Movement in Architecture

Motion in Architecture How can the Architectural Promenade Create Experiences Which Heighten Our Connection to Construct Environment? â€Å"I see obviously how external images influence the image that I call my organic structure: they transmit motion to it.And I besides see how this organic structure influences external images: it gives back motion to them.† – Henri Bergson Contentss Contentss Glossary Introduction Motion of Body in Space Decision Making In Movement Formulation of Movement Criteria Illustrations MentionsGlossaryMotion The act or procedure of traveling people or things from one topographic point or place to another. Architectural Promenade The experience of walking through a edifice. The complex web of thoughts which underpins Le Corbusier’s work, most specifically his belief in architecture as a signifier of induction. [ 1 ] Emanation An organized group or line of people or vehicles that move together easy as portion of a ceremonial. Parkour The activity or athletics of traveling quickly through an country, typically in an urban environment, negociating obstructions by running, jumping, and mounting.IntroductionThis paper seeks to research how, through design designers can heighten the users experience in the built environment through motion and the architectural promenade. Our organic structures are an inordinately good designed mechanism and an astoundingly complex piece of technology. It has been advanced and enhanced through development – and we are intended to travel. The environment we choose to bring forth around this chef-d'oeuvre merits the topmost imaginable degree of consideration. The manner we inhabit the reinforced environment replicates our capableness and the longing for our organic structures to travel and brood. Architecture has ever been designed with motion in head, whether it is knowing or unwilled. This thesis aims to analyze and uncover the legion ways our organic structures move within the built environment and look into how architecture and design can suit or order human motion. The focal point of my survey will be on the design of museums as this provides a great penetration into the ways worlds move and make determinations within the reinforced environment. From the public place to the bosom of the exhibition infinites, museums provide a phase for human motion within architecture.Motion of Body in SpaceHarmonizing to Robert Yudell the interaction between the sphere of our organic structures and the sphere of our home topographic points is invariably in gesture. Whether we are cognizant or inexperienced person of this procedure, our organic structures and our motions are in eternal duologue with our edifices. The critical interaction of organic structure signifier and motion with architecture deserves our careful attending as designers. [ 2 ] Motion and emanation has been cardinal to the preparation of the built environment dating as far back as antediluvian Egypt, Greece and Roman architecture. In peculiar when it comes to sacred or ritual infinites. Many of the techniques designers use in modern twenty-four hours design to advance motion day of the month back to the methods used in the yesteryear. For illustration in the Temple of Khons in ancient Egypt the usage of visible radiation, threshold and fluctuation in degrees non merely defined the infinite but besides the emanation through the infinite. Architects such as Philip Johnson and Le Corbusier have studied this emanation or promenade to make more piquant architecture in modern times. Through promotion in engineerings adult male is â€Å"moving† faster and farther than of all time before, but this motion is chiefly a inactive experience unlike the piquant architecture of Le Corbusier in early modernist times. Our organic structures are being moved or propelled in infinite instead than physically traveling ourselves. In kernel we are really sing less active motion in the horizontal and perpendicular planes than of all time before. Yudell describes this as frozen and drifting organic structures. This construct differentiates between the self- motion of a organic structure or the displaced organic structure that is moved by other agencies such as a vehicle or lift. We rely on the displaced motion of our organic structures to go greater distance but one may oppugn if we are going excessively reliant on these methods and as such going brainsick or alienated from our environments as we simply pass through infinite by mechanical agencies. The Futurist Movement is an utmost illustration of this disaffection from the universe and our experience of architecture around us. One of their visions promised entire freedom of life on an space gridded platform into which we may stop up for energy, information or alimentary demands. This scenario nevertheless embodies a clear denial of the demand for the interaction of organic structure and architecture. It provides no landmarks, no stimulation, no phases, and no Centres. [ 3 ] Changes in engineering has meant that some of these futurist thoughts have been implemented at a smaller degree. Our motion within the built environment has become progressively inactive due to ordinances for handiness and in some instances for pure convenience. It is our occupation as designers to turn to this deficiency of battle and inactive motion within the built environment by making a promenade that encourages motion and geographic expedition in our milieus.Decision Making In MovementLe Corbusierâ⠂¬â„¢s premier motivation when designing was to aid people in the procedure of â€Å"savoir habiter† , cognizing how to populate [ 4 ] and it was his sentiment that the architectural promenade would be designed to â€Å"resensitise† people to their milieus. [ 5 ] In planing in this manner buildings become a series of experiences, get downing with the attack from the street, tract or square and pulling a individual indoors and in along a series of experiences in infinite. In a manner the designer becomes a type of choreographer, making infinites which anticipate a person’s motion. It creates a duologue non merely between people and the reinforced environment but besides amongst other people. Le Corbusier strived to make infinites where people would be prompted to utilize their memory, analysis, concluding and finally formation of an grasp of his architecture, obliging them to convey their ain experience to the edifice, making something wholly new. He endeavoured to make a model in which people could populate their ain lives and do their ain determinations whilst ordering really strongly precisely what that model should be. This paradox is what makes Le Corbusier’s work so interesting. It is one of the most confusing issues of architectural pattern ; how can an architect design infinites that encourage motion without curtailing the individuals free motion within the infinite. Le Corbusier tried ( non ever successfully ) to turn to how other people may see his edifices and to underscore the message that edifices were considered as unfinished without people and their experience within. In a less formal scene in Mikkel Rugaard’s â€Å"Street Movement† in Denmark ( which originated as a Parkour preparation company ) has attempted to turn to the thought of planing for freedom of motion and look in the reinforced environment. Rugaard attempts to specify infinites, milieus and objects in the reinforced environment to do certain they become inspirational and invitational towards physical activity and motion without compromising the architectural vision and aesthetic value. Rugaard notes that planing for motion successfully is easy but what becomes more complex and challenging is the add-on of different people who are go throughing through these infinites and how the map of those non take parting in parkour additions the complexness of design. [ 6 ] The Gugenheim Museum in New York designed by Frank Lloyd Wright in 1959 is an illustration of a edifice that is clearly designed with a really controlled motion or promenade laid out within the edifice. The raging paseo guides the visitant up through the edifice go arounding through the whole exhibition infinite. There is no determination devising in this procedure but instead the visitant is led in one way ether up or down through the exhibition infinite. It is my purpose to analyze through instance surveies how motion can be achieved in a more intuitive manner instead than the forced nature of Frank Lloyd Wright’s work in the Guggenheim in New York. In a manner the controlling nature of the promenade within the Guggenheim is differs little from the control of motion within the futurist ideals. The visitant is non being engaged with the architecture but instead is being brought in a certain controlled way.Formulation of Movement CriteriaIn order to analyze how motion can be c ontrolled in a museum puting it is necessary to put up a standard by which I will analyze a figure of instance surveies. This has been chiefly determined by the work of Le Corbusier and the architectural promenade. He believed that the undertaking of designers was to react to the interior â€Å"sounding board† of the human organic structure and act upon it to originate a response in the signifier of action. [ 7 ] Analyzing the standard he used focal points on the ways in which architecture can ease this procedure and as such act as a call for motion. Believing as he did that the organic structure plays a chief portion in the soaking up of cognition Le Corbusier developed a series of techniques to incorporate this procedure. Deducing from his roof of the mouth of centripetal experiences, beat, coloring material, visible radiation and touch, he choreographed sequences of infinites that would arouse a response at the most instinctual degree. In his early work modulating lines were used to direct these distinguishable messages to the head, following this the modular adult male would lend to this project. Light and dark would add a farther degree to the stage dancing of the promenade by playing to the edifice user physiologically through the power of symbolism. I will endeavor to analyze farther how the undermentioned sensory factors play a portion in modern architecture where engineering and even the promotion of light control can play a portion in the design and stage dancing of the modern promenade.Rhythms of the BodyScaleSoundLightColoring materialCentripetal StimulationOn a basic degree Le Corbusier’s promenade consists of a series of experiences in infinite utilizing texture visible radiation, memory and associations which provoke action but there is a more intricate combination of these which needs to be examined. It is how the usage of these elements together which formulates the true promenade in his edifices. Le Corbusier’s edifices can be examined from a set group of elements of his promenade but non every edifice can be examined with respect to this expression ( threshold, sensitizing anteroom, oppugning, reorientation and apogee ) therefore I have set myself the undertaking of making my ain expression or group of elements that will help my scrutiny of motion through museum infinite from past to show. It is from analyzing these standards against current theoretical accounts of museum design will help my quest to make a more piquant and geographic expedition promoting edifice to animate people to travel and interact with their milieus instead than the somewhat displaced relationship we presently have with our environment.IllustrationsPageFigureBeginning1Cover ImageAlexander Straulino – My First Lightbox6Figure 1Produced By Writer6Figure 2Ibid6Figure 3Ibid7Figure 4My Playground – Kasparworks9Figure 5Ibid9Figure 6Flavie A.Iteration Type A( 2009 )MentionsSamuel F. Le Corbusier & A ; the Architectural Promenade. Sheffield: Birkhauser 2010 Kent C. Bloomer, Charles W. Moore, Robert J. Yudell Body Memory & A ; Architecture. New Haven and London: Yale University Press 1977 Le Corbusier. The Marseille Block. London: Harville 1953 Menin S. & A ; Samuel F. Nature & A ; Space: Aalto and Le Corbusier. London: Routledge 2003 The Parkour Architect, picture, Flow-The Pakour Kommunity, 7 October 2012, viewed 31 October 2014 & lt ; hypertext transfer protocol: //www.youtube.com/watch? v=sLWfRzgo__4 & A ; NR=1 & gt ;

A world without Law would be a world without Sin Essay

According to one of the Holy Books, the Bible, when God created the first man and woman, He knew as the author and finisher of man that he has mind, a conscience which is 2-sided. It could be destructive or constructive, it could embrace good or shun evil, it could love or hate based on the outline that he knows what is wrong and or right. That was the basic reason why God warned them or gave a strict Law against the act that lead to the very first sin, which is the eating of the fruit of knowledge. Hence, if there wasn’t any Law, the first and subsequent sins wouldn’t have existed. A car, an example of mechanical robot, will have no idea why it was created, which is a reason why a manual will be attached to it by the manufacturer for the use of the possible user[s]. We are all created for a purpose but the significant difference between Man and Machine is the choice and will power. These two tools can be shaped with Law[s] to guide man from being a weapon of personal and group calamity. And when there is no Law[s], then man can do whatever and anything he likes to suit his personal desire at the expense of others which would mean â€Å"No-Sin†. †¦At his best, man is the noblest of all animals; separated from law and justice he is the worst. —- Aristotle It can be said man would be reckless, irresponsible, wild, thoughtless, uncontrolled or careless in a world without law. He would be pitiless when the taste for pleasure clouds his sense of reasoning. The mentality that anything he does is not wrong; just-do-it lingers in the mind of man in a world without Laws because there will not be any form of punishment. It would be a world of no hope for the poor. Government which is supposed to organize the society would not be in existence; there would not be anything like the Legislature to make laws, Executive to administer the laws and Judiciary to interpret the laws. Since the germane objective of Law is to maintain order in a society, the government agencies to carry out crime investigations and the professionals called Lawyers would have no space in a world without laws. Therefore, there will be a paradigm shift where jungle justice takes over the expected capacity of law. Discoveries and inventions will set the world in a state of entropy. Classified experiments such as cloning, stem cell growth and Nuclear weapons would know no limit. The world would be overpopulated for their will not be birth control regulations; strange diseases would be epidemic and pandemic. I can conveniently conclude that the world will fall apart without the law [which is tantamount to a world without sin].

Defense of the Right of Privacy in the US Essay Example | Topics and Well Written Essays - 750 words

Defense of the Right of Privacy in the US - Essay Example Privacy helps couples decide the number of children they will have and the ways in which the couples will raise their family. Human beings should enjoy all these rights without restrictions. In this regard, the right to privacy controls the government from carrying out investigations on people’s lives without following due process. While the constitution of the United States does not mention the right to privacy, there are a variety of sections in the constitution that provide for these rights without mentioning that citizens have general and specific rights to privacy. Nevertheless, citizens secure the right to privacy through a number of Supreme Court decisions as this expose elucidates. According to Breckenridge, Justice Brandeis indicated that the authors of the constitution wrote it to help the American people pursue contentment by noting that: The makers of our Constitution undertook to secure conditions favorable to the pursuit of happiness†¦They conferred, as against the government, the right to be let alone-the most comprehensive of the rights of man and the right most valued by civilized men. In this regard, Justice Brandeis noted that proper interpretation of the constitution offered Americans the right of privacy. Breckenridge further notes that Judge Cooley defined privacy â€Å"as the right to be let alone.† In this regard, the right to privacy translates to doing things without the government’s interference. While the constitution does not mention privacy and the right of privacy, development of this right in this country has been under the Supreme Court rulings. Marriage is one of the relationships that the Supreme Court has ruled over and protects it under the right of privacy. In this regard, we all know that the most fundamental part of American’s way of life is the basic unit known as a family.  

