The Global Financial Crisis Essay Example | Topics and Well Written Essays - 3750 words

The Global Financial Crisis - Essay Example As the discussion declares there are similarities in the regulatory responses that have been given by different nations to the current financial crisis. The responses mainly touch on improved liquidity, management of risks, and lowering leverages. Enhanced insurance on investment and banking sector are other key response. The effects were severe in the developed countries like United States. In this regard, different countries reacted to the crisis identifying the opportunities and the associated challenges. The countries in the OECD advocated for a joint effort to have international standardization of regulatory policies. The main concerns are stimulation of demand in a given economy, improving liquidity, preventing foreclosures of mortgages and improving access to financing by for the SMEs and giant investors. There is a focus in risk reduction through investment in insurance. From this paper it is clear that the current global crisis began in 2007, in some countries, and deepened in 2008.1 Some of the factors that may contribute to financial crisis include application of similar operational strategies by players in the market, changes in the banking business, excessive leverage, changes in regulations and corporate governance, and failure of government policies on the financial sector. Government policies regulate the financial sector within in a country and the operations with a global business partner. The failures in some of these policies could have contributed greatly to the current situation. To fix the situation and mitigate for future crises, various governments have enacted some monetary policies. The current global financial crisis had other related problems like food crisis especially to the developing countries as was, and continues to be, witnessed in the horn of Africa.3 The financial reforms to manage the crisis must then focus on the other financial instruments controlling the economy of the country.  

Imaginative landscape Essay Example for Free

Imaginative landscape Essay Melbourne is the united nations of Australia, the ethnic mosaic that acts as a terminal between multiple worlds. Sprouting from the heart of the city, Russel Street boasts Greek taverns adjacent to Italian pizzerias sandwiched between sushi bars. Turning left from Russel Street we reach a new gate at the terminal, little burke street- as if a slice of China had been uprooted and planted right in the middle of Melbourne city. We have cultural music festivals where the drums of Africa and the didgeridoos of the indigenous filter into the streets, a musical harmony that proudly demonstrates our ethnic diversity Visiting Federation Square during the Indian food and wine gala, the orange, green and white flag was raised high while the smell of coriander and cardamom filled the air. Emerging from the shadows of the streets a wrinkled and deprived elderly man wearing a bindii on his forehead approached a young teenage girl sipping on a big bowl of yellow curry. Pleading for any spare change, the teenage girl simply turns around and mutters under her breath, â€Å"dirty taxi drivers†. The incongruity of that picture will always be etched into my mind. This teenage girl holds insight into the daunting truth of our generation. Our recreational interest in cultures acts only as a mask to hide behind when accused of racial injustice. This food and wine mentality has evolved the infamous â€Å"I’m not racist I have a black best friend† to the now more common â€Å"I’m not racist I love Japanese hand rolls†. We are beginning to consume cultures just as we consume products. With a selfish and egotistical agenda, we dive into multiculturalism on a superficial level. If we are ever going to tackle this racial divide, we must dig deeper than music festivals and miso soups and generate a genuine respect for their people’s interests. This year we have had a quite a confronting and raw insight into Australia’s racial intolerance verifying you don’t have to dig deep to uncover the underbelly of racism in this country. In March, a young 13-year-old girl was scrutinized and castigated for calling aboriginal player Adam Goodes an â€Å"ape† at not just any game, but the dreamtime aboriginal reconciliation game- the irony is tragicomical. No matter how much try to make this girl culpable for her actions; she is sadly just a by-product of generations of hidden racism in this country†¦and it’s time we point the finger of blame to  the mirror. We hear it all the time- On the streets, with our friends and it occasionally slips out while we are with our families. The â€Å"joke† as we try and cover it up , the â€Å"joke† that was harmless fun and was not meaning to offend. However, in Cronulla 2005, these