Premium Essay

Long Term Investment Decision by a Firm

In: Business and Management

Words 1984
Pages 8

The producers of low calorie microwavable food have been expecting a change in price and they want to choose the price strategy which would make their product less elastic and responsive to changes in the prices, then the company should make careful analysis of the entire market situation. The company should look for the substitute goods in the market and their pricing strategy. Higher the number of substitutes are available, higher will be the chance of rise in elasticity of our low calorie microwavable food. The buyers should not have many options to buy from the market. However, if there are only few substitutes available, then the producers may keep the price high in the market of their product. It is also determined by the market power of the producer. Market power is determined by the elasticity of demand of the product. The firm can set higher mark-up over their marginal cost if they know that customers will not shift to another product in case of price increase. Hence, the firm or the producer should consider the cross price elasticity of demand of their product. Another factor to be considered while setting up prices of their product in the market is that of government policies in the economy. Fiscal policy would determine the taxes and other components of aggregate demand. If the firms have set higher taxes, then people would have less disposable income available with them and they would like to spend less on such less calorie microwavable food items because such items are not the necessity for their survival. The in that case, prices should be low in the market so that more people could buy our product and we would be able to earn good amount of total revenue. Moreover, higher sales tax would also reduce the demand of our product in the market. Another factor to be considered by producers to set the prices in...

Similar Documents

Premium Essay

Fin Homework Set 5

...Running head: DIVIDENDS, CAPITAL STRUCTURES DECISIONS Dividends, Capital Structures Decisions Ma. Cesarlita G. Josol MBA - Acquisitions Strayer University 1 DIVIDENDS, CAPITAL STRUCTURES DECISIONS 2 Use the following information for Questions 1 through 3: Boehm Corporation has had stable earnings growth of 8% a year for the past 10 years and in 2013 Boehm paid dividends of $2.6 million on net income of $9.8 million. However, in 2014 earnings are expected to jump to $12.6 million, and Boehm plans to invest $7.3 million in a plant expansion. This one- time unusual earnings growth won’t be maintained, though, and after 2014 Boehm will return to its previous 8% earnings growth rate. Its target debt ratio is 35%. Calculate Boehm’s total dividends for 2014 under each of the following policies: Growth rate Net Income Dividend Dividend/Net Income Ratio Dividend/Net Income % 8% 2013 $9.8 $2.6 0.265306 26.5306% 2014 $10.584 $2.808 2014 $12.600 $3.34 QUESTION #1: Calculate Boehm’s total dividends for 2014 if its 2014 dividend payment is set to force dividends to grow at the long-run growth rate in earnings....

Words: 3433 - Pages: 14

Premium Essay

Capital Budgeting: Advantages and Limitations

...SEPTEMBER 2012 CHAPTER ONE INTRODUCTION 1.0 Background Study Capital budgeting is the process by which firms determine how to invest their capital. Included in this process are the decisions to invest in new projects, reassess the amount of capital already invested in existing projects, allocate and ration capital across divisions, and acquire other firms. In essence, the capital budgeting process defines the set and size of a firm’s real assets, which in turn generate the cash flows that ultimately determine its profitability, value and viability. In principle, a firm’s decision to invest in a new project should be made according to whether the project increases the wealth of the firm’s shareholders. For example, the Net Present Value (NPV) rule specifies an objective process by which firms can assess the value that new capital investments are expected to create. As Graham and Harvey (2001) document this rule has steadily gained in popularity since Dean (1951) formally introduced it, but its widespread use has not eliminated the human element in capital budgeting. Because the estimation of a project’s future cash flows and the rate at which they should be discounted is still a relatively subjective process, the behavioural traits of managers still affect this process. Capital budgeting is a process that is used to determine whether or not certain projects are worthwhile investments. Another term for capital budgeting is called an “investment appraisal.”...

Words: 7612 - Pages: 31

Premium Essay

Analysis and Interpretation

...Hence finance may be called as capital, investment, fund etc., but each term is having different meanings and unique characters. Increasing the profit is the main aim of any kind of economic activity. MEANING OF FINANCE: Finance may be defined as the art and science of managing money. It includes financial service and financial instruments. Finance also is referred as the provision of money at the time when it is needed. Finance function is the procurement of funds and their effective utilization in business concerns. DEFINITION OF FINANCE: According to Khan and Jain, “Finance is the art and science of managing money”. Webster’s Ninth New Collegiate Dictionary defines finance as “the Science on study of the management of funds’ and the management of fund as the system that includes the circulation of money, the granting of credit, the making of investments, and the provision of banking facilities. TYPES OF FINANCE: Finance is one of the important and integral part of business concerns, hence, it plays a...