Medievel Glass at Corning Museum of Glass Assignment

Medievel Glass at Corning Museum of Glass - Assignment Example . People who do not normally see glass as an artwork will be surprised to know that a museum of glass exists. The medieval glass collection of the Corning Museum of Glass (CMG, 2012a) displays a wide range of glass objects that had decorative and functional purposes during medieval times. After conducting a virtual visit of this museum’s â€Å"Medieval Glass for Popes, Princes and Peasants,† this writer realized how much glass can depict cultural and social beliefs, divisions, and struggles. Glass signifies cultural values and social divisions because its transformation across time depicts social stratification and social transformation. Medieval glass begins somewhere, and its humble beginnings reflect the practical needs and social concerns of its users. A 425-dated olive green glass, a Byzantine Cone Beaker, demonstrates a simple design that reflects its functional purpose (see Figure 1). After the Roman Empire disintegrated, tastes in glass varied. In locations where the Franks lived, simpler shapes and decorative styles were the norm. This Byzantine Cone Beaker is designed for convenience, which suggests how this glass expresses the pragmatic needs of its users. Glass art can be used as a â€Å"medium of learning† of another time and culture (Diffey, 1997, p.27). One can only imagine the working-class drinking their wine in pubs or homes and relaxing enough to forget their troubles. This glass stands for the practical demands of people making a living for survival. Nothing is simple with this simple glass. It is simple because life is hard. Figure 1: A Byzantine Cone Beaker, dating 425-599 Source: Corning Museum of Glass (2012b) The latest example of medieval glass in the exhibit is impressive because of its intricate design that depicts strong social changes and inequalities. A Baroque Ewer (see figure 2), a colorless glass with green tinge and numerous bubbles in color combinations, suggests aesthetic beauty and creativity. The top of the handle has a thumb rest, which is an innovation (CMG, 2012b). It signifies the changing society that demands creativity in its products. Moreover, this ewer has evolved a great deal from initial glass designs because it is multi-colored and intricately formed. Even when these things have simple functions, people craved for more beauty in their everyday objects. This beauty essentially represents their social identity. Their demand for more beautiful things in their lives connotes their need for asserting their social importance. Bourdieu talks about social and economic capital that reinforces social inequality (Dillon, 2010). Only the rich can afford this ewer, and design that is important to them becomes something coveted, and yet to the masses it is unimportant. Nevertheless, glass becomes a unique differentiating tool of their social status. Figure 2: A Baroque Ewer, dating 1550-1600 Source: Corning Museum of Glass (2012b) Glass objects represent a groups’ social status and identities. For instance, figure 3 shows a Behaim Beaker that might have been specifically made for a rich merchant’s daughter’s wedding. The wedding took place on July 7, 1495; it was the nuptial of Michael Behaim and Katerina Lochnerin, the daughter of a rich merchant, whose company monopolized the trade between Nuremberg and Venice (CMG, 2012b). This object shows that even the simplest things say something about the owner and his/her culture and society. The name Behaim Beaker belongs to a prominent family and its drawings of saints, birds, and helmets signify pow er. These are objects that help conceive self-identity with â€Å"images [that] shape an individual self-concept† (Freedman, 2003, p.2). It demonstrates power and majesty in

Does copyright needs to be changed in Digital era Essay

Does copyright needs to be changed in Digital era - Essay Example This paper explores the controversy by presenting both points of view, examining the historical origins of intellectual property protection and modern development in the field. U.S. and British laws and alternative (non-legislative) methods of intellectual property protection are analysed. Possible future developments in this field are discussed from the positions of the current situation. Throughout the history of mankind information has been playing increasingly important role in various fields of human life and activity. The uses of information and different methods of its collection and storage have long historical traditions. Institutional structures created specifically for that purpose - libraries and museums - are as old as modern civilization itself. Each of the past inventions associated with transmission and storage of information could be addressed as the major factor that affected the course of social development: invention of writing, the printing press, telephone, radio, and television have stimulated profound changes. Similarly, development of new information technologies - computers and the Internet - deeply affects contemporary society in many ways. However, the same technologies have led to dramatic changes that turned protection of informational assets into a highly controversial issue. Traditionally, Intellectual Property Rights (IPR) represent an excep... Abundant literature covering various aspects of IPR management and protection is very indicative of this complexity. Recent technological developments have contributed to the challenges associated with protection of intellectual property. The new technologies have substantial implications for literally each aspect of traditional IPR practices. It has become very difficult to keep any information protected these days. Copying materials from another medium, encapsulating content and software for emulation, or migrating content to new hardware and software, all involve activities that can potentially infringe IPR. Digital images and electronic texts can be easily altered, and people may easily transform or incorporate them as a part of some other documents, images, etc. The challenges imposed by the developing technology are likely to increase rapidly in future. IPR holders are perfectly aware about the risks imposed by this trend, and try to protect their rights. Such inclination is absolutely natural granted the fact that similar situations have already occurred in the past when emergence of new circumstances resulted in amendments in the relevant intellectual property laws. For example, in 1992 the US Congress accepted the Audio Home Recording Act that allowed people making copies of copyrighted songs or music for personal use. In 1998 amendments to the Act were made to cover digital technologies of copying, reproduction and distribution (Chebium, 2000). Similarly, the recently emerged Digital Rights Management (DRM) technologies are meant to increase the quality and scope of control that IPR holders can assert over their intellectual property

Princeton Readings in Political Thought - Mitchell Cohen, Nicole Essay

Princeton Readings in Political Thought - Mitchell Cohen, Nicole Fermon. V.I. Lenin, Roskin, Sun Tzu - Essay Example Most often, however, war begins because there is an economic benefit to engaging in violence. What might end war is the growing interdependence of nations for economic stability. As developing nations continue to join the growing number of intertwined economies, world peace may be achieved where ‘war’ becomes swift takeovers through economic domination that occurs without violence. One example of a war that was fought over the declaration of a difference in ideologies but was engaged for the purposes of economic advantages is the Vietnam War. The base issue of the conflict begins with the imperialism of France and of Japan as those nations took hold of Indochinese territories with the intent of gaining economic control of those regions. As Communism began to grow in China, the leader of Ho Chi Minh began to take territories that were near to the Chinese borders, taking advantage of both France and Japan whose militaries were weak in comparison to the Chinese (Tucker). As the allied nations began to take part in coming to the aid of France in regard to the territories in question, the propaganda of the war was that it was being fought to save the Vietnamese people from the horrors of Communism, but the truth is that the allies came to the aid of Imperialistic French interests, making the war conditioned upon economics rather than ideologies. Radical belief systems do not always require an economic foundation for the attempt to dominate the world, but economics will motivate a great deal of the consequences and actions of other nations in response to war. Radical belief systems cannot be overcome by any sense of reason and must be engaged in order to stem the violence that might come from belief systems that discount the right to life. An example of this type of leader can be seen in Adolf Hitler. However, even World War II occurred

Germany During the Cold War (West Germany) Research Paper

Germany During the Cold War (West Germany) - Research Paper Example West Germany was inclined to the western allies such as America, France, and Britain. The west side of Germany was known as Federal Republic of Germany with Bonn as the capital city. West Germany managed to maintain a stable democracy and a tremendous economic expansion. The division of Germany continued for a long time with several policy changes to facilitate the dominance. However, Germany was again unified in 1989 (Arnold 377). This paper seeks to focus on West Germany during the Cold War. Western Democracy Although the Second World War ended in 1945 followed by the defeat of Germany, the allied forces controlled Germany from 1945 to 1949. This was meant to reduce the effects and influence of the Nazi party. During this time, the allied forces realized the importance of Germany becoming a democracy. Democratic institutions were established at all levels such as parish and municipal levels and then in counties and districts. Consequently, the whole of West Germany state had democr atic institutions in place. The allied forces wanted the German people to play a part in the formation of their government (Hiscocks 496-503). Britain established nominated councils in parishes that had to take a decision without authorization by political parties. The political party ban was lifted at the end of 1945 in the three zones. From this period, there was a rapid development of democratic institutions. Administratively, the German part increased, and the number of military officers significantly reduced. Furthermore, in the last period of 1946, the process of administrative unification had increased and Britain and United States decided on economic integration of their two zones (Hiscocks 497). According to Hiscocks, the other important step in democratization of West Germany was indirect means employed by America, Britain, and France (497). This was fundamental and incorporated Cultural, Education, and Information Division of the Allied Control Commission. In England, for example, prisoners of war were given lecture on democratic institutions and international civics. Moreover, the theories of Nazis were exposed during these lectures. Additionally, America relied on the press and print media whereby a number of journalists were taken to American universities for training on democracy. There were also other important materials on German newspapers. France facilitated democratization by ensuring Germany was acquainted with French culture. The democratization of Germany helped it to overcome challenges that were experienced before during preparation of the Reich Constitution of 1919 and the failure of the Weimar Republic. However, the bureaucracy employed in German civil service continued to be a threat for democratic ideals in the region. The other obstacle was the extreme authority vested in political parties. Federal Parliamentary Republic From 1949, Western Germany was controlled under the basic law that was authored by a German constituent assembl y. This was known as the Parliamentary Council and was authorized by occupying authority and was intended to allow participation of free will of the German people. These laws led to the establishment of a Federal Republic with a bicameral legislature and a parliamentary form of government. The majority of single member constituencies elected 60% of the lower house. The remaining 40% were chosen based on proportional representation from reserves drawn from party lists

What was new about Darwin's theory of Human Nature Essay

What was new about Darwin's theory of Human Nature - Essay Example (Mayr) Darwins theory, although successful in profoundly shaking scientific opinion about the development of life, could not explain the source of variation in traits within a species, and Darwins proposal of a hereditary mechanism was not compelling to biologists. Although the occurrence of evolution of some sort became a widely-accepted view among scientists, Darwins specific ideas about evolution—that it occurred gradually by natural and sexual selection—were actively attacked and rejected. Darwins theory nearly shattered the traditional Christian notion that humanity, poised between beast and angel, was literally formed in Gods image. Darwin pointed out, long before we knew that we share 98.5 percent of our genetic material with chimpanzees, that what looks back at us in the mirror is not the face of God but is kin to the earthbound apes. As the Edinburgh Review warned at the time, "a revolution in thought is imminent, which will shake society to its very foundations by destroying the sanctity of the conscience and the religious sense." (Zimmer) Darwins theory created a revolution in thought. It took over 100 years for the shock of our humble origins to wear off and for scientists to begin to address the serious implications that Darwinian evolution has for understanding human nature. During that time, greatly due to Darwins contribution, Western cultures faith in science grew, as faith in a Supreme Being guiding our destiny diminished. Something fascinating seems to happen when human beings begin to ponder the process of evolution. Something that calls forth awe at diversity and recognizes unity in life. Even Darwin, in The Descent of Man, used his own godless logic to envision a greater human unity that borders on the spiritual: "As man advances in civilization and small tribes are united into larger communities, the simplest reason would tell each individual that he ought to extend his social instincts and sympathies to all the members

My Self-Assessment as a Writer Essay Example for Free

My Self-Assessment as a Writer Essay Up to this point I’ve never really considered myself a writer at all. After skimming through the chapters and reading about all the processes, my assessment is, as a writer, I’m probably not very good. So this brings me to, what are you able to bring to the class? Well that’s easy. I’ve really wanted to learn how to write correctly. I’m extremely excited about all the information our textbook has to offer. I’ve wondered in the past how to do certain things and how they’re supposed to be done. This whole class is going to bring the pieces together. So I guess I bring excitement and enthusiasm to learn. My Strengths and Weaknesses in writing are hard to identify. Since I don’t write a lot, there’s not much to relate to. My sentence structure and vocabulary are weak areas. Sometimes when I write an e-mail, and then come back to re-read it; it just doesn’t sound or flow right. I’m uncertain and feel embarrassed by my use of grammar and punctuation, so I tend to make every attempt to avoid writing at all. My spoken thoughts are much easier to transform into what I’m trying to communicate. Strengths are an active imagination. I have thoughts or can take a side on almost anything. I could just pick any topic and write about whatever. Discovering material, planning out my ideas, and drafting it all together would also be strengths. Learning from others in the class will require interaction with the class. The discussion board will offer those opportunities. I hope to learn how others chose a topic or decide how they layout their work. I’d like gain some knowledge from their perspectives and ingenuity.

Effects of Noise Pollution on Mental Health of Students Essay Example for Free

Effects of Noise Pollution on Mental Health of Students Essay It is interesting that noises emanating from the various types of roadways of today are still among the most important sources of environmental noise, even though the types of noise are not those that existed in Rome, Medieval Europe, or 18th century Philadelphia. Our modern roadways (including road, rail, and air) and the products of modern technology produce increasing levels of unwanted noise of varying types and intensities throughout the day and night that disturb sleep, concentration, and other functions. (Lee Fleming ) This noise affects us without our being consciously aware of it. Unlike our eyes, which we can shut to exclude unwanted visual input, we cannot voluntarily shut our ears to exclude unwanted auditory input. Our hearing mechanisms are always â€Å"on† even when we are asleep. (Babisch 113:A14-15) 3 The noise problems of the past pale in significance when compared with those experienced by modern city dwellers; noise pollution continues to grow in extent, frequency, and severity as a result of population growth, urbanization, and technological developments. For example, within the European Common Market, 65% of the population is exposed to unhealthy levels f transportation noise. (Carlos 318:1686-1689) In New York City, maximum noise levels measured 106 dB on subway platforms and 112 dB inside subway cars. These levels have the potential of exceeding recommended exposure limits given sufficient duration of exposure. (Gershon et al. 83:802-812) In 1991, it was estimated that environmental noise increased by 10% in the decade of the 1980’ s. ( Suter ) The 2000 United States Census found that 30% of Americans complained of noise and 11% found it to be bothersome. Among those who complained, noise was sufficiently bothersome to make nearly 40% want to change their place of residence. (U. S. Census Bureau, Housing and Economic Statistics Division. ) That noise pollution continues to grow in scope, variety, and magnitude is unquestioned; it is only the extent of the growth that remains unknown. In comparison to other pollutants, the control of environmental noise has been hampered by insufficient knowledge about its effects on humans and about dose-response relationships, but this seems to be changing as more research is carried out. However, it is clear that noise pollution is widespread and imposes long-term consequences on health. (Committee on Environmental Health, American Academy of Pediatrics) In 1971, 4 3a World Health Organization (WHO) working group concluded that noise is a major threat to human well-being. That assessment has not changed in the intervening 30-plus years; if anything, the threat has intensified. The various sounds in our environment (excluding all those sounds that arise in the workplace) to which we are exposed can be viewed as being either necessary (desirable) or unnecessary (undesirable). One might consider the sounds produced in and around our homes by garbage disposals, dishwashers, clothes washers and dryers, refrigerators, furnaces, air-conditioners, yard maintenance equipment, and the many other mechanized time and labor saving devices, which we all use and enjoy, as being necessary. We are exposed to the noise of radio, television, and related technologies; children are exposed to a wide variety of noisy toys. (Axelson Jerson 76:574-578) The noise of internal combustion engines (modulated by legally required mufflers), jet engines (modulated by improved design and by altered flight paths), and train horns at grade crossings (modulated by new Federal Quiet Zone rules), might all be considered necessary. There are numerous other such examples of machines or activities that produce sounds that are tolerated because they accompany a desired activity or they serve an important societal purpose, such as the sirens of emergency vehicles. But what about sounds that accompany an undesired activity, that have no societal importance, or that we consider unnecessary? What about the sounds produced by the so-called boom-cars that are roving, pulsating noise factories? What about the uncomfortable sound levels at concerts, in theaters, and public sporting events? What 5 about the noise of slow moving train horns in urbanized areas or the early morning sounds accompanying garbage collection? What about all the noise on our streets to which buses, trolley cars, car horns, car alarms, motorcycles, and un-muffled exhaust systems contribute? What about the risks to children from noisy toys and from personal sound systems? What about the noise of barking dogs, leaf blowers, and recreational vehicles? What about the noise of low flying aircraft? In general, sounds that we deem unwanted or unnecessary are considered to be noise. Our society is beset by noise, which is intrusive, pervasive, and ubiquitous; most important of all, it is unhealthy. Most reasonable people would agree that much of the environmental noise to which we are subjected serves no useful purpose and is therefore undesirable. The variety of noise polluting devices and activities is large and seems to be growing on a daily basis, although there is no consensus about what items are useful and desirable or noise polluting and unnecessary. Domestic tranquility is one of the six guarantees in the United States Constitution, a guarantee that is echoed in some form or other in every state Constitution. In 1972, the Noise Control Act was passed by Congress, declaring, â€Å"†¦it is the policy of the United States to promote an environment for all Americans free from noise that jeopardizes health and welfare. In 1974, the Environmental Protection Agency (EPA) estimated that nearly 100 million Americans lived in areas where the daily average noise levels exceeded those identified as being safe. (Environmental Protection Agency) However, in 1982, the government abruptly terminated federal funding for the Office of Noise 6 Abatement and Control, the vehicle by which the public was to be protected from the adver se effects of noise. The lack of funds threw total responsibility for noise control to the states, which have had a spotty and generally poor record with respect to noise abatement. Shapiro ) Since the Act itself was not repealed, local and state governments may have been deterred from trying to regulate noise. Furthermore, failure to repeal the Act sent the message that noise was not an important environmental concern. As a result, in the United States, most police departments seem to be unwilling or unable to respond to noise-related problems in a way that provides any measure of genuine or timely control. Yet, in most cities, as noise pollution continues to grow some say as much as 6-fold in the past 15 years so do complaints about noise. Complaints to police and other officials about noise are among the most frequent complaints by residents in urban environments; in 1998, noise was the number one complaint to the Quality of Life Hotline in New York City. In 1996, the Federal Environmental Agency in Germany reported two out of three of its citizens had complained about excessive noise. (Bronzaft 2:1-8) The number of people exposed to unhealthy levels of noise in the United States is unquestionably greater than it was in 1974; the degree of oversight and control is unquestionably less. II. Research Body

