Long-term investment planning

Capital Budgeting =process by which firm decides which LT investments to make. Capital Budgeting projects, i.e., potential long-term investments, are expected to generate cash flows over several yrs. The decision to accept or reject a Capital Budgeting project depends on analysis of CF generated by the project and its cost.

three Capital Budgeting decision rules:

• Payback Period (When exactly do we get our money back, when does our project break even)

• Net Present Value (NPV)

• Internal Rate of Return (IRR) - IRR =percentage amount of profit you get by investing in a certain project.

A Capital Budgeting decision rule should satisfy the following criteria:

• Must consider all of the project's cash flows.

• Must consider the Time Value of Money (grouped into two areas:

Future Value and Present Value. Future Value= describes process of finding what an investment today will grow to in the future. Present Value describes the process of determining what a CF to be received in the future is worth in today's dollars.)

• Must always lead to correct decision when choosing among Mutually Exclusive Projects.

Beta Coefficient

Beta measures a stock's volatility, the degree to which a stock price fluctuates in relation to the overall market; Greek letter beta, ß. It is calculated using regression analysis. A beta= 1 indicates that the security's price will move with the market. A beta > than 1 indicates that the security's price will be more volatile than the market, and a beta < 1 means that it will be less volatile than the market.

Many utility stocks have a beta of less than 1. Conversely most high-tech Nasdaq-based stocks have a beta > one; they offer a higher rate of return, but they are also very risky;

various betas:

• Negative beta - A beta < 0 is possible but highly unlikely. People used to think that gold and gold stocks should have negative betas as they tended to do better when the stock market declined, but this hasn't been true overall.

• Beta = 0 - Basically this is cash (assuming no inflation).

• Beta between 0 and 1 - Low-volatility investments, such as utilities, are usually in this range

• Beta = 1 - This is the same as an index, such as the S&P 500 or some other index fund.

• Beta > 1 - This denotes anything more volatile than the broad-based index, like a sector fund.

• Beta > 100 - This is impossible because the stock would be expected go to zero on any decline in the stock market. The beta never gets higher than two to three.

 

 

Price structure and its components. Factors of a price.

Price structure

Conventional mass products pass through 3 stages of goods movement: the enterprise-wholesale, wholesale-retail, retail - consumer. Accordingly, these stages highlight key components of prices:

1. the wholesale price of the company (selling), consisting of 1) cost of goods sold 2) profits 3) VAT

2.Wholesale Price of industry (trade), includes besides the selling price the supply and marketing margin

3. Retail price includes trade margin on the wholesale price or, often, trade discount from the retail price (appointed in%, consists of costs and profits of retail trade).

In addition price structure can distinguish the costs of packaging, weight allowances and discounts, price promotions.

pricing a product, the emphasis will be on:

· covering costs and then having a margin of profit on top

· making sure that the pricing structure gives a competitive edge over similar products (if any exist)

· providing an adequate return to providers of capital and shareholders in a company

Factors:

Cost

a- Supplier's prices

b- Price inflation

c- Exchange rate movements

d- Quality

 

Customer

a) growth in customer's income

b) Perception about future prices

c) Price sensitivity

d) Quality perception

e) Demand

 

Competition

a) perfect

b) imperfect

Monopoly (single supplier... He will set the price as he likes it)

Oligopoly (many suppliers... price will be set by market)

duopoly (two suppliers e.gpepsi and coke... price will be competitor's price)

 

Other factors

Role of middle men

Availability of close subtitles / substitute

General inflation

Ethics

 

 

53.Methods of pricing + 54. Pricing strategies.

changes in the industry or the development stage of your product used as an indicator that it’s time to review your pricing strategy.

There are three basic methods to price your product:

Cost-basedpricing

Competition-basedpricing

Customer-basedpricing

Cost-based pricing is where the price includes the cost of ingredients and cost of operating the business.

Mark-up pricing is common in retail business because of so many types of products and purchases from many vendors. include a profit percentage with product cost

cost-plus pricing. works well if you do not know your production costs. add a percentage to an unknown product cost

planned-profit pricing method ensures you will earn a total profit for the business. It differs from the first two types of cost-based pricing as they focused on a per unit price.; combines per unit costs with output projections to calculate product price. price is a blend of total profit and product cost

Competition-based pricing is where price covers costs (cost of raw mat and cost of operating the business) and is comparable to the competitor’s price. the types of companies you compete with (direct competition), the types of companies you compete with (direct competition), how companies operate in your industry. Here price is the same as at competition. This type of pricing works well if you make standard products.

market penetration pricing. To improve your market penetration, you need to select a price that will lure customers away from the competition

market-share pricing. You need to select a price that will attract and hold as many customers as possible. = to seek larger market share through price

Customer-based pricing, also known as value-based pricing, is a system where the price is based on the customer ‘demand’ or need for the product. If the product is unique or innovative, a value-based price may help create a demand for the product or service.

Price to support Product Image: Prestige-oriented consumers believe a higher price means higher quality, while bargain seekers will only be happy with lower prices

Set Price to Increase Product Sales: Promotional pricing uses lower prices to catch the attention of busy consumers.

design a price range to attract many consumer groups Rather than pricing for one group, you could design a range of prices that would appeal to several or all of the groups.

set price to increase volume sales Volume pricing is where sellers discount larger volume sales to sell more product.