jokes quickly became the vehicle for 26 injuries and 42 arrests in what would be known as one of Australia’s worst racial driven riots. Over 5000 locals joined together to protest against recent attacks by Lebanese gangs. These protests soon become a purge for locals to unleash their inner racism. SMSs such as Just a reminder that Cronullas 1st wog bashing day is still on this Sunday† circulated around the town, believing to have instigated the crowds. Our cultural music festivals and ethnic celebrations will sadly no longer conceal this ugly blemish with which Australia seems to have broken out. Last November respected Aboriginal leader and former Labour candidate Tauto Sansbury resigned from the ALP because he lost faith in the party, which he says is dismissive of indigenous affairs and has in it a big element of racism. Continually side tracking aboriginal projects Sansbury contests that the â€Å"ALP only provide lip service to the Aboriginal community†. We can no longer audaciously showcase our cultural events without simultaneously supporting them behind closed doors. However with every new problem, no matter how difficult, comes a solution. Maybe Rachel Perkins had it right with her musical drama that depicts aboriginal tracker, Albert attempting to help a reluctant white family in finding their daughter, Emily. Perkins uses Emily as the symbol for purity, running through the flowers and innocently waving at Albert’s family. However, with a family like the Ryan’s there is no doubt Emily would have grown up to be just like the 13 year old girl at the dreamtime match. Perkins emphasizes the love and youthfulness of children, proving to our generation that they are our only hope if we are to nourish a truly tolerant country. We can no longer rely on our festivals and worldly terminals to carry us through racial equality. We must actively have tolerance and a general interest in the needs of our Australian community. We have thirteen year old’s calling Adam Goodes an ape, and national celebrities making racist jokes on air. And no matter how many times McGuire pleads it was a â€Å"slip of  the tongue† I’m afraid to say that this ‘slip’ has become an endemic in Australian society.

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.

Prohibition was Ineffective :: American History

Thirteen Years That Damaged America I have always taken an interest in the Roaring Twenties and that is why I decided to write my English term paper on an event that occurred in the 1920s. What follows is my term paper which concentrates on prohibition and why it was not effective, namely because of lack of enforcement, growth of crime, and the increase in the drinking rate. I hope this may be of some help to you. "Prohibition did not achieve its goals. Instead, it added to the problems it was intended to solve" (Thorton, 15). On Midnight of January 16, 1920, one of the personal habits and customs of most Americans suddenly came to a halt. The Eighteenth Amendment was put into effect and all importing, exporting, transporting, selling, and manufacturing of intoxicating liquor was put to an end. Shortly following the enactment of the Eighteenth Amendment, the National Prohibition Act, or the Volstead Act, as it was called because of its author, Andrew J. Volstead, was put into effect. This determined intoxicating liquor as anything having an alcoholic content of anything more than 0.5 percent, omitting alcohol used for medicinal and sacramental purposes. This act also set up guidelines for enforcement (Bowen, 154). Prohibition was meant to reduce the consumption of alcohol, seen by some as the devil's advocate, and thereby reduce crime, poverty, death rates, and improve the economy and the qual ity of life. "National prohibition of alcohol -- the 'noble experiment' -- was undertaken to reduce crime and corruption, solve social problems, reduce the tax burden created by prisons and poorhouses, and improve health and hygiene in America" (Thorton, 1). This, however, was undoubtedly to no avail. The Prohibition amendment of the 1920s was ineffective because it was unenforceable, it caused the explosive growth of crime, and it increased the amount of alcohol consumption. "It is impossible to tell whether prohibition is a good thing or a bad thing. It has never been enforced in this country" (LaGuardia). After the Volstead Act was put into place to determine specific laws and methods of enforcement, the Federal Prohibition Bureau was formulated in order to see that the Volstead Act was enforced. Nevertheless, these laws were flagrantly violated by bootleggers and alike. Bootleggers smuggled liquor from oversees and Canada,commoners stole it from government warehouses, and produc ed their own. Many people hid their liquor in hip flasks, false books, hollow canes, and anything else they could find (Bowen, 159).