Types of Credit Facilities Offered by Commercial Banks

Types of Credit Facilities Offered by Commercial Banks The commercial banks are the most important player in the banking system. As at the end of December 2010, there were 9 domestic and 14 locally incorporated foreign commercial banks (BNM, 2011). Below is the list of licensed commercial banks as at 31 December 2010:- Commercial banks (Locally owed) Affin Bank Berhad Alliance Bank Malaysia Berhad AmBank (M) Berhad CIMB Bank Berhad EON Bank Berhad Hong Leong Bank Berhad Malayan Banking Berhad Public Bank Berhad RHB Bank Berhad Commercial banks (Foreign owed) Bangkok Bank Berhad Bank of America Malaysia Berhad Bank of China (Malaysia) Berhad Bank of Tokyo-Mitsubishi UFJ (Malaysia) Berhad Citibank Berhad Deutsche Bank (Malaysia) Berhad HSBC Bank Malaysia Berhad Industrial and Commercial Bank of China (Malaysia) Berhad J.P. Morgan Chase Bank Berhad OCBC Bank (Malaysia) Berhad Stardard Chartered Bank Malaysia Berhad The Bank of Nova Scotia Berhad The Royal Bank of Scotland Berhad United Overseas Bank (Malaysia) Bhd. Commercial banks offer various types of credit facilities to SMEs. There are working capital loans, fixed assets facilities and trade financing facilities. Besides that, Credit Guarantee Corporation (M) Scheme also offered by participating commercial banks. Credit Guarantee Corporation was established with the purpose to help Small and Medium Scale Enterprises (SMEs) without or with insufficient collateral to obtain credit facilities by commercial banks (Telekom Malaysia Berhad, 2010). CGC is participating with commercial banks which include Malayan Banking Berhad, RHB Bank Berhad, AmBank Berhad, CIMB Bank Berhad, EON Bank Berhad, Affin Bank Berhad and OCBC Bank Berhad (Business Loan for SME, 2011). Working capital loans is available to finance the shortfall in working capital requirement such as bank overdraft and revolving credit. (Eddie, 2006) Overdraft facility is convenience SMEs to draw additional funds immediately from current account (Eddie, 2006). Besides, the facilities fast in raising capital to operation for business and making investment. Bank overdraft has no fixed repayment schedule, interest will charged when the funds are utilised and no commitment fee for individual applicants on overdraft amounts of RM250,000 and below (Public Bank Berhad, 2011). Revolving credit is a working capital facility normally helpful as short term working capital funding. Borrowers can decide to either repay the full amount or renew the loan tenure by servicing of the interest at the end of the loan period. For SMEs borrower, commercial banks allow the flexibility of drawing funds as and when required, the repayment period is over 1 to 6 months term. A part that, SMEs can choose to repay in full upon maturity or to pay only the interest but the minimum amount of RM100,000 (Public Bank Berhad, 2011). Table 2.1 Asset conversion cycle Days Debtors credit terms 90 Inventory turnover 60 150 Less: Creditors credit terms 60 Asset conversion cycle 90 If the forecasted sales turnover is RM5 million, then the Working Capital Requirement will be 90/365 x RM5.0 million = RM1.23 million For the purpose of fixed assets financing is to finance property, plant and equipment acquisition and also cost of construction for factory and shop house. Term loan, leasing and hire purchase are the credit facilities types of the capital expenditure financing (Public Bank Berhad, 2011). A term loan is a fixed amount of loan from a bank for a period of time and repaid according to specific repayment schedule. The borrowers must be able to manage the cash flow effectively for repayment the loan (Public Bank Berhad, 2011). Trade financing helps to control the companies trade transactions and international business community. There are two group of trade financing which are local purchases or sales, import or export services. For local purchases and import services, Public Bank Berhad providing the number of credit facilities which are letter of credit, trust receipt, bankers acceptance and bankers guarantee. For local sales and export services offering bankers acceptance, bankers guarantee, bills of exchanged purchased and export credit refinancing (Public Bank Berhad, 2011). Credit Guarantee Corporation (M) Scheme includes Credit Enhancer Scheme and Direct Access Guarantee Scheme. Credit Enhancer Scheme eligibility must be Malaysian owned, borrower must have favourable financial record and business enterprises based on the definition of SMEs. Type of facilities offered by Credit Enhancer Scheme is term loan, Overdraft and all type of trade facilities. Total loan amount up to RM10 million. Guarantee cover has 2 portions which is secured and unsecured. The BLR rate is 6.3% (RHB Banking Group, 2011). Maximum interest rate for each guarantee cover percentage bond for Credit Enhancer Scheme as follows: CGC Guarantee Cover Effective Rate 100% BLR 80% 100% BLR + 1.00% 70% 80% BLR + 1.25% 60% 70% BLR +1.75% 50% 60% BLR + 2.00% à ¢Ã¢â‚¬ °Ã‚ ¤ 50% Free to quote Table 1: Interest rate according guarantee cover percentage According to past researcher Daniel Dusanjh, Direct Access Guarantee Scheme can be obtained in CIMB, Maybank and Ambank. Credit facility is range from RM50,000 to 3 million. The interest rates for DAGS ranges from 1.00% to 1.75% + BLR. Past researcher Daniel (2009) said that CIMB Bank offers credit facility under Government Assistance Scheme which is Fund for Small and Medium Industries and . In addition, CIMB Bank also provides Small Entrepreneur Guarantee Scheme. Fund for Small and Medium Industries 2 and New Entrepreneurs Fund 2 eligibility criteria include business enterprises based on definition of SMEs, shareholder fund could not more than RM2 million, public listed and government link companies shareholding not more than 20%. In addition, the Malaysian resident shareholding must at least 51% and the SMEs not exceeding 7 years in operation if more than 7 years in operation banks will consider provided average net profit over the last 3 years. The interest rate for FSMI 2 is 4% to 6% based in risk assessment of SMEs. Credit facility is range from RM50,000 to RM5million. Credit facility could be term loan and overdraft and maximum term of 5 years (CIMB Bank Berhad, 2011). Small Entrepreneur Guarantee Scheme offers much different terms, maximum loan amount is RM50,000 with an interest rate of 1.5% per annum + BLR. It should be noted that this scheme covers much micro businesses (CIMB Bank Berhad, 2011). 2.1.2 Singapore Commercial banks in Singapore offer various types of credit facilities to small and medium sized enterprises, including working capital financing, fixed assets financing, specialized financing, trade financing and government assistance scheme. Working capital financing is vital for the growing business. The purpose is to finance the everyday business operations. A number of general types include factoring loans that give credit for account receivables, overdrafts facility utilized when business make payment exceeding the balance in current account, and revolving loans that the loan amount can be re-borrowed (Government of Singapore, 2009). Factoring loan is an account receivables sold to bank for immediate cash. A charge of 1-3% levied on gross invoice value or an interest of 5-8% per annum. Most of commercial banks in Singapore have this type of loan such as DBS Bank Ltd, HSBC Private Bank (Suisse) SA and Malayan Banking Berhad (Government of Singapore, 2009). Bank overdraft is the cash ready for any business need and also means that withdraw from bank exceed the available balance. Interest charge for bank overdrafts are normally 1-2% above prime rates. Most of commercial banks in Singapore have this type of loan such as DBS Bank Ltd, HSBC Private Bank (Suisse) SA, Malayan Banking Berhad, Standard Chartered Bank and United Overseas Bank Limited (Government of Singapore, 2009). Revolving credit is loan sum available for fixed period during which amounts repaid may be re-borrowed. For revolving credit, company assets such as machinery may have to be provided as collateral. . Most of commercial banks in Singapore have this type of loan such as DBS Bank Ltd, HSBC Private Bank (Suisse) SA, Malayan Banking Berhad, Standard Chartered Bank and United Overseas Bank Limited (Government of Singapore, 2009). For fixed asset financing, commercial banks offer commercial, industrial and property loans. Like hire purchase is the most common loans for fixed asset financing, the purpose is to finance the business property, machinery and motor vehicles. During the settlement of hire purchase loans, banks will hold the legal rights over the asset until fully repaid. The commercial banks can finance up to 90% of equipment price (Standard Chartered Bank, 2011). Specialized financing is the loans are aimed for sector specific SMEs such as shipping, real estate or dealership. Maybank provide the loans of car dealership and vessel (Maybank, 2011). Another way, OCBC Bank offer shipping, real estate and commercial property loans. In Singapore, government assistance scheme separate to 2 groups which are local enterprises financial scheme and internationalization finance scheme. Local enterprises financial scheme is typically granted for modernization and upgrading the plant and equipment, expanding the manufacturing capacity. Working capital loans facilities and fixed assets financing loans facilities are available under local enterprises financial scheme. Working capital loans include Micro Loan Program and Loan Insurance Scheme. For the Micro Loan Program, maximum loan amount up to S$100,000. This type of loan is unsecured term loan and the loan term is from 1 to 4 years. The minimum of interest rate is 5.5% per annum. Eligibility of this type of loan with no more than 10 employees and the SME must incorporated in Singapore with no less than 30% shareholding (OCBC Bank, 2011). Loan insurance scheme offers an option access to funding for local enterprises through the use of loan insurance (UOB Bank, 2011). This type of scheme do not have limit amount but the insurer has veto right over S$1 million. Now, the government would focus in improving loan insurance schemes to assist small and medium enterprises (Ryan, 2011). In Malaysia, there are several procedures and condition needed for SMEs in obtaining loan. The loan application process generally has three broad stages. These are business plan preparation, the submission of the loan application and the assessment of the loan application (Banking Info, 2011). First stage is preparing the business plan, commercial banks will require information regarding the company before they make decision whether to grant a loan to it. It is essential to provide the full and complete information on the company, the reason is to ensure the loan processing complete smoothly. For a small and medium enterprise, the preparation of a business plan is significant. Business plan is outlining the vision and how the companies manage to achieve the objective. In the business plan, the written must be simple and clear (Banking Info, 2011). Second stage is the application process, to accelerate the application process, applicant should send a suitably completed loan application form together with the business plan and all appropriate documents as required by the commercial banks. Loan application forms and loan application checklists are different in each commercial bank. Although the application forms and checklists are different but required document more or less the same for verification and evaluation (Banking Info, 2011). According to Chuah Mei Lin, there are two checklists provided by commercial for SMEs applicant. The first checklist written down the general types of documents and data required and second checklist setting out the more specific documents or information required for the kind of application facilities. She said that the banks will ask for additional information and documents if get insufficient data (SME Corp, 2010). The following is the documents required for the loan application:- Statutory Documents for Corporation Memorandum and articles of association Certificate of incorporation (Form 9) Return of allotment of shares (Form 24) Register of directors (Form 49) Copies of directors or guarantors IC Form J of directors or guarantors Documents for Partnership and Sole Proprietorship Business registration and license Income tax return Form J of partner or proprietor Financial and Management Documents 3 years audited financial statements (certified by auditors for non corporations) 6 months current account statement provided by other financial institutions All borrowings disclosure and letter offer by other financial statements Loan repayment statement utilisation from other financial institutions Business and cash flow projection Major customers and suppliers list Receivables and Creditors Aging Most up-to-date management accounts Feasibility report (for project financing and new ventures) Company and directors profile, business plan Apart on above documents provided, small and medium enterprises also require prepare the security documents such as valuation report, photocopy of sale and purchase agreement and relevant collateral such as land title deed. Other relevant documents such as invoices and commercial document, documents to prove other source of income also need to submit to commercial banks (Banking Info, 2011). Commercial banks could perform interviews and carry out a site visit to business premises for the intention of understands the business and clarification. This is to facilitate the commercial banks to verify and measure companys financial position (Banking Info, 2011). The last stage is assessment of the loan application. Commercial banks will access the credit application after the borrower submission all the documents required. For assessment the loan application, commercial banks would view for certain basic requirements, for example the business viability, capacity to make repayment for loan application, whether the loan application is for business development, and credit history with commercial banks and to assess whether the risks are acceptable. Besides, commercial banks will also assess for the businesss credit risks that are called 5Cs, character, capital, capacity, conditions and collateral. Commercial banks will analysis 5Cs to decide approval or rejected the loans (Banking Info, 2011). According to Chuah Mei Lin, commercial bank will use 14 to 30 days to process the application depend on the size of the loans. If commercial bank approves the loan application, they will issue a letter offer to the applicant within three working days (SME Corp, 2010). A letter offer will state the term and conditions. The borrower should understand all the term and condition write down in letter of offer. The common term and condition include periods for repayment and payment in default, submission of financial statements, while the company change the nature of the business and the requirement of the borrower After the loan approved, the borrowers can utilised it within 5 working days. If decline offer, the companies can appeal against facilities (Banking Info, 2011). 2.3 PROBLEM FACED BY SMALL AND MEDIUM ENTERPRISES IN OBTAINING LOAN SMEs have difficulty in obtaining credit facilities from commercial banks when compared to large industries during crisis period even in normal period. The main reason always is low profitability earn by commercial banks. Almost all commercial bankers in the world will interest in the profitability business. Since loaning is the principle activity of a banks and it is its responsibility to make sure that all monies lent out are collectible. As such, commercial banks make sure that the creditworthiness of borrower will repaid the loan through assessing the information provided by applicants. (Anna, 2008) During global economic crisis, loans will be difficult to obtain especially risky loans will become increasingly strict (Factoring Financing Articles, 2011). This is bad news for SMEs since they form the riskiest borrowers. Due to the loan condition of commercial banks too strict, SMEs faced the problem in obtaining loan (Hongbo and Xiaojie , 2009). Insufficient collateral and social guarantee system In Malaysia, some small and medium enterprises do not qualify to obtain credit facility from commercial banks. Such as lack of collateral which is the big issue in obtaining credit facilities from commercial banks. The low value of outdated equipment is difficult to collateral as the credit facilities. (Kian Seong, 2010). Collateral is essential because it decrease the credit risks of commercial banks. In Singapore, Gabriel (2009) said that small and medium enterprises are facing problem in securing essential loans. For unprecedented crisis facing by SMEs, the government assistance schemes still do not far enough and not suitable. But the real problem is the commercial banks unwilling to lend the loan under government scheme because they reluctant pay the cash first. Although the government willing bear 50 to 80 percent of risks but the government guarantee portion is difficult to claw back. But if the borrower cannot pay up, the government agreed to bear the risk for the portion of loans. Most of the SMEs companies need working capital financing that is cash overdraft. For working capital loans, government assistance scheme usually do not seem to provide. In China, when SMEs applying loan who face strict condition for mortgage (Hongbo Duan, Xiaojie Han Hongbo Yang, 2009). Customers asset mortgage as the basis of the commercial banks decided whether to approve the loan application. It means that SMEs insufficient collateral assets, and cannot be effectively secured. Most of SMEs do not meet up the conditions of the collateral assets. SMEs always have lack of plant and equipment for collateral through the view of enterprise asset structure. For the moment of the loan application, the equipments are outdated, the collateral value of which is relatively low (Jiantuo, 2007). Another problem faced by SMEs is the enterprises property legal rights, it is because a huge number of SMEs is having the joint cooperation. This joint cooperation will lead to the ownership of property, plant and equipment and other real estate property not apparent. Therefore, the fixed assets do not used as loan mortgage. Simultaneously, due to the high cost and complicated process of mortgage register, the SME get that guarantee from mortgage will much more difficult (Xiao Li, 2003). To carry out the protection act, SME loan guarantee must refers to the method of assurances of the debt agreement. The warrants credit is increased when all the way through utilize of third-party credit with reward. At that moment, both sites credit can turn to a balance and the capital achieves to a proper scale (Xiao Li, 2005). Even if local governments put more and more efforts to develop credit guarantee institutions for SMEs, they are still facing many problems. SME credit warranty institutions help out the small and medium enterprise to get multi-funding for capital collection. But too small of the capital scale warranty institutions also cannot assist more in SME financing. In most areas of SME warranty funding is governmental financial funding. Although the government put effort to help out SMEs but it is still far from their needs for warranty funding. SMEs still seek for other credit financial support. Simultaneously, issue small loan and bear higher cost in financing also the problem faced by small warranty funding institutions (Xiao Li, 2005). Commercial banks will not simply recognize the information prepared by warranty institutions. Because of the existing tax revenue, bank management system and information service centre cannot obtain a full business and personal records (Howrey 2011). So, bank has to face more risks in lending loan to SMEs. Interest rates and processing costs In Malaysia, raise in interest rate is one of the problems faced by SMEs. SMEs cannot bear those high interest rates. While commercial banks willing to gain high profits, small and medium sized enterprises will be hard to negotiate low interest rates with them. Commercial banks are rejecting the application of small loans due to high supervision and monitoring costs. Commercial banks judge the SMEs as riskiest borrower because of their insufficient assets to fulfill requirement, low capitalization and high mortality rates. For this situation, to raise the fixed and working capital from commercial banks is harder. According to Fazlur (2011), SME face difficulties because of the bank reluctance provide loans to them. Many banks are unwilling issue loans to them because of high processing costs and monitoring costs. In addition, interest rates for SME loans are high due to the high processing costs. But CEO of Unique Trust, Capt rtd Prince Kofi Amoabeng said that they must express disapproval the government to take some decisions to force interest rates down, because low interest rates will lead to the banks stop loan to the SME sector so SME is going to suffer. Therefore, they all have to go to the non-bank financial institutions where they would be given the loans at even higher interest rates (Fidel Amoah, 2011). Poor documentation and management Malaysian SMEs are always regarded as higher risk borrower because of their poor documentation. SMEs have no lucrative projects, low quality, real estate title deed is not clear, no clear business aims and succession business plans, and no available credit history. Besides that, small and medium sized enterprises unable to give necessary documentation like financing accounting and track records for application of credit facilities. Due to that heavy documentation needed by commercial bank so they will delay the processing of application loan(Gloria, 2010). In India, small and medium enterprises suffer losses in their business so they always provide bad track record for application loans. Besides that, SMEs seldom have a long history so they usually hard to get loan (Gandhi, 2011). According to Executive Director of First Banc Mawuli Hedo, it is possible to reduce the rate of bank facilities but majority of the SMEs do not provide proper documentation (Obeng-Sakyi Sobgbodjor, 2010). In Thailand, the major obstruction for SMEs is facing several financial problems which include trouble in debts and lack of working capital. SMEs have facing problem in obtaining loan from domestic commercial banks especially in business of handicraft products. They have deficient plant and equipment and do not use standard accounting procedures. (Arunee and Anongnart, 2000). From the SMEs opinion, they have been complained that shortage of information and guidance provide by commercial banks, complication and trouble related to credit facilities application procedure, insufficient requirement of SMEs, high interest rates charged, and lack of collateral are the major problem access to finance (Sinswat and Subhan, 2010). From the commercial banks point of view, the main obstructions for loaning to SMEs consist of lack of collateral provided by SMEs, inadequate business experience, poor management, untrustworthy accounting system, no business plan, no long credit provided, high transaction and operational costs per SME loan application (Sinswat and Subhan, 2010). In China, most SMEs companies financial performance is not satisfactory by commercial banks. SMEs companies always with low level of average profit because they are in high competitive industries. In addition, their bankruptcy rate is very high for the reason that they are easily affected by business environment, sensitive to the effects of variables and risk. They have poor supervision and sense of credit. As such, after suffering from a huge loss, SMEs normally cannot raise any corrective measures. They attempt to be delayed the payment for interests and principle and let the lending bank suffer the loss. Furthermore, SMEs is difficult to meet the requirement or condition in the way of operation scale and business capacity due to the present credit assessment system is set for large size enterprises (Xiao Li, 2003). With unofficial financial accounting and poor management, so SMEs unable to meet the bank collateral conditions and guarantees due to commercial banks offer most of mortgages loans is secured by real estate. As most SME loan is an urgent require for capital due to short-term liquidity stress, for term of revolving credit cannot be correctly measured and the probability of overdue payback is relatively high. Commercial banks have problems to assess SMEs production business when confront with such complicated SME market (Yanan Chao, 2010). Rejecting Loan Application In Malaysia, if refer to the form of cash flow in SME Company, know that inability to generate cash to repay the loan, commercial banks automatically will rejecting loan application (Banking Info, 2003). SMEs will face problem in obtaining loan such as the commercial banks rejecting loan application, the general reason include poor credit history, inadequate capital commitment, inadequate supporting documents, unacceptable financial problem, lack of financial information and doubtful repayment ability. Besides that, the borrower is the high risk enterprises which overdependence on a single purchaser or dealer (SMI/SME Business Directory Malaysia, 2010). HSBC Bank Malaysia Bhd managing director Thomas Varughese said that the top issues to reject loan application is the applicant do not provided enough financial information. Besides that, SMEs do not perform well in managing their financial position. Another issue for rejecting loan application is the poor credit history for the enterprises, director and guarantors. (Kian Seong, 2010). Reduce the facility In Malaysia, Banking info (2003) recorded that commercial banks perform periodical review of their credit risk profile of existing loans and based on this assessment, if their assessment proves a high default risk profile, the commercial banks will reduce the amount of credit facility. In India, if the SME companies without increasing the security, commercial banks will maintain or reduce the credit facilities (Aditi, 2005). In Singapore, Hng Kiang (2009) said that the SMEs credit facility from commercial banks is secured by strong collateral, but they also will reduce the credit facility during the recession period.

