusses what is WACC and what are there components and how these components are calculated and are helpful in the calculation of WACC. The paper further discusses that what should be the minimum discount rate that make intuitive sense to invest or to add a firm in portfolio. It also explains that what is the cost of debt, cost of financing and the components of cost of financing. Myers and majluf (1984), argues that the use of debt reduces agency problems and further leverage also brings its own agency cost thats generates a conflict between agency cost debt and equity. Jenson (1986), states that the use of debt will restrict the cash flow projections due to its fixed rules. Since marginal benefits and control its positively related to firm development. Therefore management may invest available resources to obtain cash flows. When dividend are paid but at a low rate its adversely affect the share price in the market. The usage of debt limits the firm to invest else-where because the non-payment of the debt leads to bankruptcy. Lakshmi (1994), differentiates between the traditional capital structure models and the new pecking order theory model of the corporate financing. The basics of pecking order theory model assumes that the debt financing driven by the internal financing, has much more time series explanatory power than a static trade of model, which predicts that each firm adjusts gradually toward an optimal debt ratio. And had shown in their results that the power to reject the pecking order against trade of theory. The model of (CAPM) given by William and John (1964,1965), gives evidence of the birth of asset pricing theory for which noble prize was given to sharpe in 1990. Forty years later CAPM is now publically used in estimating the cost of capital of the industry and evaluating the esteem to have the maximum profits from the portfolio invested in. The attractiveness in estimation of CAPM is that it offers a wide pleasing range of predictions about how to measure and ensure the risk and the relation between expected returns and risk. Unfortunately, some problems of CAPMs may reflect the theory may fails at some times, the result of many not be as per assumptions. But they may be caused by difficulties in implementation of valid tests to the model. Dan at el (2005) examine the entire associations between leverage, corporate and personal taxes, and the firms cost of equity to generate capital. Expanding the theory of Modigliani and Miller (1958, 1963), the cost of equity capital can be expressed as an impact of leverage and corporate and level taxes. The predictions that the equity cost will increase in leverage, but that corporate taxes shifts from leverage related risk premium, while the personal tax disadvantage of burden of debt reduces the profit. They examined the findings by using implied equity cost estimation system of the firms corporate tax rate and the personal tax gives a big advantage of debt. Their result suggests that the premium equity risk is linked with the profit, and if the entire profit is decreasing the corporate tax generates benefit. They also marked evidence that the premium equity risk has relations with leverage, and increase in entire profit may give a results in increased in personal tax. Rodolfo (2008) sets forth the contribution to this long lasting debate on cost of capital, firstly by introducing the multiplicative model that helps to calculate the rate of WACC. Secondly, by making adjustments in the rate of governance risk. The older approach says that the cost of capital might be calculated by means of a weighted average of debt and capital. But this is not a correct way of calculation and that might bring misappropriation, whereas the multiplicative model not only calculate the linear approximation but also the joint outcome of expected costs of debt and stock, and its proportion in the capital structure of that firm. Nevins (1967), explains in reference to Modigliani and millers discussion that how leverage can be effective and efficient to increase the entire cost of capital of the industry or the firm. He also discusses in detail that when the account is taken of risk and is ruin an increasing cost of capital is perfectly the same with little arbitrage operations. Giving ways to the chances of bankruptcy is tantamount to relax the that entire stream of operating earnings Is independent from the entire capital structure. Robert (1988), argues the effect of corporate and personal taxes on the firms optimal capital structure and financing decisions under uncertain defined conditions. It further more discussion they discussed the entire capital structure model by categorizing them entire firms important investments decisions. The results suggests that when investment was allowed to adjust optimally the existing assumptions about the relationship between investment and debt related tax shields must be changed. Secondly, they discussed that the increases in investment related tax shields changes due to corporate tax code are not necessarily linked with reductions in profits at the individual and companys level. In cross sectional analysis, firms with bigger investment tax shield. Need not to have lower debt tax shields unless all the market utilize the same mechanism. Differences in production technologies in the entire market may query questions that why the empirical results cross-sectional analysis do not meet the expectations of the researchers. Alan reviewed the financial consumption and behavior of the company to increase their profits and wealth of their existing shareholders. They mainly focuses on the impact of personal income and capital gains and taxes, and