Positioning and Repositioning

Positioning and repositioning Before positioning companies has to do segmentation and targeting. Segmentation is dividing the market into segments upon some set of criteria and evaluating the profitability of each segment   Targeting is selecting one or more segments and going after them Positioning is how do you want your brand to be considered by consumers when compared to other competing brands. Positioning is based on product features such as color, price, fluffiness, quality of service, innovative approach, etc.Re-positioning is when you want your brand to be considered/associated with different features. For example, KIA cars has repositioned themselves from being some brand into being a cool brand .. Cadillac has repositioned themselves from being classical car for the rich and old into more affordable elegant car †¦ Oldsmobile has tried to reposition themselves as â€Å"not your father's car† but it was unsuccessful repositioning. Re-positioning is quite lot mor e difficult and expensive compared to initial positioning.You know the saying ‘only one chance to make first impression' also applies to the world of branding. Repositioning Strengthens Lifebuoy’s 107-Year Heritage 12-02-2002  : Lifebuoy is no longer a carbolic soap with cresylic perfume. It is now a milled toilet soap with a new health fragrance. The new formulation has an ingredient, Active-B, which offers protection against germs, which can cause stomach infection, eye infection and infections in cuts and bruises. The new health perfume has been selected after one of the most extensive perfume hunts in the industry.The new milled formulation offers a significantly superior bathing experience and skin feel. The new formulation, new health perfume and superior skin feel, along with the popular red colour, have registered conclusive and clear preference among existing and new users. Lifebuoy is already used by about 600 million consumers, with about 2 million tablets sold every day. The relaunch strengthens this equity by repositioning the brand. Lifebuoy was previously targeted at the male user with an individual-oriented â€Å"success through health† positioning.The new Lifebuoy is targeted at today’s discerning housewife with a more inclusive â€Å"family health protection for my family and me† positioning. Introducing the new Lifebuoy Introducing the new Lifebuoy, Mr. Sanjay Dube, Category Head – Mass Market of HLL’s Detergents Profit Centre, said, â€Å"Launched in 1895, Lifebuoy, for over a 100 years has been synonymous with health and value. The brick red soap, with its perfume and popular Lifebuoy jingle, has carried the Lifebuoy message of health across the length and breadth of the country, making it the largest selling soap brand in the world.It is to maintain its leadership, and further strengthen its benefits of health to larger sections of consumers, that we have researched and developed this new mix. We have repositioned Lifebuoy and have made a deliberate shift from the male, victorious concept of health to a warmer, more versatile, more responsible benefit of health for the entire family. â€Å"The significant changes in formulation have registered a clear consumer preference. The new perfume has been selected after one of the largest perfume tests in the industry to ensure a universal appeal without alienating the 600 million loyal users.We are confident that this mix will deliver an enjoyable bath experience and also deliver on the core Lifebuoy properties of health and value. This will restore the brand’s growth by expanding its consumer base, † Mr. Dube added. Lifebuoy Range Lifebuoy is among HLL’s power brands, which the company is focussing on, selected on the basis of their absolute size, brand strength, brand relevance, competitive advantage and potential for growth. The new Lifebuoy range now includes Lifebuoy Active Red (125gm, 100 gm and 6 0 gm) and Lifebuoy Active Orange (100gm).Lifebuoy Active Orange offers the consumer a differentiated health perfume while offering the health benefit of Lifebuoy. At the upper end of the market, Lifebuoy offers specific health benefits through Lifebuoy International (Plus and Gold). Lifebuoy International Plus offers protection against germs which cause body odour, while Lifebuoy International Gold helps protect against germs which cause skin blemishes. In 2001, HLL’s soaps & detergents turnover was Rs. 295 crores, which is approximately 39% of the company’s net turnover of Rs. 10972 crores. HLL’s power brands in soaps registered an overall growth of 5. 3% in 2001. HLL has been significantly increasing investment behind its power brands, in innovation, quality improvement and marketing. These have been backed by major sales initiatives. In rural India, the focus is to further extend reach, which has resulted in direct coverage of about 46% of the rural populatio n as of now. In urban markets, the objective is to improve customer service.Dedicated sales teams have been formed to service key accounts and wholesalers in larger towns and cities. A cell has been set up to attend to the modern trade, comprising chain stores. Repositioning Strengthens of Maggie positioning Maggi noodles is a brand of instant noodles manufactured by Nestle. Maggi has been the highest sold noodles in India. It is a product of Nestle Brand. It took several years and lots of money for nestle to establish its noodles brand in India Maggi was invented in Europe by a person named Jullius Maggi.In India it was launched in 1980s by Nestle group of companies. Maggie had merged with Nestle family in 1947. Maggie has faced lot of hurdles in its journey in India†¦. The basic problem the brand faced was the Indian psyche. i. e Indians used to be conservative about the food habits so noodles faced a lot of problem in promoting sales. Initially nestle tried to to position th e Noodles in the platform of convenience targeting the working women. However, the sales of Maggi was not picking up despite of heavy Media Advertising.To overcome this NIL conducted a research,which revealed that it was children who liked the taste of Maggi noodles and who were the largest consumers of the product. so they came up with Maggi- 2 minute noodles with price of Rs. 2. 