Latin jazz orchestra Essay -- essays research papers

If I were to use one word to describe the â€Å"Afro-Latin Jazz Orchestra† that word would be astonishing. At first, hearing that I was required to attend a Jazz concert I was completely turned off. I am very closed minded and automatically thought to myself that the kind of music would be dreadful. That is not the case anymore. This genre of music is amusing and very pleasing to the ears. The band members are some of the most talented musicians that I ever saw or heard.   Ã‚  Ã‚  Ã‚  Ã‚  Standing room tickets were sold out when we arrived at Mc Carter Theater. For ten dollars we purchased box seats right near the stage. My friend Kevin and I were thrilled with our seats which allowed the beat view of the whole stage. The theater it self was beautiful. The stage was set up well with nice a nice lighting. The entire band consisted of eighteen musicians. There were seventeen males and one female. In the front of the stage was the pianist and director Arturo O’ Farril. Also in the front was the musician on bongos. To the left of the stage was the saxophone players and to the right the trombone players. In the rear were the trumpet players with the musician on bass in front of them as well as the drummer. I believe this setup allowed for their superb sound. Over all our seats were incredible and made the performance much more enjoyable.   Ã‚  Ã‚  Ã‚  Ã‚  Between songs the pianist and director Arturo O’ Farril would give a short introduction and history behind ...

Business Plan for Beauty Products Company Essay -- Business Plan for C

Table of Contents Executive summary 2 The company 2 Company description 2 Vision statement 3 Mission statement 3 Objective 3 Company background 4 Product/ service and industry 4 Product/ service description 4 Industry description 5 The market 5 Market and target customer 5 Competition and competitive advantage 6 Marketing strategy 6 Overall strategy 7 Sales plan 7 Competitive plan 7 Research and development or growth plan 8 The organization 8 Legal and organizational structures 8 Key personnel 8 Related service providers 8 Location 9 The financials 9 Critical risks 9 Income statement 9 Cash flow projection 10 Balance sheet 10 Start- up costs 10 Assumptions 11 Schedule 11 Conclusion 11 References 13 The appendixes 15 Executive Summary Starting a business is a challenging undertaking that requires detailed planning and intensive research. The modern dynamic market and economic changes demand for the adoption of a well through of business plan that incorporates the entire business requirements (Pinson, 2004). The Paradise Beauty Centre will be a small enterprise that will focuses on the production and distribution of beauty products in United States of America. The business plan will help the business managers and other employees in understanding the long-term and immediate goals and objective of the business. The business plan will also be useful in facilitating the adoption of a strategy that will help the business prosper in the modern market. The plan will be a critical tool that will help in the production of a reliable strategy for attaining the goals and objectives. The proposed business plan will be implemented in three years time. Within the first three years, the business i... ...ice-Hal Millikan, E. (2001). Cosmetology, cosmetics, cosmeceuticals: definitions and regulations, Clinics in dermatology 1.(4) 371-374 Moore, M., (2012). Creating Public Value: Strategic Management in Government, Cambridge: Harvard University Pres Pinson, L. (2004). Anatomy of a Business Plan: A Step-by-Step Guide to Building a Business and Securing Your Company’s Future. Chicago: Dearborn Trade Reshetnikov S., Wasser S., Duckman I., & Tsukor K. (2000). Medicinal value of the genus Tremella Pers. International Journal of Medicinal Mushrooms 2 (3): 345–67 Sullivan, A., & Steven M., (2003). Economics: Principles in action. Upper Saddle River, New Jersey : Pearson Prentice Hal Winter, R., (2005) A Consumer's Dictionary of Cosmetic Ingredients: Complete Information About the Harmful and Desirable Ingredients in Cosmetics. New York, NY: Three Rivers Press

The making of a football star

Famous people often feel lonely but what makes them who they are. Rahul, a lonely sixteen year old famous professional football player has maybe too many responsibilities and expectations. Residing in Mumbai, Rahul comes from a middle class family, where his parents work very hard to give him a good education so he will have a better tomorrow and lead a better life. Rahul, however faced learning difficulties and his parents, not realizing his sporting talents, put pressure on him to perform well academically It was when he was 12 years old that the physical education coach of that school saw him playing football with friends and realized that this boy had latent talent which would probably take him to higher levels. Not losing any time the coach put him in the school football team which plays various inter-school tournaments each year. Being in the team made Rahul very happy and he felt completely charged up as he began to love the game and now aspired to become a professional football player and play for a well known football club in the future. His parents began to support him, but yet were not very content as they wanted him to become an all-rounder. Rahul tried hard but was never successful in becoming good at academics. Being twelve he thought he had it all a game he loved playing and was good at, friends in school and the respect of his teammates. At thirteen he was made captain of the football team of his school and led the team to the finals of the biggest inter-school tournaments of Mumbai and scored four goals for his team comprehensively, winning the trophy for his team. For him this was one of the best moments in his life and after the game he was surrounded by the press. The next day his name and picture came in all city newspapers and he was also featured live on many different news channels. This gave him a lot of confidence and he began to think that these were stepping stones to his future. After a year he had become very famous as his school had won the championship for the second successive year under his captaincy. All his friends as a result began to feel very jealous of him and started to ignore him and kept on mocking him when he did not play well or tried talking to them. Rahul felt very lonely and went through a emotionally hard time. This made him angry and resentful and he started loosing his passion towards the game. However, the coach motivated him to play as he could see the future in this boy. This was way too much pressure for a fifteen year old boy and he was having a tough time already in the start of a dream career. He wanted to give up football because of all the sacrifices he had to make just to be successful and famous in one sport. Any fifteen year old boy would not want to lose all his friends to become famous and successful in a sport and this is why Rahul wanted his friends back and thus wiling to sacrifice the game he loved. But, the coach, the parents and the principal of the school did not let this happen as they felt he was too talented to give up the game and they did not know about the problems he faced as he never told them. His coach to encourage him made him the captain of the under 16 team. In the first tournament itself as captain Rahul won the championship for his side even though the rest of the team was not co-operative because they were so jealous of him and did not even pass the ball to him. The performance of Rahul without the help of his team mates caught the eyes of many selectors and immediately he got an offer from the Mahindra United youth team. This was extremely prestigious as Mahindra United is one of India's best clubs. They offered him a contract of 3 years at Rs.50000 per year. He was in a dilemma as he loved the game so much but he wanted to enjoy his childhood as well. Accepting this offer meant that he would face many difficulties and could not attend school regularly and miss a lot of work and without many friends it would be very difficult for him. Any sixteen year old boy would not like to miss his school life for all this achievements and destroy their childhood but Rahul was forced to. However, Rahul made many new friends in his club Mahindra United and they constantly supported him. Later in that year he had taken time off to study for his tenth standard board exams and did well. After he returned on the football field he was back to his best, now feeling less pressure and playing for the love of the game and a year later he was chosen into the U-19 football team to play internationally for India which he thinks has been his best achievement so far. However, the childhood of his which was destroyed can never be got back with any achievement or the gain of wealth. The period of loneliness can never be forgotten by him and he questions his decisions. Children are forced to make hard decisions at a very young age without any maturity. Hence, sometimes they loose the chance to have a normal care free childhood like you and me.