discovered that in the presence of different taxation systems of dividends and capital gains, wealth maximization does not imply maximization of firm market value and the source of equity financing is not irrelevant. The approximate cost of capital in the presence of income taxes does not depend directly on either the dividend payout rate or the tax on dividends paid. Equity shares have a market value lower than the difference between the production cost of a companys assets and the current market value of its debt obligations. Because of this capitalization, it need not be true that an economy without taking risks and uncertainty there would have no financing. The Hypothesis The detail literature review enabled us to construct the following hypothesis. H0: The firm with high debt/ equity ratio should have less cost of capital. H1: The firm with lower debt/ equity ratio should have higher cost of capital.. Research Methodology This chapter describes the methodology to investigate research problems in order to draw conclusion for the present study. Research methodology comprises of research method employed identification to the problem criteria for sample selection methods for data collection and construction for measuring instruments. It comprises of the brief description of variables and proxies used to measure those variables. It also describers research limitation and ethical concerns. 3.1 Research design and data description As stated earlier, the objective of the study is to explore the relationship between the Debt / Asset Ratio and the weighted average cost of capital. For this purpose we have targeted four companies of fertilizer sector from Pakistan into year 2010. Basically there are four companies in the Fertilizer sector listed under the roof of Karachi Stock Exchange, but three of them are selected at random. Therefore, the sample size comprises of almost cover 75% of the fertilizer sector. 3.2 Model Description As stated earlier the study has been under taken to investigate the relationship of Debt / Equity Ratio and weighted cost of capital in the industry. Following models are used to calculate the cost of capital. 3.2.1 Cost of debt The capital structure of a firm normally include the debt component. The debt may be in the form of Debentures, Bonds, Term Loans from Financial Institutions and Banks etc. The debt carries a fix rate of interest, irrespective of the profitability of the company. Because the coupon rate is fixed, the firm increases its earning through debt financing. Then after payment of fixed interest charges more surplus is available for equity shareholders, and hence EPS will increase. An important point to be remembered that dividends payable to equity shareholders and preference shareholders is an appropriation of profit, whereas the interest payable to debt is charged against profit. Therefore, any payment towards interest will reduce the profit and ultimately the companys tax liability will decrease. The phenomenon is called as tax shield. The tax shield is viewed as a benefit that accrues to the company which is geared. 3.2.2 Price Earning Method This method takes into consideration the Earning per share(EPS) and the market price of the share. It is based on the assumption that the investors capitalize the stream of future earnings of the share and the earnings of a share need not be in the form of dividend and also it need not be disbursed to the shareholders. It based on the argument that even if the earning are not disbursed as dividends, it is kept in the retained earnings and it causes future growth in the earnings of capital, the earning per share is divided by the current market price. We have selected price earning method as this method provides us the required results. Although there are various methods to calculate the cost of Equity but there are some limitations applied on them. 3.2.3 Debt / Equity Ratio The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of shareholders equity and debt used to raise the companys capital. It is also known as Risk, Gearing or Leverage Ratio. The two components are often taken from the firms balance sheet or statement of financial position, but the ratio may also be calculated using market values for both, if the companys debt and equity are publicly traded, or using a combination of book value for debt and market value for equity financially. =Long Term Interests Bearing Debt/ Total Equity 3.3 Companies Included in the Study Following companies are included in this study from the Fertilizer sector for detailed analysis. Fauji Fertilizer Limited. (FFC) Fauji Fertilizer Bin Qasim Limited. (FFBL) Dawood Hercules Chemicals Limited. (DAWH) 3.4 Limitations of The Study Although there are various methods to calculate the Cost of Equity but there are some limitations. For instance, Gordon Growth Model cannot be applied because the firms in Pakistan do not pay dividends at perpetual constant growth rate. The other technique Capital Asset Pricing Model of calculating the Cost of Equity will create biasness due to real adjustment of inflation premium in real rate of interest to calculate the risk free rate of return. Further, the return on market portfolio requires a detailed analysis of stock returns with other financial indicators. Therefore, the study uses Price Earning Method due to availability of actual and exact data. Empirical Study Of Fertilizer Sector This chapter includes the descriptive results and detailed analysis. The detailed analysis of Fertilizer sector is given below. It includes Cost of Debt KD, Cost of Equity KE, the WACC and Debt / Equity Ratio of the three companies which fall in the fertilizer sector. Analysis The