10 with a close of 100% margin. NIL shifted its focus from working women and targeted children and their mothers through its marketing. NIL's promotions positioned the noodles as a ‘convenience product', for mothers and as a ‘fun' product for children. The noodles' tagline,  Ã¢â‚¬ËœFast to Cook Good to Eat' was also in keeping with this positioning.They promoted the product by   1. Distributing free samples. 2. Giving gifts on return of empty packets. 3. Dry sampling-distributing Maggi packets 4. wet sampling – distributing cooked Maggi. 5. Availability in different packages 50gm,100 gm,200gm,etc.. and 6. Effective Tagline Communication. Through its ads, NIL positioned Maggi as a ‘fun' food for kids which mothers could prepare easily. Taglines like ‘Mummy, bhookh lagi hai' (Mom, I'm hungry), ‘Bas 2-Minute,' and ‘Fast to Cook Good to Eat' effectively communicated the product's benefits to target consumers.These ads had become so popular that the tagline ‘Bas 2-Minute' immediately reminded Indian consumers of Maggi noodles even several years after the ads were taken off the TV. Maggi's first product extension was Maggi instant soups launched in 1988. With the launch of Maggi soups, NIL had become a pioneer in the organized packaged soup market in India.. since then Maggi has been successful in India and launched ketch ups sauces and soups in India, which was very successful in grasping market.Though NIL tried to extend to other ready to eat products like pickles, cooking aids and paste, It was unsuccessful so dumped those products. Ma ggi is competing with Heinz Sauces and Ketchup, Knoor Soups, Kissin Sauces and Ketchup, Top Ramen, Sunfeast Pasta Wai Wai and 2 PM in corresponding categories of products and variants. Market position of Maggie: 1. No. 1 in instant noodles and sauces. 2. No. 2 in healthy soups. 3. Market share of noodles- 80% 4. current sales-5. 5crores boxes in India. Repositioning

15 Things You Should Never Say at Work

15 Things You Should Never Say at Work Ever wonder what sets successful people apart in the workplace? They always seem to stand head and shoulders above the fray. Part of that is class and style. And part of that is knowing what to say, when to say it, and- more importantly- what not to say. Here’s a list of 15  things  you should  never say  in the workplace.1. Anything that remotely seems like gossipGossip is no good. It takes your focus and energy off doing your best work and can also be seen as petty and vindictive. Keep your eyes on your own desk and life and watch your social capital rise.2. Anything that seems like an excuseIf you can’t do something, don’t offer. And constant apologizing for being late or disrupting meetings? That only draws attention to the fact that you screwed up in the first place. Instead, don’t screw up. Make it a personal policy never to be late.3. â€Å"No†Successful people are a little bit fearless, and a lot ambitious. They may not always make g uarantees, but they don’t immediately say â€Å"no† either. Try, fail, try harder. Fail, fail better. Succeed.4. Complaints about the systemIf you’re bumping up against the work system and it’s curbing your style and your potential, ask yourself first if that particular obstacle is there for good. If it is, put your brain into figuring out how to work around it. If it isn’t, try to change it. Complaints won’t help in either case.5. Complaints about workloadMore work = more achievement = more success. Never complain about how much work you have. Get it done, then ask for more. And do it because it is a joy to do it, and to set yourself apart.6. Personal stuffSuccessful people keep work talk on work. It’s less complicated and more productive. And they can remain a bit of a mystery.7. Anything that makes you seem negativeDon’t be mean to your colleagues. Don’t tease them. Don’t be petty. Don’t engage in gossip . Keep your head above the fray and be nice to your colleagues and underlings. Avoid controversy. Keep your good name squeaky clean.8. Money stuffNever brag about your salary. And don’t show off your fancy toys. Stick to encouraging equal footing among your colleagues, and value talent, productivity, and hard work. Keep talk of money out of your office entirely.9. Your goalsSuccessful people rarely broadcast their goals. It not only adds to the pressure on them to achieve them, it keeps them from unnecessary scrutiny. And when they do succeed, the degree of their accomplishment gets to take people by surprise.10. â€Å"Me, me, me†¦and more about me†¦Ã¢â‚¬ The best way to win people over is not to constantly talk about yourself. Listen and show genuine interest in your coworkers. Win hearts subtly and be genuine. It’s not all about you.11. â€Å"I might just give up†Successful people don’t even consider giving up. They think outside the box and find another way. But if they do consider it, they’d never say it out loud. Not even to themselves. Devote your energy to finding solutions.12. â€Å"I know enough†Successful people never say no to a learning opportunity. And they don’t feel bashful about admitting what they don’t know and allowing someone to teach them. A strong desire to learn is what keeps successful people on top of their personal wave.13. â€Å"I can’t help†Successful people aren’t ashamed to ask for help when they need it. And they always try to help someone out when they are asked for help. This is a great networking strategy as well.14.  