Unemployment – Case Study

Therefore we consider theories of selling, by studying the decision-making process of buyers.Problem In the case study: 1. How will Jan maintain good rapport and close the deal of the purchase. 2. Jan inexperienced customers and unsure of his ability to explain the product in the new surroundings to a more technical audience. 3. He is also worried about demonstrating the product to the office staff since one of the advantage which will become apparent at any such demonstration is the potential staff savings of the equipment. 4.Jan is dejected and He thinks where did he go wrong and what will he do now? Ian Browsing is a salesperson and has the ability in selling appropriate products to customers need, answering any questions is his capability to communicate. With his being good communicator, he convince and get good harmonious relationship and close to deal of purchase. Jan needs to assure that before he explain to the new surroundings he must be knowledgeable and he learned what his being explain so he need to study first before he proceed to explanation.Jan dejected as it means Jan can't continuously become demonstrating the products because only purchasing anger can do what he will do. Jan worried so that he need to talk the supervisor who promoted him as direct business division to also get information about the company premises. The purchasing manager is upset because he has not been consulted about the proposed purchase so Jan has been dejected. He Is also worried about equipment Jan Browsers Is a salesperson promoted to direct division In a computer company.HIS ability to strike rapport with prospects and reading them well, leaders to purchase is the contribution of his success. When he started working in the local firms he contacts a chemical-producing company with co employees, 1 2 of those is in office and administrative positions. He Is asked before his visits for the demonstration of the sullenest as well as posting relevant details to the company's office manager. He is worried because he is inexperienced when deals in retail, but much of his 1 OFF by the office manager. He telephoned Jan saying he is determined to block the purchase on pentacle. VI.RECOMMENDATION For Jan Browsers as a sales person and for purchasing manager they need to have DOD harmonious relationship in order to benefit their company. Jan has to appear to the purchasing manager and convince him and he must use his ability in communicating the purchase manager. For purchasing manager he might be look and try Jan too new direct division if it is effective so that he knows first the capability and knowledge of Jan. Purchasing was believed to be a problem solving behavior undertaken by a rational individual whose goal was to maximize satisfaction by choosing ideal combination from range affordable commodities. Unemployment – Case Study Therefore we consider theories of selling, by studying the decision-making process of buyers.Problem In the case study: 1. How will Jan maintain good rapport and close the deal of the purchase. 2. Jan inexperienced customers and unsure of his ability to explain the product in the new surroundings to a more technical audience. 3. He is also worried about demonstrating the product to the office staff since one of the advantage which will become apparent at any such demonstration is the potential staff savings of the equipment. 4.Jan is dejected and He thinks where did he go wrong and what will he do now? Ian Browsing is a salesperson and has the ability in selling appropriate products to customers need, answering any questions is his capability to communicate. With his being good communicator, he convince and get good harmonious relationship and close to deal of purchase. Jan needs to assure that before he explain to the new surroundings he must be knowledgeable and he learned what his being explain so he need to study first before he proceed to explanation.Jan dejected as it means Jan can't continuously become demonstrating the products because only purchasing anger can do what he will do. Jan worried so that he need to talk the supervisor who promoted him as direct business division to also get information about the company premises. The purchasing manager is upset because he has not been consulted about the proposed purchase so Jan has been dejected. He Is also worried about equipment Jan Browsers Is a salesperson promoted to direct division In a computer company.HIS ability to strike rapport with prospects and reading them well, leaders to purchase is the contribution of his success. When he started working in the local firms he contacts a chemical-producing company with co employees, 1 2 of those is in office and administrative positions. He Is asked before his visits for the demonstration of the sullenest as well as posting relevant details to the company's office manager. He is worried because he is inexperienced when deals in retail, but much of his 1 OFF by the office manager. He telephoned Jan saying he is determined to block the purchase on pentacle. VI.RECOMMENDATION For Jan Browsers as a sales person and for purchasing manager they need to have DOD harmonious relationship in order to benefit their company. Jan has to appear to the purchasing manager and convince him and he must use his ability in communicating the purchase manager. For purchasing manager he might be look and try Jan too new direct division if it is effective so that he knows first the capability and knowledge of Jan. Purchasing was believed to be a problem solving behavior undertaken by a rational individual whose goal was to maximize satisfaction by choosing ideal combination from range affordable commodities.

Rhetorical Analysis: the Crisis, No. 1

Rhetorical Analysis: The Crisis, No. 1 by Thomas Paine Political writer, Thomas Paine, in his persuasive writing, The Crisis No. 1, expresses feelings towards Britain's control over the colonies. Paine's purpose is to unite the colonists in an effort to retaliate against Great Britain. He uses an objective tone in order to unite and rally the common person in his nation. Paine opens his persuasion to the nation by warning that getting their freedom from Britain will not be easy. By using the simile, â€Å"Tyranny, like hell†¦ , he implies that Britain's control over them will not be easy to overcome. As he says in the beginning of the paragraph, â€Å"The summer soldier and the sunshine patriot will†¦ shrink from the service†¦ but he that stands it now, deserves the love and thanks of man and women. â€Å", this states that anyone who will not fight for their country does not deserve their country, he uses pathos when declaring this statement. In the latter section of this paragraph, Paine uses the metaphor, â€Å"†¦ f being bound in that manner is not slavery†, to show that the way that the Britain is controlling them, makes them feel like slaves. Paine later uses ethos when he states, â€Å"However, the fault, if it were one, was all our own; we have none to blame but ourselves. But no great deal is lost yet. † He says this to show the nation that they had messed up in the beginning, but if they were to come together they could right the wrongs that were done. In the following paragraph Paine uses pathos when he talks about God not giving up on his people.That God will provide for them and not give them â€Å"up to the care of devils†. he also states that God will be on their side, â€Å"I cannot see on what grounds the King of Britain can look up to heaven for help against us: a common murderer†. Paine shifts to talk about panic, how panic can be used to produce good and bad. He uses a simile in paragraph th ree, â€Å"Britain has trembled like and ague†, he uses this to show that even the royal British army can be terrified, later in the paragraph he states, â€Å"the whole English army†¦ was driven back like men petrified with fear†, to emphasize his point more.Paine opens the closing paragraph by uniting the people with ethos, â€Å"The far and near, the home counties and the back, the rich and the poor will suffer or rejoice alike. † In saying that Paine implies, no matter what happens they all will stay together, whether it be death or freedom. He also uses ethos by stating â€Å"Not all the treasures in the world†¦ could have induced me to support and offensive war, I think it murder. â€Å", by saying this Paine shows that war was the last option he would have much rather came to a peaceful solution, but given the circumstances, there was no choice.Paine closes up the paragraph by using an asyndeton, â€Å"Let them call me a rebel and welcomeâ₠¬ ¦ but I should suffer the misery of devils were I to make a whore of my soul by swearing allegiance to one whose character is that of a sottish, stupid, stubborn, worthless, brutish man. † His use of the asyndeton to show that the King is much more than that he listed. In The Crisis No. 1, Thomas Paine creates an objective tone to unite and rally the nation by showing what kind of man the King of Britain is. Paine achieved his goal by using a variety of rhetorical devices. He connected to the nation through the use of his devices.