present study empirically investigates the relationship between the Weighted Average Cost Of Capital and Return On Assets. We have chosen three fertilizer companies listed in Karachi Stock Exchange. Name of Company WACC Debt/ Equity Ratio Fauji Fertilizer Limited 12.77% 24.72% Fauji Fertilizer Bin Qasim Limited 9.18% 37.16% Dawood Hercules Chemicals Limited 10.98% 20.91% After the detailed analysis, the study concludes that Fauji fertilizer has low debt / equity ratio as compared to Fauji Fertilizer Bin Qasim Limited and higher WACC. Which is consistent with our hypothesis that H0: The firm with high debt/ equity ratio should have less cost of capital. In the case of Fauji Fertilizer Bin Qasim Limited it has higher Debt / Equity ratio as compared to Dawood Hercules. So accordingly, its WACC is less than Dawood Hercules which is consistent with our Hypothesis. Further, when we compared Dawood Hercules with Fauji Fertilizer the study concludes that, though the debt / equity ratio of Fauji Fertilizer has greater Debt / Equity Ratio than of Dawood Hercules, but the WACC of Fauji Fertilizer is higher than Dawood Hercules. Which is not favorable according to hypothesis. This conclusion leads to the conclusion that while deciding about the capital structure, the firms always do not keep in mind the optimal capital structure which is subject to the availabil ity of funds. Conclusion The present study depicts that firms always keep in mind the tax shield. They usually prefer debt due to tax shield but some firms go with the more easiest way to raise capital, and the concept of optimal capital structure is set aside. In Pakistan, the interest rates are usually high as compared to developed countries. That is why, big firms usually prefer to raise funds through equity instead of debt. Since, financial institutions offer loans to profitable firms, at low rate keeping in view their credit rating and riskiness of operations, so these firms like fertilizer companies also include debt in their capital structure. The results are constructed with the literate review concluding that there is no consensus among researchers about the level of optimal capital structure because of variation in proxies used to measure the same attribute, variation in industry norms (size, location and technology), agency cost (management ownership and competence) etc. Further, maximization of s tock return for different firms is debatable. Role of Debt in Capital Structure of Firms Role of Debt in Capital Structure of Firms Capital structure has got importance in the literature of corporate finance. It provides insight about the role of debt in the capital structure of a firm. It is believed that firm endeavors to uphold optimal capital structure. In existing literature, however, there is no consensus among researchers about the level of optimal capital structure because of variation in proxies used to measure the same attribute, variation in industry norms (size, location and technology), agency cost (management ownership and competence) etc. The main objective of a firm is to maximize its profit and to give maximum return to its shareholders. For this purpose the company should use Optimal Capital Structure so as to achieve the desired targets, but usually when the time comes for the generation of capital, firms go with the more easiest way. The study investigates the relationship between the weighted average cost of capital (WACC) with Debt / Equity ratio of the firms in the Fertilizer Sector through , cross sectional analysis for the financial year 2010. The present study depicts that firms always keep in mind the tax shield. They usually prefer debt due to tax shield but some firms go with the more easiest way to raise capital, and the concept of optimal capital structure is set aside. In Pakistan, the interest rates are usually high as compared to developed countries. That is why, big firms usually prefer to raise funds through equity instead of debt. Since, financial institutions offer loans to profitable firms, at low rate keeping in view their credit rating and riskiness of operations, so these firms like fertilizer companies also include debt in their capital structure. The results are constructed with the literate review concluding that there is no consensus among researchers about the level of optimal capital structure because of variation in proxies used to measure the same attribute, variation in industry norms (size, location and technology), agency cost (management ownership and competence) etc. Further, maximization of stock return for different firms is debatable. Introduction Capital structure theories provide insights about the role of debt in the capital structure of a firm. In corporate finance literature, it is believed that firm endeavor to uphold optimal capital structure. In existing literature, however, there is no consensus among researchers about the level of optimal capital structure because of variation in proxies used to measure the same attribute, variation in industry norms (size, location and technology), agency cost (management ownership and competence) etc. Further, maximization of stock return for different firms is debatable. Various decisions taken by management include operating, financial and non- financial decisions. Financial structure (capital structure) decisions have gained importance in corporate finance, strategic management and financial economics literature. These decisions have implication for shareholders value. Capital structure comprises of debt and equity, the choice of which is associated with different levels of benefit and controls. There have always been controversies among the researchers about