Anything just for the sake of kissing up to someonePleasing other people should never be your motive. Be excellent. Be genuine. Win people over with your best qualities, not some idea of what you think they want to hear. And avoid trying to take shortcuts or sweeten up the boss by any other means. That’s transparent and won’t reflect well on you.15. Offensive jokesOffensive comments are wrong, but so are offensive jokes. Something offensive said in jest is still offensive. Don’t be rude. Be sensitive to the needs and feelings of others. And keep control of your emotions; that will keep you above the fray.

The focus of this assignment is to increase our awareness The WritePass Journal

The focus of this assignment is to increase our awareness Introduction The focus of this assignment is to increase our awareness Introduction AccountabilityEthicsLawConclusionRelated Introduction The focus of this assignment is to increase our awareness of the professional, ethical and legal issues that are associated with providing accountable health and social care. Once groups were formulated, and the scenario was decided, the group could discuss and draw focus areas both as a group and individually. A learning journal was kept using diary sheets which documented what was discussed.   The scenario that was chosen by the group was Eddie, based on the numerous ethical issues that arose. This assignment is going to concentrate on the issue of record keeping, and the way it impacts on the role of the accountable practitioner. As part of adult nursing there are various forms of record keeping that exists and the Nursing and Midwifery Council (NMC) (2009) stipulates good record keeping is a fundamental element of nursing practice, and is crucial to safe and effectual care. The NMC (2009) guidance for record keeping also specifies that your records should be accurate and recorded in such a way that the meaning is clear and you have a duty to communicate effectively with your colleagues. This was not present throughout this scenario as the constant lack misunderstandings and communication errors are what lead to the medication errors being made, resulting in actual harm to this patient. Caulfield (2005) talks about a framework of accountability based on four pillars, professional, ethical, legal and employment accountability, which takes into account our different understandings as to what accountability is all about. The key pillar within this is the presence of professional accountability, which is a fundamental aspect of nursing and sanctions nurses to work within a structure of practice and follow standards of conduct that preserve the patients trust. Its manifestation spearheaded the creation of our standards of conduct that exists within our governing body the NMC today. Accountability Accountability in terms of record keeping is the facilitation of good governance. There is no solitary source of accountability, as different organisations create different principles and guidelines. As a registered nurse we are obligated and duty-bound by a particular set of standards that govern our profession, this gives us our boundaries and restrictions in which we must work. This is supported by Griffith and Tengnah (2010) which acknowledge that as a registered nurse you will be lawfully and professionally answerable for your behaviour regardless of whether a person is following directives from another individual or using their own ingenuity. Accountability is often seen in practice as a rationalisation of ones actions, specifically in terms of distributing the blame. Blame Mentality can be destructive can often lead to a pessimistic view of accountability and its application in caring for patients and espousing staff (Scrivener, Hand and Hooper, 2011). However one definition that adds a more positive facet view on accountability is that â€Å" it is an inherent confidence as a professional that allows a nurse to take pride in being transparent about the way he or she has carried out their practice† (Caulfield, 2005, p.3). There are systems that are put into place throughout our workplace, these can often govern the care we give our patients; it can also have an impact on the quality in which we deliver this care. However despite this professional accountability is an individual responsibility that is also parallel with duty of care in law. Our governing body of nursing regards professional responsibility and accountability to be at the core of high quality nursing. Neglect, medication errors, poor record keeping and communication problems are the commonest issues, and all told account for almost 60% of cases heard before the fitness to practice panel (NMC, 2010a). This report also identified record keeping as the fourth most common allegation in fitness to practice cases, which is why the current record keeping guidance in place by NMC, is under review. As this report has shown there is definitely a lack of value to documentation shown by nurses, this is perhaps because nurses may feel it is too time consuming and takes away the time we need for our patients. There is also perhaps a negative perception in terms of the importance of record