Damodaran Book on Investment Valuation, 2nd Edition

INVESTMENT VALUATION: SECOND EDITION I will be putting my entire second edition online, while the book goes through the printing process – it will be available at the end of the year. This may seem like a bit of a free lunch, and I guess it is. I hope, though, that you can do me a favor as you go through the manuscript. If you find any mistakes – mathematical or grammatical – could you please let me know? It would help me ensure that the typos do not find their way into the final version. Chapter 1: Introduction to Valuation Chapter 2: Approaches to Valuation Chapter 3: Understanding Financial Statements Chapter 4: The Basics of Risk Chapter 5: Option Pricing Theory and Models Chapter 6: Market Efficiency: Theory and Models Chapter 7: Riskless Rates and Risk Premiums Chapter 8: Estimating Risk Parameters and Costs of Financing Chapter 9: Measuring Earnings Chapter 10: From Earnings to Cash Flows Chapter 11: Estimating Growth Chapter 12: Closure in Valuation: Estimating Terminal Value Chapter 13: Dividend Discount Models Chapter 14: Free Cashflow to Equity Models Chapter 15: Firm Valuation: Cost of Capital and APV Approaches Chapter 16: Estimating Equity Value Per Share Chapter 17: Fundamental Principles of Relative Valuation Chapter 18: Earnings Multiples Chapter 19: Book Value Multiples Chapter 20: Revenue and Sector-Specific Multiples Chapter 21: Valuing Financial Service Firms Chapter 22: Valuing Firms with Negative Earnings Chapter 23: Valuing Young and Start-up Firms Chapter 24: Valuing Private Firms Chapter 25: Acquisitions and Takeovers Chapter 26: Valuing Real Estate Chapter 27: Valuing Other Assets Chapter 28: The Option to Delay and Valuation Implications Chapter 29: The Option to Expand and Abandon: Valuation Implications Chapter 30: Valuing Equity in Distressed Firms Chapter 31: Value Enhancement: A Discounted Cashflow Framework Chapter 32: Value Enhancement: EVA, CFROI and Other Tools Chapter 33: Valuing Bonds Chapter 34: Valuing Forward and Futures Contracts Chapter 35: Overview and Conclusions References 1 CHAPTER 1 INTRODUCTION TO VALUATION Every asset, financial as well as real, has a v alue. The key to successfully nvesting in and managing these assets lies in understanding not only what the value is but also the sources of the value. Any asset can be valued, but some assets are easier to value than others and the details of valuation will vary from case to case. Thus, the valuation of a share of a real estate property will require different information and follow a different format than the valuation of a publicly traded stock. What is surprising, however, is not the differences in valuation techniques across assets, but the degree of similarity in basic principles. There is undeniably uncertainty associated with valuation. Often that uncertainty comes from the asset being valued, though the valuation model may add to that uncertainty. This chapter lays out a philosophical basis for valuation, together with a discussion of how valuation is or can be used in a variety of frameworks, from portfolio management to corporate finance. A philosophical basis for valuation It was Oscar Wilde who described a cynic as one who â€Å"knows the price of everything, but the value of nothing†. He could very well have been describing some equity research analysts and many investors, a surprising number of whom subscribe to the ‘bigger fool' theory of investing, which argues that the value of an asset is irrelevant as long as there is a ‘bigger fool' willing to buy the asset from them. While this may provide a basis for some profits, it is a dangerous game to play, since there is no guarantee that such an investor will still be around when the time to sell comes. A postulate of sound investing is that an investor does not pay more for an asset than its worth. This statement may seem logical and obvious, but it is forgotten and rediscovered at some time in every generation and in every market. There are those who are disingenuous enough to argue that value is in the eyes of the beholder, and that any price can be justified if there are other investors willing to pay that price. That is patently absurd. Perceptions may be all that matter when the asset is a painting or a sculpture, but investors do not (and should not) buy most assets for aesthetic or emotional reasons; 2 financial assets are acquired for the cashflows expected on them. Consequently, perceptions of value have to be backed up by reality, which implies that the price paid for any asset should reflect the cashflows that it is expected to generate. The models of valuation described in this book attempt to relate value to the level and expected growth in these cashflows. There are many areas in valuation where there is room for disagreement, including how to estimate true value and how long it will take for prices to adjust to true value. But there is one point on which there can be no disagreement. Asset prices cannot be justified by merely using the argument that there will be other investors around willing to pay a higher price in the future. Generalities about Valuation Like all analytical disciplines, valuation has developed its own set of myths over time. This section examines and debunks some of these myths. Myth 1: Since valuation models are quantitative, valuation is objective Valuation is neither the science that some of its proponents make it out to be nor the objective search for the true value that idealists would like it to become. The models that we use in valuation may be quantitative, but the inputs leave plenty of room for subjective judgments. Thus, the final value that we obtain from these models is colored by the bias that we bring into the process. In fact, in many valuations, the price gets set first and the valuation follows. The obvious solution is to eliminate all bias before starting on a valuation, but this is easier said than done. Given the exposure we have to external information, analyses and opinions about a firm, it is unlikely that we embark on most valuations without some bias. There are two ways of reducing the bias in the process. The first is to avoid taking strong public positions on the value of a firm before the valuation is complete. In far too many cases, the decision on whether a firm is under or over valued precedes the actual 3 valuation1, leading to seriously biased analyses. The second is to minimize the stake we have in whether the firm is under or over valued, prior to the valuation. Institutional concerns also play a role in determining the extent of bias in valuation. For instance, it is an acknowledged fact that equity research analysts are more likely to issue buy rather than sell recommendations,2 i. e. , that they are more likely to find firms to be undervalued than overvalued. This can be traced partly to the difficulties they face in obtaining access and collecting information on firms that they have issued sell recommendations and to the pressure that they face from portfolio managers, some of whom might have large positions in the stock. In recent years, this trend has been exacerbated by the pressure on equity research analysts to deliver investment banking business. When using a valuation done by a third party, the biases of the analyst(s) doing the valuation should be considered before decisions are made on its basis. For instance, a self-valuation done by a target firm in a takeover is likely to be positively biased. While this does not make the valuation worthless, it suggests that the analysis should be viewed with skepticism. The Biases in Equity Research The lines between equity research and salesmanship blur most in periods that are characterized by â€Å"irrational exuberance†. In the late 1990s, the extraordinary surge of market values in the companies that comprised the new economy saw a large number of equity research analysts, especially on the sell side, step out of their roles as analysts and become cheerleaders for these stocks. While these analysts might have been well meaning in their recommendations, the fact that the investment banks that they worked for were leading the charge on new initial public offerings from these firms exposed them to charges of bias and worse. 1This is most visible in takeovers, where the decision to acquire a firm often seems to precede the valuation of the firm. It should come as no surprise, therefore, that the analysis almost invariably supports the decision. 2In most years, buy recommendations outnumber sell recommendations by a margin of ten to one. In recent years, this trend has become even stronger. 4 In 2001, the crash in the market values of new economy stocks and the anguished cries of investors who had lost wealth in the crash created a firestorm of controversy. There were congressional hearing where legislators demanded to know what analysts knew about the companies they recommended and when they knew it, statements from the SEC about the need for impartiality in equity research and decisions taken by some investment banking to create at least the appearance of objectivity. At the time this book went to press, both Merrill Lynch and CSFB had decided that their equity research analysts could no longer hold stock in companies that they covered. Unfortunately, the real source of bias – the intermingling of investment banking business and investment advice – was left untouched. Should there be government regulation of equity research? We do not believe that it would be wise, since regulation tends to be heavy handed and creates side costs that seem to quickly exceed the benefits. A much more effective response can be delivered by portfolio managers and investors. The equity research of firms that create the potential for bias should be discounted or, in egregious cases, even ignored. Myth 2: A well-researched and well-done valuation is timeless The value obtained from any valuation model is affected by firm-specific as well as market-wide information. As a consequence, the value will change as new information is revealed. Given the constant flow of information into financial markets, a valuation done on a firm ages quickly, and has to be updated to reflect current information. This information may be specific to the firm, affect an entire sector or alter expectations for all firms in the market. The most common example of firm-specific information is an earnings report that contains news not only about a firm’s performance in the most recent time period but, more importantly, about the business model that the firm has adopted. The dramatic drop in value of many new economy stocks from 1999 to 2001 can be traced, at least partially, to the realization that these firms had business models that could deliver customers but not earnings, even in the long term. In some cases, new information can affect the valuations of all firms in a sector. Thus, pharmaceutical companies that were valued highly in early 1992, on the assumption that the high growth from the eighties would continue into the future, were valued much less in early 1993, as the prospects of 5 health reform and price controls dimmed future prospects. With the benefit of hindsight, the valuations of these companies (and the analyst recommendations) made in 1992 can be criticized, but they were reasonable, given the information available at that time. Finally, information about the state of the economy and the level of interest rates affect all valuations in an economy. A weakening in the economy can lead to a reassessment of growth rates across the board, though the effect on earnings are likely to be largest at cyclical firms. Similarly, an increase in interest rates will affect all investments, though to varying degrees. When analysts change their valuations, they will undoubtedly be asked to justify them. In some cases, the fact that valuations change over time is viewed as a problem. The best response may be the one that Lord Keynes gave when he was criticized for changing his position on a major economic issue: â€Å"When the facts change, I change my mind. And what do you do, sir? † Myth 3. : A good valuation provides a precise estimate of value Even at the end of the most careful and detailed valuation, there will be uncertainty about the final numbers, colored as they are by the assumptions that we make about the future of the company and the economy. It is unrealistic to expect or demand absolute certainty in valuation, since cash flows and discount rates are estimated with error. This also means that you have to give yourself a reasonable margin for error in making recommendations on the basis of valuations. The degree of precision in valuations is likely to vary widely across investments. The valuation of a large and mature company, with a long financial history, will usually be much more precise than the valuation of a young company, in a sector that is in turmoil. If this company happens to operate in an emerging market, with additional disagreement about the future of the market thrown into the mix, the uncertainty is magnified. Later in this book, we will argue that the difficulties associated with valuation can be related to where a firm is in the life cycle. Mature firms tend to be easier to value than growth firms, and young start-up companies are more difficult to value than companies with established produces and markets. The problems are not with the valuation models we use, though, but with the difficulties we run into in making estimates for the future. 6 Many investors and analysts use the uncertainty about the future or the absence of information to justify not doing full-fledged valuations. In reality, though, the payoff to valuation is greatest in these firms. Myth 4: . The more quantitative a model, the better the valuation It may seem obvious that making a model more complete and complex should yield better valuations, but it is not necessarily so. As models become more complex, the number of inputs needed to value a firm increases, bringing with it the potential for input errors. These problems are compounded when models become so complex that they become ‘black boxes’ where analysts feed in numbers into one end and valuations emerge from the other. All too often the blame gets attached to the model rather than the analyst when a valuation fails. The refrain becomes â€Å"It was not my fault. The model did it. † There are three oints we will emphasize in this book on all valuation. The first is the principle of parsimony, which essentially states that you do not use more inputs than you absolutely need to value an asset. The second is that the there is a trade off between the benefits of building in more detail and the estimat ion costs (and error) with providing the detail. The third is that the models don’t value companies: you do. In a world where the problem that we often face in valuations is not too little information but too much, separating the information that matters from the information that does not is almost as important as the valuation models and techniques that you use to value a firm. Myth 5: To make money on valuation, you have to assume that markets are inefficient Implicit often in the act of valuation is the assumption that markets make mistakes and that we can find these mistakes, often using information that tens of thousands of other investors can access. Thus, the argument, that those who believe that markets are inefficient should spend their time and resources on valuation whereas those who believe that markets are efficient should take the market price as the best estimate of value, seems to be reasonable. This statement, though, does not reflect the internal contradictions in both positions. Those who believe that markets are efficient may still feel that valuation has something to contribute, especially when they are called upon to value the effect of a change in the way a firm is run or to understand why market prices change over time. Furthermore, it is not clear how markets would become efficient in the first place, if investors did not attempt to find under and over valued stocks and trade on these valuations. In other words, a pre-condition for market efficiency seems to be the existence of millions of investors who believe that markets are not. On the other hand, those who believe that markets make mistakes and buy or sell stocks on that basis ultimately must believe that markets will correct these mistakes, i. e. become efficient, because that is how they make their money. This is a fairly self-serving definition of inefficiency – markets are inefficient until you take a large position in the stock that you believe to be mispriced but they become efficient after you take the position. We approach the issue of market efficiency as wary skeptics. On the one hand, we believe that markets make mistakes but, on the other, finding these mistakes requires a combination of skill and luck. This view of markets leads us to the following conclusions. First, if something looks too good to be true – a stock looks obviously under valued or over valued – it is probably not true. Second, when the value from an analysis is significantly different from the market price, we start off with the presumption that the market is correct and we have to convince ourselves that this is not the case before we conclude that something is over or under valued. This higher standard may lead us to be more cautious in following through on valuations. Given the historic difficulty of beating the market, this is not an undesirable outcome. Myth 6: The product of valuation (i. e. , the value) is what matters; The process of valuation is not important. As valuation models are introduced in this book, there is the risk of focusing exclusively on the outcome, i. e. , the value of the company, and whether it is under or over valued, and missing some valuable insights that can be obtained from the process of the valuation. The process can tell us a great deal about the determinants of value and help us answer some fundamental questions — What is the appropriate price to pay for high growth? What is a brand name worth? How important is it to improve returns on projects? What is the effect of profit margins on value? Since the process is so 8 informative, even those who believe that markets are efficient (and that the market price is therefore the best estimate of value) should be able to find some use for valuation models. The Role of Valuation Valuation is useful in a wide range of tasks. The role it plays, however, is different in different arenas. The following section lays out the relevance of valuation in portfolio management, acquisition analysis and corporate finance. 1. Valuation and Portfolio Management The role that valuation plays in portfolio management is determined in large part by the investment philosophy of the investor. Valuation plays a minimal role in portfolio management for a passive investor, whereas it plays a larger role for an active investor. Even among active investors, the nature and the role of valuation is different for different types of active investment. Market timers use valuation much less than investors who pick stocks, and the focus is on market valuation rather than on firm-specific valuation. Among security selectors, valuation plays a central role in portfolio management for fundamental analysts and a peripheral role for technical analysts. The following sub-section describes, in broad terms, different investment philosophies and the role played by valuation in each. 1. Fundamental Analysts: The underlying theme in fundamental analysis is that the true value of the firm can be related to its financial characteristics — its growth prospects, risk profile and cashflows. Any deviation from this true value is a sign that a stock is under or overvalued. It is a long term investment strategy, and the assumptions underlying it are: (a) the relationship between value and the underlying financial factors can be measured. (b) the relationship is stable over time. (c) deviations from the relationship are corrected in a reasonable time period. Valuation is the central focus in fundamental analysis. Some analysts use discounted cashflow models to value firms, while others use multiples such as the priceearnings and price-book value ratios. Since investors using this approach hold a large number of ‘undervalued' stocks in their portfolios, their hope is that, on average, these portfolios will do better than the market. 9 2. Franchise Buyer: The philosophy of a franchise buyer is best expressed by an investor who has been very successful at it — Warren Buffett. â€Å"We try to stick to businesses we believe we understand,† Mr. Buffett writes3. â€Å"That means they must be relatively simple and stable in character. If a business is complex and subject to constant change, we're not smart enough to predict future cash flows. † Franchise buyers concentrate on a few businesses they understand well, and attempt to acquire undervalued firms. Often, as in the case of Mr. Buffett, franchise buyers wield influence on the management of these firms and can change financial and investment policy. As a long term strategy, the underlying assumptions are that : (a) Investors who understand a business well are in a better position to value it correctly. (b) These undervalued businesses can be acquired without driving the price above the true value. Valuation plays a key role in this philosophy, since franchise buyers are attracted to a particular business because they believe it is undervalued. They are also interested in how much additional value they can create by restructuring the business and running it right. 