the optimal capital structure of the firm because of significant variation with regard to capital structure of the firm because if significant variations with regard to capital structure existing in different industries and among firm within the same industry. Further, the different proxies may be used to measure the same attribute of a variable. Selection of these proxies may create biasness. Conventional determinants of capital structure in existing literature include collateral value of ass et, non-debt tax shield, growth, uniqueness, industry classification, size volatility, and profitability. Use of debt in capital structure of a firm acts as a monitoring device over managerial actions. Use of debt puts pressure on managers to enhance the performance of a firm so that sufficient cash flows are generated to retire loan obligations. The main objective of business firm is to maximize the wealth of shareholders in the long run, the management should only invest in projects which give are turn in excess of cost of funds invested in the projects of the business. The difficulty will arise in determination of cost of funds, if it raised from different sources and different quantums. The various sources of funds to the company are in the form of equity and debt. The cost of capital is the rate of return the company has to pay to various suppliers of funds in the company. There are variations in the cost of capital due to the fact that different kinds of investment carry different levels of risk which is compensated for by different levels of return on the investment. There are two main sources of capital for a company: shareholders and lenders usually debenture holders and financial institutions. The cost of equity and cost of debt are the rates of return that need too be offered to these two groups of suppliers of capital in order to attract funds from them. The cost of capital consist of four elements: Cost of Equity (Ke), Cost of Retained Earning (Kr), Cost of Preferred Capital (Kp) and Cost of Debt( Kd).The funds required for the project are raised from the equity shareholders which are of permanent nature. These funds need not be repayable during the life time of the organization. Hence its a permanent source of funds. The equity shareholders are the owners of the company. The main objective of the firm is to maximize the wealth of the equity shareholders. Equity share capital is the risk capital of the company. If the companys business is doing well the ultimate beneficiaries are the equity shareholders who will get the return in the form of dividends from the company and the capital appreciation for their investment. If the company comes for liquidation due to losses, the ultimate and worst sufferers are the equity shareholders. Sometimes they may not get their investment back during the liquidation process. The following methods are used in calculation of cost of equity. First is Dividend Yield Method. The Dividend per share is expected on the current market price per share. As per this method, the cost of capital is defined as â€Å"the discount rate that equates the present value of all expected future dividends per share with the net proceeds of the sales (or the current market price) of a share. This method is based on the assumption that market value of shares is directly related to the future dividends on the shares. Another assumption is that the future dividend per shares is expected to be constant and the company is expected to earn at least this yield to keep the shareholders content. Second method is Dividend growth Model in which shareholders will normally expect to increase year after year and not to remain constant in perpetuity. In this method, an allowance for future growth in dividend is added to the current dividend yield. It is recognized that the current market price of a share reflect expected future dividends. The dividend growth model is also called as â€Å"Gordon dividend growth model. Third model is Price Earning Method which takes into consideration the Earning per share(EPS) and the market price of the share. It is based on the assumption that the investors capitalize the stream of future earnings of the share and the earnings of a share need not be in the form of dividend and also it need not be disbursed to the shareholders. It based on the argument that even if the earning are not disbursed as dividends, it is kept in the retained earnings and it causes future growth in the earnings of capital, the earning per share is divided by the current market price. Forth model is Capital Asset Pricing Model which divides the cost of equity into two components, the near risk-free return available on investing in government bonds and an addition risk premium for investing in a particular share or investment. This risk premium in turn comprises the average return on the overall market portfolio and the beta factor (or risk) of the particular investment. Putting this all together the CAPM assesses the cost of equity for an investment. Literature Review The empirical study done by Modigliani and Miller (1958) depicts the basis of capital structure. Under the assumption of market perfection, they argued that the value of firm is independent from its mode or source of financing. They believe that cost of capital had no influence on the capital structure, so according to them there exists no capital structure. The level of leverage may be different in the firm or within the same industry. In their point of view, the value of firm is not determined by however, the firm finances its assets but by the real assets possession is the actual value of a firm. Researchers have relaxed the unrealistic assumptions