Words: 3387 - Pages: 14

Premium Essay

Capital Budgeting

...The firm's capital investment decision may be comprised of a number of distinct decisions, each referred to as a project. A capital project is a set of assets that are contingent on one another and are considered together. Suppose a firm is considering the production of a new product. It must make a decision of whether or not to produce this new product. This...

Words: 1074 - Pages: 5

Premium Essay


...The financial manager plays the crucial role in the modern enterprise by supporting investment decision, financing decision, and also the profit distribution decision. He/she also helps the firm in balancing cash inflows and cash outflows, and in turn to maintain the liquidity position of the firm. How does the modern financial manager differ from the traditional financial manager? Does the modern financial manager's role differ for the large diversified firm and the small to medium size firm? The traditional financial manager was generally involved in the regular finance activities, e.g., banking operations, record keeping, management of the cash flow on a regular basis, and informing the funds requirements to the top management, etc. But, the role of financial manager has been enhanced in the today's environment; he/she takes an active role in financing, investment, distribution of profits, and liquidity decisions. In addition, he/she is also involved in the custody and safeguarding of financial and physical assets, efficient allocation of funds, etc. The role of financial manager in case of diversified firm is more complicated in comparison with a small and medium size firm. A diversified firm has several products and divisions and varied financial needs. The conflicting interests of divisional managers make the work of financial manager quite difficult in a...

Words: 1368 - Pages: 6

Premium Essay

Introduction to Corporate Finance

...Chapter 1 Introduction to Corporate Finance Week 1 by Hee Soo Lee Learning Goals The basic types of financial management decisions and the role of the financial manager The financial implications of the different forms of business organization The goal of financial management The conflicts of interest that can arise between owners and managers The various types of financial markets      2 Chapter Structure 1.1 The Types of Firms 1.2 Ownership Versus Control of Corporations 1.3 The Stock Market    3 What is Corporate Finance?  Three important questions that are answered when you start your own business: - What long-term investments should you take on? (business type, building, machinery, and equipment?) - Where will you get the long-term financing to pay for the investment? (bring other owners or borrowing?) - How will you manage the everyday financial activities of the firm?...

Words: 1934 - Pages: 8

Premium Essay

Tof Study

...Cash Ratio=Cash/Liabilities o Short term creditors would be interested in this ration 4. Networking capital to total assets=Net Working Capital/Total Assets o NWC is frequently viewed as the firms amount of short term liquidity 5. Interval Measure= Current Assets/Average Daily Operations Costs o...

Words: 1327 - Pages: 6

Premium Essay

Capital Budeting

...Capital budgeting (or investment appraisal) is the planning process used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It is budget for major capital, or investment, expenditures.[1] Many formal methods are used in capital budgeting, including the techniques such as Accounting rate of return Payback period Net present value Profitability index Internal rate of return Modified internal rate of return Equivalent annuity Real options valuation These methods use the incremental cash flows from each potential investment, or project. Techniques based on accounting earnings and accounting rules are sometimes used - though economists consider this to be improper - such as the accounting rate of return, and "return on investment." Simplified and hybrid methods are used as well, such as payback period and discounted payback period. acoording to two Economist Khizar Hayyat And Saqlain Shah: capital budgeting is a long term economics decision making it is called capital budgiting Each potential project's value should be estimated using a discounted cash flow (DCF) valuation, to find its net present value (NPV). (First applied to Corporate Finance by Joel Dean in 1951; see also Fisher separation theorem, John Burr Williams: Theory.)...

Words: 539 - Pages: 3

Premium Essay


...The financial manager is an intermediary between capital markets and the firm’s operations, responsible for both financing decisions (decisions that involve raising money) and investment decisions (decisions that involve...

Words: 1121 - Pages: 5

Premium Essay

Marriott Case Solution

...What type of investments would you value using Marriott’s WACC? ........................ 6   5.   If Marriott used a single corporate hurdle rate for evaluating investment opportunities in each of its lines of business, what would happen to the company over time? ......... 7   6.   What is the cost of capital for the lodging and restaurant divisions of Marriott? ........ 8   7.   What is the cost of capital for Marriott’s contract services division? How can you estimate its equity costs without publicly traded comparable companies? ................ 11   APPENDIX I – Math Utilized to Derive WACC for Marriott .......................................... 13   APPENDIX II – Math Utilized to Derive WACC for Divisions ...................................... 16   BA  626  Financial  Decision  Making     ii     1.  Are  the  four  components  of  Marriott’s  financial  strategy  consistent  with   its  growth...