3. Chartists: Chartists believe that prices are driven as much by investor psychology as by any underlying financial variables. The information available from trading — price movements, trading volume, short sales, etc. — gives an indication of investor psychology and future price movements. The assumptions here are that prices move in predictable patterns, that there are not enough marginal investors taking advantage of these patterns to eliminate them, and that the average investor in the market is driven more by emotion rather than by rational analysis. While valuation does not play much of a role in charting, there are ways in which an enterprising chartist can incorporate it into analysis. For instance, valuation can be used to determine support and resistance lines4 on price charts. 3This is extracted from Mr. Buffett's letter to stockholders in Berkshire Hathaway for 1993. 4On a chart, the support line usually refers to a lower bound below which prices are unlikely to move and the resistance line refers to the upper bound above which prices are unlikely to venture. While these levels are usually estimated using past prices, the range 10 4. Information Traders: Prices move on information about the firm. Information traders attempt to trade in advance of new information or shortly after it is revealed to financial markets, buying on good news and selling on bad. The underlying assumption is that these traders can anticipate information announcements and gauge the market reaction to them better than the average investor in the market. For an information trader, the focus is on the relationship between information and changes in value, rather than on value, per se. Thus an information trader may buy an ‘overvalued' firm if he believes that the next information announcement is going to cause the price to go up, because it contains better than expected news. If there is a relationship between how undervalued or overvalued a company is and how its stock price reacts to new information, then valuation could play a role in investing for an information trader. 5. Market Timers: Market timers note, with some legitimacy, that the payoff to calling turns in markets is much greater than the returns from stock picking. They argue that it is easier to predict market movements than to select stocks and that these predictions can be based upon factors that are observable. While valuation of individual stocks may not be of any use to a market timer, market timing strategies can use valuation in at least two ways: (a) The overall market itself can be valued and compared to the current level. (b) A valuation model can be used to value all stocks, and the results from the crosssection can be used to determine whether the market is over or under valued. For example, as the number of stocks that are overvalued, using the dividend discount model, increases relative to the number that are undervalued, there may be reason to believe that the market is overvalued. 6. Efficient Marketers: Efficient marketers believe that the market price at any point in time represents the best estimate of the true value of the firm, and that any attempt to exploit perceived market efficiencies will cost more than it will make in excess profits. They assume that markets aggregate information quickly and accurately, that marginal of values obtained from a valuation model can be used to determine these levels, i. e. the maximum value will become the resistance level and the minimum value will become the support line. 11 investors promptly exploit any inefficiencies and that any inefficiencies in the market are caused by friction, such as transactions costs, and cannot be arbitraged away. For efficient marketers, valuation is a useful exercise to determine w hy a stock sells for the price that it does. Since the underlying assumption is that the market price is the best estimate of the true value of the company, the objective becomes determining what assumptions about growth and risk are implied in this market price, rather than on finding under or over valued firms. . Valuation in Acquisition Analysis Valuation should play a central part of acquisition analysis. The bidding firm or individual has to decide on a fair value for the target firm before making a bid, and the target firm has to determine a reasonable value for itself before deciding to accept or reject the offer. There are also special factors to consider in takeover valuation. First, the effects of synergy on the combined value of the two firms (target plus bidding firm) have to be considered before a decision is made on the bid. Those who suggest that synergy is impossible to value and should not be considered in quantitative terms are wrong. Second, the effects on value, of changing management and restructuring the target firm, will have to be taken into account in deciding on a fair price. This is of particular concern in hostile takeovers. Finally, there is a significant problem with bias in takeover valuations. Target firms may be over-optimistic in estimating value, especially when the takeover is hostile, and they are trying to convince their stockholders that the offer price is too low. Similarly, if the bidding firm has decided, for strategic reasons, to do an acquisition, there may be strong pressure on the analyst to come up with an estimate of value that backs up the acquisition. 3. Valuation in Corporate Finance If the objective in corporate finance is the maximization of firm value5, the relationship among financial decisions, corporate strategy and firm value has to be 5Most corporate financial theory is constructed on this premise. 12 delineated. In recent years, management consulting firms have started offered companies advice on how to increase value6. Their suggestions have often provided the basis for the restructuring of these firms. The value of a firm can be directly related to decisions that it makes — on which projects it takes, on how it finances them and on its dividend policy. Understanding this relationship is key to making value-increasing decisions and to sensible financial restructuring. Conclusion Valuation plays a key role in many areas of finance — in corporate finance, mergers and acquisitions and portfolio management. The models presented in this book will provide a range of tools that analysts in each of these areas will find useful, but the cautionary note sounded in this chapter bears repeating. Valuation is not an objective exercise; and any preconceptions and biases that an analyst brings to the process will find its way into the value. 6The motivation for this has been the fear of hostile takeovers. Companies have increasingly turned to ‘value consultants' to tell them how to restructure, increase value and avoid being taken over. 13 Questions and Short Problems: Chapter 1 1. The value of an investment is A. he present value of the cash flows on the investment B. determined by investor perceptions about it C. determined by demand and supply D. often a subjective estimate, colored by the bias of the analyst E. all of the above 2. There are many who claim that value is based upon investor perceptions, and perceptions alone, and that cash flows and earnings do not matter. This argument is flawed because A. value is determined by earnings and cash flows, and investor perceptions do not matter. B. perceptions do matter, but they can change. Value must be based upon something more stable. C. investors are irrational. Therefore, their perceptions should not determine value. D. alue is determined by investor perceptions, but it is also determined by the underlying earnings and cash flows. Perceptions must be based upon reality. 3. You use a valuation model to arrive at a value of $15 for a stock. The market price of the stock is $25. The difference may be explained by A. a market inefficiency; the market is overvaluing the stock. B. the use of the wrong valuation model to value the stock. C. errors in the inputs to the valuation model. D. none of the above E. either A, B, or C. 0 CHAPTER 2 APPROACHES TO VALUATION Analysts use a wide range of models to value assets in practice, ranging from the simple to the sophisticated. These models often make very different assumptions about pricing, but they do share some common characteristics and can be classified in broader terms. There are several advantages to such a classification — it makes it easier to understand where individual models fit into the big picture, why they provide different results and when they have fundamental errors in logic. In general terms, there are three approaches to valuation. The first, discounted cashflow valuation, relates the value of an asset to the present value of expected future cashflows on that asset. The second, relative valuation, estimates the value of an asset by looking at the pricing of ‘comparable' assets relative to a common ariable such as earnings, cashflows, book value or sales. The third, contingent claim valuation, uses option pricing models to measure the value of assets that share option characteristics. Some of these assets are traded financial assets like warrants, and some of these options a re not traded and are based on real assets – projects, patents and oil reserves are examples. The latter are often called real options. There can be significant differences in outcomes, depending upon which approach is used. One of the objectives in this book is to explain the reasons for such differences in value across different models and to help in choosing the right model to use for a specific task. Discounted Cashflow Valuation While discounted cash flow valuation is one of the three ways of approaching valuation and most valuations done in the real world are relative valuations, we will argue that it is the foundation on which all other valuation approaches are built. To do relative valuation correctly, we need to understand the fundamentals of discounted cash flow valuation. To apply option pricing models to value assets, we often have to begin with a discounted cash flow valuation. This is why so much of this book focuses on discounted cash flow valuation. Anyone who understands its fundamentals will be able to analyze and use the other approaches. In this section, we will consider the basis of this approach, a philosophical rationale for discounted cash flow valuation and an examination of the different sub-approaches to discounted cash flow valuation. Basis for Discounted Cashflow Valuation This approach has its foundation in the present value rule, where the value of any asset is the present value of expected future cashflows that the asset generates. t=n t ? (1+r) t t=1 Value = where, CF n = Life of the asset CFt = Cashflow in period t r = Discount rate reflecting the riskiness of the estimated cashflows The cashflows will vary from asset to asset — dividends for stocks, coupons (interest) and the face value for bonds and after-tax cashflows for a real project. The discount rate will be a function of the riskiness of the estimated cashflows, with higher rates for riskier assets and lower rates for safer projects. You can in fact think of discounted cash flow valuation on a continuum. At one end of the spectrum, you have the default-free zero coupon bond, with a guaranteed cash flow in the future. Discounting this cash flow at the riskless rate should yield the value of the bond. A little further up the spectrum are corporate bonds where the cash flows take the form of coupons and there is default risk. These bonds can be valued by discounting the expected cash flows at an interest rate that reflects the default risk. Moving up the risk ladder, we get to equities, where there are expected cash flows with substantial uncertainty around the expectation. The value here should be the present value of the expected cash flows at a discount rate that reflects the uncertainty. The Underpinnings of Discounted Cashflow Valuation In discounted cash flow valuation, we try to estimate the intrinsic value of an asset based upon its fundamentals. What is intrinsic value? For lack of a better definition, consider it the value that would be attached to the firm by an all-knowing analyst, who not only knows the expected cash flows for the firm but also attaches the right discount rate(s) to these cash flows and values them with absolute precision. Hopeless though the task of estimating intrinsic value may seem to be, especially when valuing young companies with substantial uncertainty about the future, we believe that these estimates can be different from the market prices attached to these companies. In other word s, markets make mistakes. Does that mean we believe that markets are inefficient? Not quite. While we assume that prices can deviate from intrinsic value, estimated based upon fundamentals, we also assume that the two will converge sooner rather than latter. Categorizing Discounted Cash Flow Models There are literally thousands of discounted cash flow models in existence. Oftentimes, we hear claims made by investment banks or consulting firms that their valuation models are better or more sophisticated than those used by their contemporaries. Ultimately, however, discounted cash flow models can vary only a couple of dimensions and we will examine these variations in this section. I. Equity Valuation, Firm Valuation and Adjusted Present Value (APV) Valuation There are three paths to discounted cashflow valuation — the first is to value just the equity stake in the business, the second is to value the entire firm, which includes, besides equity, the other claimholders in the firm (bondholders, preferred stockholders, etc. and the third is to value the firm in pieces, beginning with its operations and adding the effects on value of debt and other non-equity claims. While all three approaches discount expected cashflows, the relevant cashflows and discount rates are different under each. The value of equity is obtained by discounting expected cashf lows to equity, i. e. , the residual cashflows after meeting all expenses, reinvestment needs, tax obligations and net debt payments (interest, principal payments and new debt issuance), at the cost of equity, i. e. , the rate of return required by equity investors in the firm. t=n Value of Equity = where, CF to Equity t (1+k e )t t=1 ? CF to Equityt = Expected Cashflow to Equity in period t ke = Cost of Equity The dividend discount model is a specialized case of equity valuation, where the value of the equity is the present value of expected future dividends. The value of the firm is obtained by discounting expected cashflows to the firm, i. e. , the residual cashflows after meeting all operating expenses, reinvestment needs and taxes, but prior to any payments to either debt or equity holders, at the weighted average cost of capital, which is the cost of the different components of financing used by the firm, weighted by their market value proportions. t=n Value of Firm = where, ? (1+WACC)tt t=1 CF to Firm CF to Firm t = Expected Cashflow to Firm in period t WACC = Weighted Average Cost of Capital The value of the firm can also be obtained by valuing each claim on the firm separately. In this approach, which is called adjusted present value (APV), we begin by valuing equity in the firm, assuming that it was financed only with equity. We then consider the value added (or taken away) by debt by considering the present value of the tax benefits that flow from debt and the expected bankruptcy costs. Value of firm = Value of all-equity financed firm + PV of tax benefits + Expected Bankruptcy Costs In fact, this approach can be generalized to allow different cash flows to the firm to be discounted at different rates, given their riskiness. While the three approaches use different definitions of cashflow and discount rates, they will yield consistent estimates of value as long as you use the same set of assumptions in valuation. The key error to avoid is mismatching cashflows and discount rates, since discounting cashflows to equity at the cost of capital will lead to an upwardly biased estimate of the value of equity, while discounting cashflows to the firm at the cost of equity will yield a downward biased estimate of the value of the firm. In the illustration 4 that follows, we will show the equivalence of equity and firm valuation. Later in this book, we will show that adjusted present value models and firm valuation models also yield the same values. Illustration 2. : Effects of mismatching cashflows and discount rates Assume that you are analyzing a company with the following cashflows for the next five years. Assume also that the cost of equity is 13. 625% and the firm can borrow long term at 10%. (The tax rate f or the firm is 50%. ) The current market value of equity is $1,073 and the value of debt outstanding is $800. Year 1 2 3 4 5 Terminal Value Cashflow to Equity $ 50 $ 60 $ 68 $ 76. 2 $ 83. 49 $ 1603. 008 Interest (1-t) $ 40 $ 40 $ 40 $ 40 $ 40 Cashflow to Firm $ 90 $ 100 $ 108 $ 116. 2 $ 123. 49 $ 2363. 008 The cost of equity is given as an input and is 13. 625%, and the after-tax cost of debt is 5%. Cost of Debt = Pre-tax rate (1 – tax rate) = 10% (1-. 5) = 5% Given the market values of equity and debt, we can estimate the cost of capital. WACC = Cost of Equity (Equity / (Debt + Equity)) + Cost of Debt (Debt/(Debt+Equity)) = 13. 625% (1073/1873) + 5% (800/1873) = 9. 94% Method 1: Discount CF to Equity at Cost of Equity to get value of equity We discount cash flows to equity at the cost of equity: PV of Equity = 50/1. 13625 + 60/1. 136252 + 68/1. 136253 + 76. 2/1. 136254 + (83. 49+1603)/1. 136255 = $1073 Method 2: Discount CF to Firm at Cost of Capital to get value of firm PV of Firm = 90/1. 0994 + 100/1. 09942 + 108/1. 09943 + 116. 2/1. 09944 + (123. 49+2363)/1. 9945 = $1873 5 PV of Equity = PV of Firm – Market Value of Debt = $ 1873 – $ 800 = $1073 Note that the value of equity is $1073 under both approaches. It is easy to make the mistake of discounting cashflows to equity at the cost of capital or the cashflows to the firm at the cost of equity. Error 1: Discount CF to Equity at Cost of Capital to get too high a value for equity PV of Equity = 50/1. 0994 + 60/1. 09942 + 68/1. 09943 + 76. 2/1. 09944 + (83. 49+1603)/1. 09945 = $1248 Error 2: Discount CF to Firm at Cost of Equity to get too low a value for the firm PV of Firm = 90/1. 13625 + 100/1. 136252 + 108/1. 136253 + 116. 2/1. 136254 + (123. 49+2363)/1. 36255 = $1613 PV of Equity = PV of Firm – Market Value of Debt = $1612. 86 – $800 = $813 The effects of using the wrong discount rate are clearly visible in the last two calculations. When the cost of capital is mistakenly used to discount the cashflows to equity, the value of equity increases by $175 over its true value ($1073). When the cashflows to the firm are erroneously discounted at the cost of equity, the value of the firm is understated by $260. We have to point out that getting the values of equity to agree with the firm and equity valuation approaches can be much more difficult in practice than in this exa mple. We will return and consider the assumptions that we need to make to arrive at this result. A Simple Test of Cash Flows There is a simple test that can be employed to determine whether the cashflows being used in a valuation are cashflows to equity or cashflows to the firm. If the cash flows that are being discounted are after interest expenses (and principal payments), they are cash flows to equity and the discount rate that should be used should be the cost of equity. If the cash flows that are discounted are before interest expenses and principal payments, they are usually cash flows to the firm. Needless to say, there are other items that need to be considered when estimating these cash flows, and we will consider them in extensive detail in the coming chapters. 6 II. Total Cash Flow versus Excess Cash Flow Models The conventional discounted cash flow model values an asset by estimating the present value of all cash flows generated by that asset at the appropriate discount rate. In excess return (and excess cash flow) models, only cash flows earned in excess of the required return are viewed as value creating, and the present value of these excess cash flows can be added on to the amount invested in the asset to estimate its value. To illustrate, assume that you have an asset in which you invest $100 million and that you expect to generate $12 million per year in after-tax cash flows in perpetuity. Assume further that the cost of capital on this investment is 10%. With a total cash flow model, the value of this asset can be estimated as follows: Value of asset = $12 million/0. 0 = $120 million With an excess return model, we would first compute the excess return made on this asset: Excess return = Cash flow earned – Cost of capital * Capita l Invested in asset = $12 million – 0. 10 * $100 million = $2 million We then add the present value of these excess returns to the investment in the asset: Value of asset = Present value of excess return + Investment in the asset = $2 million/0. 