in Modigliani and Miller proposition. In real life there exists information asymmetry. Debt payments are subject to tax shield. Agency costs reflect a tradeoff model where decrease in agency cost of equity will cause an increase in agency cost of debt Jensen and Meckling (1976) They argue that agency costs, however, reduce because use of debt restricts issuance of equity, which in turn strengthens managerial ownership. It helps to reduce agency conflicts. Myers and Majluf (1984) argue that use of debt reduces agency problems. Further, leverage also bring its own agency cost that generates a conflict between agency cost of debt and equity. Jensen (1986) argues that use of debt constrains the free cash flow explanations give birth to its fixed nature of obligations. Since managerial compensation had controlled the positively related firms to grow, therefore, investors may invest available cash flows optimally or utilizes the available cash flows to pay dividends or profits. When profits are paid at low rate due to some reason, it extremely impacts the shares market price. Use of debt generate limits to the managerial discretion to use such cash flows fully because of non-payment of profit on debt may take a firm bankruptcy. Further, firms that use debt faces extreme scanning by debt holders. These facts indulge managers to utilize their resources optimally which ultimately enriches firm value. The theoretical framework of capital structure begins with the seminal paper of Modigliani and Miller (1958) who postulate that capital structure of a firm is irrelevant in perfect capital markets. By using net operating income approach, they argue that the overall capitalization rate remain constant for any level of financial leverage. That is, the total risk of security holders of a firm remains unaffected for any change in capital structure. Therefore, value of a firm is independent of the capital structure of a firm. Their theory is based on unrealistic assumptions of no income taxes, no transaction costs, no information asymmetry, no bankruptcy and agency cost etc. They believe in the conservation of investment value. The researchers have relaxed the assumption of perfect capital market assumed by Modigliani and Miller. Following theories explain the relevance of capital structure under different market imperfection. Trade off theory relaxes the assumption of bankruptcy costs. It considers the cost of financial distress (bankruptcy cost, reorganization cost and non-bankruptcy cost). It elaborates the impact of financing cost and tax shield on debt. According to trade-off theory, increase in debt is positively related to marginal cost of debt and negatively related to marginal benefit of increase in debt. A firm focuses on trade-off between marginal benefit and cost of debt while deciding about the proportion of debt and equity in its capital structure with a view to optimize the overall value of the firm. A firm should borrow until the marginal tax advantage of additional debt is offset by the increase in present value of the expected costs of financial distress. This theory has been criticized by researchers on different grounds. For instance, Miller (1977) argues that firms pay large taxes frequently, whereas occurrence of bankruptcy is not recurring in nature. So, low weights are assigned to b ankruptcy cost. Further, in reality, firms do not have higher weightage of debt in their capital structure. Pecking Order theory of capital structure is based on the costs of asymmetric information. It assumes relevance of asymmetric information only for external financing. It describes the sequence (internal financing to external financing) that a firm uses to finance its capital expenditures. According to pecking order, a firm having sufficient profits and cash flows use internal funds first. It will go for external financing if internal funds are not sufficient. While deciding about external financing, a firm will issue the safest security like bonds; debenture or term-finance certificates and equity will be used as the last option. Further, in case the internally generated cash flows exceed the capital investment requirements, these excessive cash flows will be utilized to repay debt instead of buying back equity. Milton and Artur (1991) discussed the theory of capital structure grounded on four basic factors. Firstly, agency cost that shows conflicts among managers, equity holders and debt holders. Secondly, there is asymmetric information and it explains the possible capital structure. Thirdly, it is centered on the product/input market interactions with Capital structure. Fourthly, it describes theories driven by co-operate control consideration it shows the linkage between the market for co-operate control and for Capital structure. Peter and Gordon (2005) have discussed the importance of industry to firm-level financing and real its decisions. The findings of this paper were financial structure that depends on a firms position within its industry and In competitive industry, a firms financial control depends on its natural hedge the activities of other firms in this industry, and its status as entrant, current performance, or exiting firm. Financial control is higher and less discrete in concentrated industries, where strategic debt interactions are stronger, but a firms natural hedge is not significant. Our finding shows that financial structure, technology, and risk are jointly determined within industries. These findings are reliable with recent industry equilibrium models of financial structure. The analysis made by Laurence et al (2001), discusses the Capital Structures in developing countries uses a new set of