Day: April 1, 2018

Effect of Leverage on Corporate Performance in Nigeria

Effect of Leverage on Corporate Performance in Nigeria

EFFECT OF LEVERAGE ON CORPORATE PERFORMANCE IN NIGERIA A PAPER PRESENTED TO THE DEPARTMENT OF MANAGEMENT SCIENCE OF LADOKE AKINTOLA UNIVERSITY OF TECHNOLOGY OGBOMOSO, OYO STATE. ABSTRACT In contemporary business organization, profit maximization is seen as the primary objective of establishing a firm; therefore the success of a firm is measured on how well it can increase earnings to its shareholders.

This study has therefore made an attempt to establish issues regarding the use of fixed cost financing to improve the overall profitability of the firm through empirical analysis, which is a response to conflicting opinion on the effectiveness of fixed cost financing on a firm’s value. TABLE OF CONTENT TITTLE PAGE ABSTRACTii CHAPTER ONE: INTRODUCTION BACKGROUND OF STUDY1 STATEMENT OF PROBLEM2 OBJECTIVE OF STUDY3 SIGNIFICANCE OF STUDY3 SCOPE/ LIMITATION OF STUDY3 CHAPTER TWO: LITERATURE REVIEW INTRODUCTION4 CAPITAL STRUCTURE THEORY4-7

CHAPTER THREE:RESERCH METHODOLOGY INTRODUCTION8 METHOD OF ANALYSIS8 MODEL SPECIFICATION8 STATEMENT OF HYPOTHESIS9 MEASURE OF LEVERAGE9 MEASURE OF PERFOMANCE9 CHAPTER FOUR: PRESENTATION AND DATA ANALYSIS INTRODUCTION10 DATA PRESENTATION10-12 INTERPRETATION OF RESULTS13-15 CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATION SUMMARY16 CONCLUSION17 RECOMMENDATION18 CHAPTER ONE INTRODUCTION BACKGROUND OF STUDY Every time the firm makes an investment decision, it is at the same time making a financing decision.

The assets of a company can be financed either by increasing the owners claim or the creditors’ claims. The owner’s claims increase when the firm raises funds by issuing ordinary shares or by retaining the earnings while the creditors’ claims increase through borrowings from hem. The various means of financing represents the financial structure of the organization. The financing or capital structure decision is a significant managerial decision. It influences the shareholders return and risk; and consequently, the market value of the share may also be affected by the capital structure decision.

The company will then have to plan its capital structure initially at the time of its promotion in which the value of the firm depends upon its expected earnings stream and the rate used to discount this stream. Thus leverage cannot change the total expected earnings of the firm, but it can affect the residue earnings of the shareholders. If leverage affects the cost of capital and the value of the firm, an optimum capital structure would be obtained at that combination of debt and equity that maximizes the total value of the firm or minimizes the weighted average cost of capital.

The effect of leverage on the firm’s value is not very clear, conflicting opinions have been expressed on this issue. In fact, this issue is one of the most contentious areas in the theory of finance and perhaps more theoretical work and empirical study has been done on this subject than any other. There has been a major source of controversy among scholars due to the diverse nature of their results. The result of this study will not only alidate the finding of existing studies, but also serve as a reference for future financial decision making, designed to achieving optimum capital structure that would optimize the returns to the shareholders. This research intends to examine the following questions being faced by company’s management while making the financing decision. * How should the investment be financed? * Does it really matter the way in which the investment project is financed? * How does financing affect the shareholders risk return and value? Does there exist, an optimum financing mix in terms of the maximum value to shareholders of a company? * Can the optimum financing mix be determined in practice for a company? * What factors in practice should a company consider in designing its financing policy? STATEMENT OF PROBLEM Finance is seen as the main stream of any business that is established, and the function of the financial manager is efficient utilization of shareholders fund to attain optimum shareholders wealth, which is obtained when the market value per share, is maximum.

Today, the most disturbing issue facing financial theorist and corporate manager is the existence of a relationship between a firms capital structures and its value and the nature of such relationship. In other word the question has been what will happen to the average cost of capital and the value of the firm when the degree of leverage increases or decreases. Many theories have been propounded and a lot of study work has been carried out on the existence of a relationship between capital structure and the firm’s value.

Some writers argued that taxes, agency cost and signalling consideration would make the capital structure to have effect on the firm’s value. The nature of capital structure has also been controversial over the years, what proportion of debt should be employed in the capital structure? While some logically concluded that leverage is perpetually advantageous others argued that leverage could be excessive thereby reducing the value of the firm. However, since the capital has cost like any other resources which is used in the production process, the financial manager, seeks to maximize this cost.

It has also been argued that it is not necessary to take a view of the likely impact of the combination of debt and equity in the capital structure, if a reliable cost of capital is to be estimated for use in the evaluation of future investment opportunities. Thus, it has been said that by changing the capital structure (debt and equity); the financial manager increases the firms value and decreases the average cost of capital of the firm. It is this situation that the study attempts to examine empirically whether the ratio of debt to equity can have a positive or negative impact on the value of the firm.