10 + $100 million = $120 million Note that the answers in the two approaches are equivalent. Why, then, would we want to use an excess return model? By focusing on excess returns, this model brings home the point that it is not earning per se that create value, but earnings in excess of a required return. Later in this book, we will consider special versions of these excess return models such as Economic Value Added (EVA). As in the simple example above, we will argue that, with consistent assumptions, total cash flow and excess return models are equivalent. Applicability and Limitations of DCF Valuation Discounted cashflow valuation is based upon expected future cashflows and discount rates. Given these informational requirements, this approach is easiest to use for assets (firms) whose cashflows are currently positive and can be estimated with some reliability for future periods, and where a proxy for risk that can be used to obtain 7 discount rates is available. The further we get from this idealized setting, the more difficult discounted cashflow valuation becomes. The following list contains some scenarios where discounted cashflow valuation might run into trouble and need to be adapted. (1) Firms in trouble: A distressed firm generally has negative earnings and cashflows. It expects to lose money for some time in the future. For these firms, estimating future cashflows is difficult to do, since there is a strong probability of bankruptcy. For firms which are expected to fail, discounted cashflow valuation does not work very well, since we value the firm as a going concern providing positive cashflows to its investors. Even for firms that are expected to survive, cashflows will have to be estimated until they turn positive, since obtaining a present value of negative cashflows will yield a negative1 value for equity or the firm. (2) Cyclical Firms: The earnings and cashflows of cyclical firms tend to follow the economy – rising during economic booms and falling during recessions. If discounted cashflow valuation is used on these firms, expected future cashflows are usually smoothed out, unless the analyst wants to undertake the onerous task of predicting the timing and duration of economic recessions and recoveries. Many cyclical firms, in the depths of a recession, look like troubled firms, with negative earnings and cashflows. Estimating future cashflows then becomes entangled with analyst predictions about when the economy will turn and how strong the upturn will be, with more optimistic analysts arriving at higher estimates of value. This is unavoidable, but the economic biases of the analyst have to be taken into account before using these valuations. (3) Firms with unutilized assets: Discounted cashflow valuation reflects the value of all assets that produce cashflows. If a firm has assets that are unutilized (and hence do not produce any cashflows), the value of these assets will not be reflected in the value obtained from discounting expected future cashflows. The same caveat applies, in lesser degree, to underutilized assets, since their value will be understated in discounted cashflow valuation. While this is a problem, it is not insurmountable. The value of these 1 The protection of limited liability should ensure that no stock will sell for less than zero. The price of such a stock can never be negative. 8 assets can always be obtained externally2, and added on to the value obtained from discounted cashflow valuation. Alternatively, the assets can be valued assuming that they are used optimally. (4) Firms with patents or product options: Firms often have unutilized patents or licenses that do not produce any current cashflows and are not expected to produce cashflows in the near future, but, nevertheless, are valuable. If this is the case, the value obtained from discounting expected cashflows to the firm will understate the true value of the firm. Again, the problem can be overcome, by valuing these assets in the open market or by using option pricing models, and then adding on to the value obtained from discounted cashflow valuation. (5) Firms in the process of restructuring: Firms in the process of restructuring often sell some of their assets, acquire other assets, and change their capital structure and dividend policy. Some of them also change their ownership structure (going from publicly traded to private status) and management compensation schemes. Each of these changes makes estimating future cashflows more difficult and affects the riskiness of the firm. Using historical data for such firms can give a misleading picture of the firm's value. However, these firms can be valued, even in the light of the major changes in investment and financing policy, if future cashflows reflect the expected effects of these changes and the discount rate is adjusted to reflect the new business and financial risk in the firm. (6) Firms involved in acquisitions: There are at least two specific issues relating to acquisitions that need to be taken into account when using discounted cashflow valuation models to value target firms. The first is the thorny one of whether there is synergy in the merger and if its value can be estimated. It can be done, though it does require assumptions about the form the synergy will take and its effect on cashflows. The second, especially in hostile takeovers, is the effect of changing management on cashflows and risk. Again, the effect of the change can and should be incorporated into the estimates of future cashflows and discount rates and hence into value. (7) Private Firms: The biggest problem in using discounted cashflow valuation models to value private firms is the measurement of risk (to use in estimating discount rates), since 2 If these assets are traded on external markets, the market prices of these assets can be used in the valuation. If not, the cashflows can be projected, assuming full utilization of assets, and the value can be most risk/return models require that risk parameters be estimated from historical prices on the asset being analyzed. Since securities in private firms are not traded, this is not possible. One solution is to look at the riskiness of compara ble firms, which are publicly traded. The other is to relate the measure of risk to accounting variables, which are available for the private firm. The point is not that discounted cash flow valuation cannot be done in these cases, but that we have to be flexible enough to deal with them. The fact is that valuation is simple for firms with well defined assets that generate cashflows that can be easily forecasted. The real challenge in valuation is to extend the valuation framework to cover firms that vary to some extent or the other from this idealized framework. Much of this book is spent considering how to value such firms. Relative Valuation While we tend to focus most on discounted cash flow valuation, when discussing valuation, the reality is that most valuations are relative valuations. The value of most assets, from the house you buy to the stocks that you invest in, are based upon how similar assets are priced in the market place. We begin this section with a basis for relative valuation, move on to consider the underpinnings of the model and then consider common variants within relative valuation. Basis for Relative Valuation In relative valuation, the value of an asset is derived from the pricing of ‘comparable' assets, standardized using a common variable such as earnings, cashflows, book value or revenues. One illustration of this approach is the use of an industry-average price-earnings ratio to value a firm. This assumes that the other firms in the industry are comparable to the firm being valued and that the market, on average, prices these firms correctly. Another multiple in wide use is the price to book value ratio, with firms selling at a discount on book value, relative to comparable firms, being considered undervalued. The multiple of price to sales is also used to value firms, with the average rice-sales ratios of firms with similar characteristics being used for comparison. While these three multiples are among the most widely used, there are others that also play a role in estimated. 10 analysis – price to cashflows, price to dividends and market va lue to replacement value (Tobin's Q), to name a few. Underpinnings of Relative Valuation Unlike discounted cash flow valuation, which we described as a search for intrinsic value, we are much more reliant on the market when we use relative valuation. In other words, we assume that the market is correct in the way it prices stocks, on average, but that it makes errors on the pricing of individual stocks. We also assume that a comparison of multiples will allow us to identify these errors, and that these errors will be corrected over time. The assumption that markets correct their mistakes over time is common to both discounted cash flow and relative valuation, but those who use multiples and comparables to pick stocks argue, with some basis, that errors made by mistakes in pricing individual stocks in a sector are more noticeable and more likely to be corrected quickly. For instance, they would argue that a software firm that trades at a price earnings ratio of 10, when the rest of the sector trades at 25 times earnings, is clearly under valued and that the correction towards the sector average should occur sooner rather than latter. Proponents of discounted cash flow valuation would counter that this is small consolation if the entire sector is over priced by 50%. Categorizing Relative Valuation Models Analysts and investors are endlessly inventive when it comes to using relative valuation. Some compare multiples across companies, while others compare the multiple of a company to the multiples it used to trade in the past. While most relative valuations are based upon comparables, there are some relative valuations that are based upon fundamentals. I. Fundamentals versus Comparables In discounted cash flow valuation, the value of a firm is determined by its expected cash flows. Other things remaining equal, higher cash flows, lower risk and higher growth should yield higher value. Some analysts who use multiples go back to these discounted cash flow models to extract multiples. Other analysts compare multiples 11 across firms or time, and make explicit or implicit assumptions about how firms are similar or vary on fundamentals. 1. Using Fundamentals The first approach relates multiples to fundamentals about the firm being valued – growth rates in earnings and cashflows, payout ratios and risk. This approach to estimating multiples is equivalent to using discounted cashflow models, requiring the same information and yielding the same results. Its primary advantage is to show the relationship between multiples and firm characteristics, and allows us to explore how multiples change as these characteristics change. For instance, what will be the effect of changing profit margins on the price/sales ratio? What will happen to price-earnings ratios as growth rates decrease? What is the relationship between price-book value ratios and return on equity? 2. Using Comparables The more common approach to using multiples is to compare how a firm is valued with how similar firms are priced by the market, or in some cases, with how the firm was valued in prior periods. As we will see in the later chapters, finding similar and comparable firms is often a challenge and we have to often accept firms that are different from the firm being valued on one dimension or the other. When this is the case, we have to either explicitly or implicitly control for differences across firms on growth, risk and cash flow measures. In practice, controlling for these variables can range from the naive (using industry averages) to the sophisticated (multivariate regression models where the relevant variables are identified and we control for differences. ). II. Cross Sectional versus Time Series Comparisons In most cases, analysts price stocks on a relative basis by comparing the multiple it is trading to the multiple at which other firms in the same business are trading. In some cases, however, especially for mature firms with long histories, the comparison is done across time. a. Cross Sectional Comparisons When we compare the price earnings ratio of a software firm to the average price earnings ratio of other software firms, we are doing relative valuation and we are making 12 cross sectional comparisons. The conclusions can vary depending upon our assumptions about the firm being valued and the comparable firms. For instance, if we assume that the firm we are valuing is similar to the average firm in the industry, we would conclude that it is cheap if it trades at a multiple that is lower than the average multiple. If, on the other hand, we assume that the firm being valued is riskier than the average firm in the industry, we might conclude that the firm should trade at a lower multiple than other firms in the business. In short, you cannot compare firms without making assumptions about their fundamentals. b. Comparisons across time If you have a mature firm with a long history, you can compare the multiple it trades today to the multiple it used to trade in the past. Thus, Ford Motor company may be viewed as cheap because it trades at six times earnings, if it has historically traded at ten times earnings. To make this comparison, however, you have to assume that your firm has not changed its fundamentals over time. For instance, you would expect a high growth firm’s price earnings ratio to drop and its expected growth rate to decrease over time as it becomes larger. Comparing multiples across time can also be complicated by changes in the interest rates over time and the behavior of the overall market. For instance, as interest rates fall below historical norms and the overall market increases, you would expect most companies to trade at much higher multiples of earnings and book value than they have historically. Applicability of multiples and limitations The allure of multiples is that they are simple and easy to work with. They can be used to obtain estimates of value quickly for firms and assets, and are particularly useful when there are a large number of comparable firms being traded on financial markets and the market is, on average, pricing these firms correctly. They tend to be more difficult to use to value unique firms, with no obvious comparables, with little or no revenues and negative earnings. By the same token, they are also easy to misuse and manipulate, especially when comparable firms are used. Given that no two firms are exactly similar in terms of risk and 13 growth, the definition of ‘comparable' firms is a subjective one. Consequently, a biased analyst can choose a group of comparable firms to confirm his or her biases about a firm's value. An illustration of this is given below. While this potential for bias exists with discounted cashflow valuation as well, the analyst in DCF valuation is forced to be much more explicit about the assumptions which determine the final value. With multiples, these assumptions are often left unstated. Illustration 2. 2. The potential for misuse with comparable firms Assume that an analyst is valuing an initial public offering of a firm that manufactures computer software. At the same time, the price-earnings multiples of other publicly traded firms manufacturing software are as follows:3 Firm Adobe Systems Autodesk Broderbund Computer Associates Lotus Development Microsoft Novell Oracle Software Publishing System Software Average PE Ratio Multiple 23. 2 20. 4 32. 8 18. 0 24. 1 27. 4 30. 0 37. 8 10. 6 15. 7 24. 0 While the average PE ratio using the entire sample listed above is 24, it can be changed markedly by removing a couple of firms from the group. For instance, if the two firms with the lowest PE ratios in the group (Software Publishing and System Software) are eliminated from the sample, the average PE ratio increases to 27. If the two firms with the highest PE ratios in the group (Broderbund and Oracle) are removed from the group, the average PE ratio drops to 21. 3 These were the PE ratios for these firms at the end of 1992. 14 The other problem with using multiples based upon comparable firms is that it builds in errors (over valuation or under valuation) that the market might be making in valuing these firms. In illustration 2. 2, for instance, if the market has overvalued all computer software firms, using the average PE ratio of these firms to value an initial public offering will lead to an overvaluation of its stock. In contrast, discounted cashflow valuation is based upon firm-specific growth rates and cashflows, and is less likely to be influenced by market errors in valuation. Asset Based Valuation Models There are some who add a fourth approach to valuation to the three that we describe in this chapter. They argue that you can argue the individual assets owned by a firm and use that to estimate its value – asset based valuation models. In fact, there are several variants on asset based valuation models. The first is liquidation value, which is obtained by aggregating the estimated sale proceeds of the assets owned by a firm. The second is replacement cost, where you evaluate what it would cost you to replace all of the assets that a firm has today. While analysts may use sset-based valuation approaches to estimate value, we do not consider them to be alternatives to discounted cash flow, relative or option pricing models since both replacement and liquidation values have to be obtained using one or more of these approaches. Ultimately, all valuation models attempt to value assets – the differences arise in how we identify the assets and how we attach value to each asset. In liquidation valuation, we look only at assets in place and estimate their value based upon what similar assets are priced at in the market. In traditional discounted cash flow valuation, we consider all assets including expected growth potential to arrive at value. The two approaches may, in fact, yield the same values if you have a firm that has no growth assets and the market assessments of value reflect expected cashflows. Contingent Claim Valuation Perhaps the most significant and revolutionary development in valuation is the acceptance, at least in some cases, that the value of an asset may not be greater than the present value of expected cash flows if the cashflows are contingent on the occurrence or 15 non-occurrence of an event. This acceptance has largely come about because of the development of option pricing models. While these models were initially used to value traded options, there has been an attempt, in recent years, to extend the reach of these models into more traditional valuation. There are many who argue that assets such as patents or undeveloped reserves are really options and should be valued as such, rather than with traditional discounted cash flow models. Basis for Approach A contingent claim or option pays off only under certain contingencies – if the value of the underlying asset exceeds a pre-specified value for a call option, or is less than a pre-specified value for a put option. Much work has been done in the last twenty years in developing models that value options, and these option pricing models can be used to value any assets that have option-like features. The following diagram illustrates the payoffs on call and put options as a function of the value of the underlying asset: Figure 2. 1: Payoff Diagram on Call and Put Options Net Payoff on Call Option Net Payoff on Put Option Break Even Strike price Value of Underlying asset Maximum Loss Break Even An option can be valued as a function of the following variables – the current value, the variance in value of the underlying asset, the strike price, the time to expiration of the option and the riskless interest rate. This was first established by Black and Scholes (1972) and has been extended and refined subsequently in numerous variants. While the Black-Scholes option pricing model ignored dividends and assumed that options would 16 not be exercised early, it can be modified to allow for both. A discrete-time variant, the Binomial option pricing model, has also been developed to price options. An asset can be valued as an option if the payoffs are a function of the value of an underlying asset. It can be valued as a call option if the payoff is contingent on the value of the asset exceeding a pre-specified level.. It can be valued as a put option if the payoff increases as the value of the underlying asset drops below a pre-specified level. Underpinnings for Contingent Claim Valuation The fundamental premise behind the use of option pricing models is that discounted cash flow models tend to understate the value of assets that provide payoffs that are contingent on the occurrence of an event. As a simple example, consider an undeveloped oil reserve belonging to Exxon. You could value this reserve based upon expectations of oil prices in the future, but this estimate would miss the two nonexclusive facts. 1. The oil company will develop this reserve if oil prices go up and will not if oil prices decline. 2. The oil company will develop this reserve if development costs go down because of technological improvement and will not if development costs remain high. An option pricing model would yield a value that incorporates these rights. When we use option pricing models to value assets such as patents and undeveloped natural resource reserves, we are assuming that markets are sophisticated enough to recognize such options and to incorporate them into the market price. If the markets do not, we assume that they will eventually, with the payoff to using such models comes about whe