data to assess whether capital structure theory is transferable across countries with different influential structures or not. In this analysis they used 10 developing countries and provided evidence that these decisions are affected by the same factors as in developed countries. However, there are persistent differences across countries, indicating that specific country factors are at work. their findings suggests that although some of the insights from modern finance theory are transferable across countries and much remains to be done to understand the impact of different institutional features on capital structure choices. This paper affirms the arguments on the tax shield valuation as it remains a hot issue in the financial literature. Basically, two methods have been projected to incorporate the tax benefit of debt in the present value computation: The adjusted present value (APV), and the weighted average cost of capital (WACC). This note clarifies the correlation between these two apparently different approaches by offering a formula for the WACC. Firms interest expenses are tax deductible. Therefore, debt increases the cash flows available to stockholders and bondholders by the amount of the tax reduction. Joseph Ignacio (2005), discusses the cost of debt is the market rate or unsubsidized rate for which an investor is willing to pay. In further detail debt creates and sustain its value when tax shield is applied and the rate is sustainable but if the rate of repayment is high then form the loan and at a low market rate then loan will be preferable as it is subsidized debt and no tax is applied, the firm would be a benefited with debt financing, and the unlevered and levered values of the cash flows would be unequal. And the optimal rate of return and WACC can be achieved if a firm follows the rules and take into account all sources of financing. Tom and Timothy (2004) assumes that the use of weighted average cost of capital (WACC) is better then the use of any other calculation because either it may be riskier or will not depict the true picture of the financial performance or the position of the firm. This paper encourages the usage of WACC in all the firms although it is difficult to calculate and had some mathematical complexities but after that it depicts a clear picture of the firm, as by using spreadsheets it is easy to present the findings of the company to its managers, clients, colleagues and shareholders. The WACC is a fundamental concept in corporate finance. Its basic definition is averaging the cost of capital coming from both the equity and the debt by Farber at el (2006) and it looks simple. But the fact is its practical implementation which has raised several questions, they are most likely the distinction between book value and the market value. This paper addresses more in depth the tax shield valuation and establishes a general formula that remains valid for any debt structure. In this context, there contribution allows not only to compare the usual WACC computation in a more rigorous way but also less synthetic one, and helps the firms to adapt the WACC approach to any chosen tax shield valuation model. In this sense, the WACC appears as a powerful and very adaptable concept. Greg (2004), discusses what is WACC and what are there components and how these components are calculated and are helpful in the calculation of WACC. The paper further discusses that what should be the minimum discount rate that make intuitive sense to invest or to add a firm in portfolio. It also explains that what is the cost of debt, cost of financing and the components of cost of financing. Myers and majluf (1984), argues that the use of debt reduces agency problems and further leverage also brings its own agency cost thats generates a conflict between agency cost debt and equity. Jenson (1986), states that the use of debt will restrict the cash flow projections due to its fixed rules. Since marginal benefits and control its positively related to firm development. Therefore management may invest available resources to obtain cash flows. When dividend are paid but at a low rate its adversely affect the share price in the market. The usage of debt limits the firm to invest else-where because the non-payment of the debt leads to bankruptcy. Lakshmi (1994), differentiates between the traditional capital structure models and the new pecking order theory model of the corporate financing. The basics of pecking order theory model assumes that the debt financing driven by the internal financing, has much more time series explanatory power than a static trade of model, which predicts that each firm adjusts gradually toward an optimal debt ratio. And had shown in their results that the power to reject the pecking order against trade of theory. The model of (CAPM) given by William and John (1964,1965), gives evidence of the birth of asset pricing theory for which noble prize was given to sharpe in 1990. Forty years later CAPM is now publically used in estimating the cost of capital of the industry and evaluating the esteem to have the maximum profits from the portfolio invested in. The attractiveness in estimation of CAPM is that it offers a wide pleasing range of predictions about how to measure and ensure the risk and the relation between expected returns and risk. Unfortunately, some problems of CAPMs may reflect the theory may fails at some times, the result of many not be as per assumptions. But they may be caused by difficulties in implementation of valid tests to the model. Dan at el (2005) examine the entire associations between leverage, corporate and personal taxes, and the firms cost of equity to generate