keeping. However the public and our patients expect nurses to be working to a certain level of competence and high standards. This is why the Royal College of Nursing (2010) drew up principles of nursing practice, and within this they stipulate that nurses should take responsibility for the care they carry out, and answer for their own judgements and action. This is to be carried out in accordance with the law and our professional governing body. These principles incorporate the thesis of accountability. In terms of record keeping the principles suggest that nurses are pivotal to the communication process, this is due to recording and reporting on treatment and care that is required. Information th at is not available or written can have an influence on the practice that other healthcare professionals give and the effectiveness of that practice. As the registered nurses role expands, their responsibility becomes greater and so does the level of risk management and legal accountability. Once a healthcare worker adopts obligation for care of a patient, they are legally bound to this through duty of care. This can apply when performing complex tasks or more straightforward tasks such as record keeping. Additionally, where the task has been delegated by another healthcare professional or more senior practitioner, on whom overall accountability lies; there is also a duty of care that lies with that individual to delegate appropriately and effectively. This is mirrored by the NMC (2008) standards of conduct and other care professional organisations. Also in relation to accountability the Essence of Care (2010) document benchmarks best practice required for record keeping. It specifies that staff to be competent to generate, use and sustain care records, together with the aptitude to keep precise, comprehensive care records. Ethics Ethics is a philosophy which determines right and wrong in relation to a person’s decisions or actions. However in nursing this can often compete with other realities and pressures, such as time constraints and the increasing responsibilities that are put upon nurses, such as record keeping. How we interpret ethics is individual, like our morals and beliefs, however ethics are universal and is often implied within our laws and standards of practice. Our governing body the NMC does not mention anything precisely in relation to ethics within the code of conduct, but implies it through the standards and rules that they have set in place. One major ethical issue is that of confidentiality. The Caldicott Report (1997 cited by Department of Health (DOH) 1998) recognised flaws in the way parts of the NHS conducted confidential patient records. They had worries about the quantity of personal material that was being moved and the competence of the of NHS to create a boundary, in which this information was only accessed by those that needed to know. The Caldicott Committee made numerous recommendations and focused on initialising certain frameworks to avoid this occurring. Part of this was to hold NHS organisations responsible for bettering their confidentiality systems and confidentiality breaches. Good record keeping will play a key role in achieving this. They did this by setting out six key principles, which entails justifying the purpose in which you are using that information, not to use that information unless necessary and keep the usage to a minimum, and you should be aware of the responsibilities you have when acc essing that information and understand and obey the law (DOH, 2010). However, although maintaining and protecting patient’s privacy and confidentiality is a matter of law and is governed by our regulating body of nursing.   The Royal College Nursing (2009) thinks that distributing data about patients, taking into account safeguarding, is a vital part of nursing and is important for multi-disciplinary treatment. It is not just a case of one person providing all the care needed every time, and the communication of important information to other health professional is central in relation patient safety and continuity of care.   In order to provide this continuity it is vital that record keeping be precise and exact. Beauchamp and Childress (2008) offer four principles that they believe can structure a guide in ethical decision-making; Autonomy, Non-maleficence, Beneficence and Justice. They consider these four principles to lie at the core of nursing and health care. Non-Maleficence requires that no harm be caused to any patient either intentionally or deliberately. However non-maleficence is not an ethical value on its own, but a concept incorporated by the ethics of beneficence. Not doing harm inevitably means you are doing good .Poor recording keeping could be deemed as clinical negligence and therefore is a breach of duty of care and could lead to harm of a patient. The NMC (2010b) regards safeguarding as part of daily nursing practice so therefore, as a nurse in these environments you should have the skills to realise when something is inappropriate, this could be where an individual in your care is at risk of injury, mistreatment or neglect, including poor practice. This is also the ethical issue in relation to autonomy within record keeping. This gives the patient to freedom to make their own decisions, and in terms of record keeping patients have access to the material they want, to make decisions about their care. They have more control over their own care records. The NHS Published Equality and Excellence (2010) specifying that this is empowering and enabling patients to discuss their care with nurses and get