Words: 4681 - Pages: 19

Premium Essay

Marketing Mix

...In the era of modern trade and commerce, business firm have to decide from where they will raise fund, where they will invest and how much of the profit will be distributed among the shareholders. “Finance” Came from Latin word “finis” means “dealing with the money”.finace is called the art and science of managing money. At the micro level, finance is the study of financial planning, asset management and fund raising for business and financial institutions. At the macro level, finance is the study of financial institution and financial markets and how they operate within the financial systems in both the domestic and global economics. Scholar’s view: “Finance consists of providing and utilizing the money, capital rights, credit and funds of any kind which are employed in the operation of an enterprise.” _George R Terry “Finance is concerned with the process, institutionsmarkets and instruments involved in the transfer of money among and between individuals, business and governments”. _Lawrence J Gitman From the above discussion, it can be said that finance is the process of financial planning, identification of sources of fund raising, investment of fund, protection of fund, distribution of profit to achieve the goal of the organization....

Words: 7921 - Pages: 32

Premium Essay

Guillermo Furniture

...The firm has come to a crossroads in its industry. Due to competitive forces that have recently entered the firm’s market, the firm must decide if it should make capital investments to become a high tech manufacturer, become a distributor, or due nothing and continue its traditional course of operations. Capital investments are instrumental to future successes realizable by Guillermo and “business profitability ultimately hinges, to a large extent, on the quality of a few capital investment decisions” (Edmonds, 2007). As a result, we will explore recommendations for Guillermo to vacate its current landscape of operations for a more innovative approach as a high tech manufacturer or distributor. The goal of this brief is to convey the most appropriate management of Guillermo Furniture’s capital funds and ascertain the best return on the firm’s investments. There are various techniques available for the firm to utilize. Consequently, this memo will also serve to explain the fundamental differences between the following two techniques, net present value (NPV) and internal rate of return (IRR).   Differences: NPV and IRR There are many techniques available for managers to use when analyzing potential capital investments. NPV compares the present value of an investment with the costs associated with the investment. The difference between the present value and the cost of the investment equals the net present value of the investment....

Words: 785 - Pages: 4

Premium Essay

ResolucióN Capitulo 14

...PMF Templates The following spreadsheet templates are provided: Problem 14-1 14-6 Topic Cash conversion cycle EOQ, reorder point, and safety stock 373 Part 5 Short-Term Financial Decisions Study Guide The following Study Guide examples are suggested for classroom presentation: Example 2 4 7 Topic Aggressive versus conservative...

Words: 4871 - Pages: 20

Premium Essay

Employee Resourcing

...These are: a) Investment of Long-term asset-mix decisions These decisions (also referred to as capital budgeting decisions) relates to the allocation of funds among investment projects. They refer to the firm’s decision to commit current funds to the purchase of fixed assets in expectation of future cash inflows from these projects. Investment proposals are evaluated in terms of both risk and expected return. Investment decisions also relates to recommitting funds when an old asset becomes less productive. This is referred to as replacement decision. b) Financing decisions Financing decision refers to the decision on the sources of funds to finance investment projects. The finance manager must decide the proportion of equity and debt. The mix of debt and equity affects the firm’s cost of financing as well as the financial risk. This will further be discussed under the risk return trade-off. c) Division of earnings decision The finance manager must decide whether the firm should distribute all profits to the shareholders, retain them, or distribute a portion and retain a portion. The earnings must also be distributed to other providers of funds such as preference shareholder, and debt providers of funds such as preference shareholders and debt providers....

Words: 5977 - Pages: 24

Premium Essay

Investment Decision

...CAPITAL BUDGETING DECISIONS 12/24/2012 Prof.Dr. Anuj Verma 2 LEARNING OBJECTIVES Understand the nature and importance of investment decisions Explain the methods of calculating net present value (NPV) and internal rate of return (IRR) Show the implications of net present value (NPV) and internal rate of return (IRR) Describe the non-DCF evaluation criteria: payback and accounting rate of return Illustrate the computation of the discounted payback Compare and contrast NPV and IRR and emphasize the superiority of NPV rule 12/24/2012 Prof.Dr. Anuj Verma 3 Nature of Investment Decisions The investment decisions of a firm are generally known as the capital budgeting, or capital expenditure decisions. The firm’s investment decisions would generally include expansion, acquisition, modernisation and replacement of the long-term assets. Sale of a division or business (divestment) is also as an investment decision. Decisions like the change in the methods of sales distribution, or an advertisement campaign or a research and development programme have long-term implications for the firm’s expenditures and benefits, and therefore, they should also be evaluated as investment decisions. 12/24/2012 Prof.Dr. Anuj Verma 4 Features of Investment Decisions The exchange of current funds for future benefits. The funds are invested in long-term assets. The future benefits will occur to the firm over a series of years. 12/24/2012 Prof.Dr....

Words: 1004 - Pages: 5