capital. Expanding the theory of Modigliani and Miller (1958, 1963), the cost of equity capital can be expressed as an impact of leverage and corporate and level taxes. The predictions that the equity cost will increase in leverage, but that corporate taxes shifts from leverage related risk premium, while the personal tax disadvantage of burden of debt reduces the profit. They examined the findings by using implied equity cost estimation system of the firms corporate tax rate and the personal tax gives a big advantage of debt. Their result suggests that the premium equity risk is linked with the profit, and if the entire profit is decreasing the corporate tax generates benefit. They also marked evidence that the premium equity risk has relations with leverage, and increase in entire profit may give a results in increased in personal tax. Rodolfo (2008) sets forth the contribution to this long lasting debate on cost of capital, firstly by introducing the multiplicative model that helps to calculate the rate of WACC. Secondly, by making adjustments in the rate of governance risk. The older approach says that the cost of capital might be calculated by means of a weighted average of debt and capital. But this is not a correct way of calculation and that might bring misappropriation, whereas the multiplicative model not only calculate the linear approximation but also the joint outcome of expected costs of debt and stock, and its proportion in the capital structure of that firm. Nevins (1967), explains in reference to Modigliani and millers discussion that how leverage can be effective and efficient to increase the entire cost of capital of the industry or the firm. He also discusses in detail that when the account is taken of risk and is ruin an increasing cost of capital is perfectly the same with little arbitrage operations. Giving ways to the chances of bankruptcy is tantamount to relax the that entire stream of operating earnings Is independent from the entire capital structure. Robert (1988), argues the effect of corporate and personal taxes on the firms optimal capital structure and financing decisions under uncertain defined conditions. It further more discussion they discussed the entire capital structure model by categorizing them entire firms important investments decisions. The results suggests that when investment was allowed to adjust optimally the existing assumptions about the relationship between investment and debt related tax shields must be changed. Secondly, they discussed that the increases in investment related tax shields changes due to corporate tax code are not necessarily linked with reductions in profits at the individual and companys level. In cross sectional analysis, firms with bigger investment tax shield. Need not to have lower debt tax shields unless all the market utilize the same mechanism. Differences in production technologies in the entire market may query questions that why the empirical results cross-sectional analysis do not meet the expectations of the researchers. Alan reviewed the financial consumption and behavior of the company to increase their profits and wealth of their existing shareholders. They mainly focuses on the impact of personal income and capital gains and taxes, and discovered that in the presence of different taxation systems of dividends and capital gains, wealth maximization does not imply maximization of firm market value and the source of equity financing is not irrelevant. The approximate cost of capital in the presence of income taxes does not depend directly on either the dividend payout rate or the tax on dividends paid. Equity shares have a market value lower than the difference between the production cost of a companys assets and the current market value of its debt obligations. Because of this capitalization, it need not be true that an economy without taking risks and uncertainty there would have no financing. The Hypothesis The detail literature review enabled us to construct the following hypothesis. H0: The firm with high debt/ equity ratio should have less cost of capital. H1: The firm with lower debt/ equity ratio should have higher cost of capital.. Research Methodology This chapter describes the methodology to investigate research problems in order to draw conclusion for the present study. Research methodology comprises of research method employed identification to the problem criteria for sample selection methods for data collection and construction for measuring instruments. It comprises of the brief description of variables and proxies used to measure those variables. It also describers research limitation and ethical concerns. 3.1 Research design and data description As stated earlier, the objective of the study is to explore the relationship between the Debt / Asset Ratio and the weighted average cost of capital. For this purpose we have targeted four companies of fertilizer sector from Pakistan into year 2010. Basically there are four companies in the Fertilizer sector listed under the roof of Karachi Stock Exchange, but three of them are selected at random. Therefore, the sample size comprises of almost cover 75% of the fertilizer sector. 3.2 Model Description As stated earlier the study has been under taken to investigate the relationship of Debt / Equity Ratio and weighted cost of capital in the industry. Following models are used to calculate the cost of capital. 