involved in decision making. Justice is about treating individuals fairly and equally and requires nurses to be non- judgemental. Justice is also a concept of fairness. Seedhouse (2009) suggests that there three versions of fairness in justice which are part the overall notion of justice, these are to each according to his rights, what he deserves, and according to his need. Based upon this it is important in record keeping to remember that we must record an evaluation of care that is individual to the patient. It is about our professional judgement on this patient not our personal one. Law The law does not generally advocate who should perform what role or tasks we perform, although there are numerous exceptions, the law does however compel a registered practitioner to abide by a duty of care. This is applies to any healthcare worker that could potentially cause harm to a patient. Once a law is enforced there is a certain standard of care expected of nurses performing certain duties or tasks, like record keeping. The legal standard is appraised by that of a conventional skilled practitioner performing that task or role (Cox, 2010). In relation to particular tasks such as record keeping the courts will apply common sense in establishing the appropriate standard needed. Poor record keeping are inexcusable by the standards of any rational individual. A health professional’s record keeping is the only legal form communication that can be used as evidence of care taking place. Effective record keeping protects a nurse from having to give testimony of their profession al accountability. The courts adopt the attitude that if an action has not been recorded it has simply not taken place (Owen, 2005). Often in circumstances such as discrepancies within record keeping the Bolam Test can be used. The Bolam Test (1957 cited by Robertson 1981) was introduced to establish principles of professional practice, this can be used to judge as to whether any defects or errors have been made, which could have lead to the suffering or harm to that patient. There is numerous legislation within nursing that govern our power and limitations, particularly in relation to the handling and processing of information, which impacts upon record keeping in the process. One key legislation is that of the Data Protection Act (1998). This is the main act in the United Kingdom that protects our personal data and controls the handling of that personal data for both patients and staff. The act requires a healthcare professional to obey the eight principles, in which it encourages equality and honesty when handling particular information. These principles are also there to ensure that data is processed lawfully in accordance with the act. Another piece of legislation that applies to record keeping is the NHS Code of Practice. The Department of Health NHS Code of Practice (2003, p.7) states that â€Å"a duty of confidence arises when one person discloses information to another in circumstances where it is reasonable to expect that the information will be held in confidence. It is a legal obligation that is derived from case law; and is a requirement established within professional codes of conduct†. Our NMC (2008) code of conduct is underpinned by law. It requires us as registered nurses to act lawfully, whether those laws apply to either our professional practice or personal life. Information governance plays a big part within record keeping. Information governance is comprised of a set of principles that the National Health Service (NHS) has to obey to make ensure they maintain complete and precise records of care. They must also keep there records confidential, protected and accurate. This is where the NHS Care Record Guarantee comes in Play. It explains the NHS promise, which is to only use patient’s records in a way that is respectful to their rights and promotes their health and well being. The guarantee ensures that the people who care for our records maintain them in a confidential, secure and accurate manor and to provide information that can be accessed easily (NHS, 2005). The Human Rights Act (1998) exists to protect our civil rights in the United Kingdom (UK) and to increase our understanding of the basic principles and values we share. Anyone in the UK for any reason has elemental human rights. Article 8 of that act, the right to respect for private and family life, is the most relevant in terms of information governance within record keeping. Article 8 reflects the common law duty of confidentiality. If data is inaptly divulged, the person can take legal action. Patient information must be held confidentially and securely. Conclusion In conclusion accountability, ethics and the law are a fundamental and integral part of nursing. Focusing on these key matters helps establish boundaries and principles, in which we can apply to become safer and more competent accountable practitioners Our duty of care bounds us legally and ethically, and also through accountability, to provide accurate record keeping throughout our healthcare system. This is why an awareness of professional codes of practice, ethical decision making and an understanding of accountability and anti-discriminatory concepts, will help strengthen a nurse’s ability to provide impeccable record keeping. The benefits to good record keeping means that patient care will be consistent and that is not compromised.   Both registered nurses and student nurses need to be supported and urged to regard record keeping as having a constructive impact of a patient’s care, rather then just an inconvenience that has to be endured.