3.2.1 Cost of debt The capital structure of a firm normally include the debt component. The debt may be in the form of Debentures, Bonds, Term Loans from Financial Institutions and Banks etc. The debt carries a fix rate of interest, irrespective of the profitability of the company. Because the coupon rate is fixed, the firm increases its earning through debt financing. Then after payment of fixed interest charges more surplus is available for equity shareholders, and hence EPS will increase. An important point to be remembered that dividends payable to equity shareholders and preference shareholders is an appropriation of profit, whereas the interest payable to debt is charged against profit. Therefore, any payment towards interest will reduce the profit and ultimately the companys tax liability will decrease. The phenomenon is called as tax shield. The tax shield is viewed as a benefit that accrues to the company which is geared. 3.2.2 Price Earning Method This method takes into consideration the Earning per share(EPS) and the market price of the share. It is based on the assumption that the investors capitalize the stream of future earnings of the share and the earnings of a share need not be in the form of dividend and also it need not be disbursed to the shareholders. It based on the argument that even if the earning are not disbursed as dividends, it is kept in the retained earnings and it causes future growth in the earnings of capital, the earning per share is divided by the current market price. We have selected price earning method as this method provides us the required results. Although there are various methods to calculate the cost of Equity but there are some limitations applied on them. 3.2.3 Debt / Equity Ratio The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of shareholders equity and debt used to raise the companys capital. It is also known as Risk, Gearing or Leverage Ratio. The two components are often taken from the firms balance sheet or statement of financial position, but the ratio may also be calculated using market values for both, if the companys debt and equity are publicly traded, or using a combination of book value for debt and market value for equity financially. =Long Term Interests Bearing Debt/ Total Equity 3.3 Companies Included in the Study Following companies are included in this study from the Fertilizer sector for detailed analysis. Fauji Fertilizer Limited. (FFC) Fauji Fertilizer Bin Qasim Limited. (FFBL) Dawood Hercules Chemicals Limited. (DAWH) 3.4 Limitations of The Study Although there are various methods to calculate the Cost of Equity but there are some limitations. For instance, Gordon Growth Model cannot be applied because the firms in Pakistan do not pay dividends at perpetual constant growth rate. The other technique Capital Asset Pricing Model of calculating the Cost of Equity will create biasness due to real adjustment of inflation premium in real rate of interest to calculate the risk free rate of return. Further, the return on market portfolio requires a detailed analysis of stock returns with other financial indicators. Therefore, the study uses Price Earning Method due to availability of actual and exact data. Empirical Study Of Fertilizer Sector This chapter includes the descriptive results and detailed analysis. The detailed analysis of Fertilizer sector is given below. It includes Cost of Debt KD, Cost of Equity KE, the WACC and Debt / Equity Ratio of the three companies which fall in the fertilizer sector. Analysis The present study empirically investigates the relationship between the Weighted Average Cost Of Capital and Return On Assets. We have chosen three fertilizer companies listed in Karachi Stock Exchange. Name of Company WACC Debt/ Equity Ratio Fauji Fertilizer Limited 12.77% 24.72% Fauji Fertilizer Bin Qasim Limited 9.18% 37.16% Dawood Hercules Chemicals Limited 10.98% 20.91% After the detailed analysis, the study concludes that Fauji fertilizer has low debt / equity ratio as compared to Fauji Fertilizer Bin Qasim Limited and higher WACC. Which is consistent with our hypothesis that H0: The firm with high debt/ equity ratio should have less cost of capital. In the case of Fauji Fertilizer Bin Qasim Limited it has higher Debt / Equity ratio as compared to Dawood Hercules. So accordingly, its WACC is less than Dawood Hercules which is consistent with our Hypothesis. Further, when we compared Dawood Hercules with Fauji Fertilizer the study concludes that, though the debt / equity ratio of Fauji Fertilizer has greater Debt / Equity Ratio than of Dawood Hercules, but the WACC of Fauji Fertilizer is higher than Dawood Hercules. Which is not favorable according to hypothesis. This conclusion leads to the conclusion that while deciding about the capital structure, the firms always do not keep in mind the optimal capital structure which is subject to the availabil ity of funds. Conclusion The present study depicts that firms always keep in mind the tax shield. They usually prefer debt due to tax shield but some firms go with the more easiest way to raise capital, and the concept of optimal capital structure is set aside. In Pakistan, the interest rates are usually high as compared to developed countries. That is why, big firms usually prefer to raise funds through equity instead of debt. Since, financial institutions offer loans to profitable firms, at low rate keeping in view their credit rating and riskiness of operations, so these firms like fertilizer companies also include debt in their capital structure. The results are constructed with the literate review concluding that there is no consensus among researchers about the level of optimal capital structure because of variation in proxies used to measure the same attribute, variation in industry norms (size, location and technology), agency cost (management ownership and competence) etc. Further, maximization of s tock return for different firms is debatable.