OBJECTIVE OF STUDY Under favourable economic conditions the earning per share of a company increases with leverage but leverage also increase the financial risk of the shareholders. As a result, it cannot be stated definitely whether or not the value of the firm will increase with leverage. Based on these statements, the study attempts to find out the following: *What constitutes an appropriate capital structure in financing decision? *The effect of leverage on the firm’s value. *To show whether the financing mix of a firm has any effect on its earnings per share and net asset per share. To identify the problem that is encountered by the financial manager in taking capital structure decision. In other to achieve these objectives, some selected firms, quoted on the Nigerian Stock Exchange will be examined. SIGNIFICANCE OF STUDY Finance has been viewed as necessary in all business undertakings and it has also been increasingly becoming acceptable that firms should employ debt in its capital structure but the most pressing issue is at what level leverage should be acquired.

The importance of this study takes its base on the fact that measuring the firm’s value is expedient to management and investors will want to know how well their resources have been put, to attain an optimal capital wealth. The impact of capital structure knowledge is important to various participants in the firm such as the owners who will be interested in the financial risk of their company and its actual worth while the management will use the value of the firm in seeking to improve their operating conditions, and creditors will want to know the viability of such a firm in the stock market.

SCOPE/LIMITATION OF STUDY The study is restricted to data collected for twenty firms quoted in the Nigerian Stock Exchange to show the relationship between leverage and firms value measured in terms of Earnings per Share and the Net Assets per Share. CHAPTER TWO LITERATURE REVIEW INTRODUCTION Raising of funds to finance the firm’s investment project is an important function of the financial manager. In practice it is observed that the financial manager uses a mix of debt and equity. A practical question therefore is what motivates them to do so. More fundamental questions to be answered are: Does use of debt create value? *If so, do firms tend toward an optimum mix of debt and equity? The effect of capital structure on the shareholders earnings and risk under favourable economic condition is that earnings per share increases with leverage, but leverage also increase the financial risk of the shareholders. As a result, it cannot be stated whether or not the value of the firm will increase with leverage, as the objective of the firm should be directed towards the maximization of the value of the firm. Thus the leverage decision of the firm is viewed from the effect it has on the value of the firm. What constitute an appropriate capital structure? *Reviewing of the contentious issue “the effect of leverage on the value of the firm”. CAPITAL STRUCTURE THEORY Every time a company borrows, it increases its financial leverage and financial risk. New equity financing decreases financial leverage and risk. Changes in financial leverage, brings the potential for good and bad results. How then do financial managers analyze many factors including the tax effects of interest payments and how the comparative costs of equity affect firm’s value? Debt in a firm’s capital structure can be beneficial.

First, debt creates the potential for leveraged increases in net income (NI) when operating income (EBIT) is rising. Secondly, debt gives the company a tax deduction for the interest that is paid on the debt. In contrast to debt, an issue of common stock to raise equity funds results in no tax break. In short, interest paid on business debt, is tax deductible, but dividends paid to common stockholders are not. The tax laws therefore give an incentive to use debt in their capital structures. How does a company balance the costs and benefits of debt?

In 1958, Franco Modigliani and Merton Miller wrote a seminal paper that has influenced capital structure decision ever since. Modigliani and Miller (known in Economics and Finance circles as M & M) concluded that when interest payments are tax deductible to a firm, a capital structure of all debt is optimal. In reaching the conclusion, M & M assumed the following: * There were no transaction costs. * Purchasers of a company’s bonds or common stock paid no income tax. * Corporations and investors can borrow at the same rate of interest * Investors and management have the same information about the firm. Debt, the firm issues are risk less. * Operating income is not affected by the use of debt. In such an environment, M & M showed that the tax benefits to the firm from issuing debt were so beneficial that the benefits allowed the company to increase its value by issuing more and more debt. Given the assumptions, a hundred percent (100%) debt capital structure is optimal. The assumptions of course, do not exist in the real world. In the real world capital structures vary widely. Firms seek to balance the costs and benefits of debt to reach an optimal mix that maximizes the value of the firm.

The optimal capital structure for a firm depends on the future prospects of that firm, so the answer to the question, what is the optimal capital structure for a firm? Financial managers must balance the costs and benefits of debt and use expertise and experience to develop the capital structure they deem optimal. When there is a rise in the level of leverage; the cost of equity increases in a manner such as to exactly off set the greater proportion of cheaper debt capital, so that the WACC remain unchanged.

They stated that tax relief on interest payment does not lower the WACC that the WACC will always continue to fall as leverage increases, while the value of the unleveraged firm remains the same. Chekuri and Litzerberger (1971) on a comparative study of effect of capital structure on the cost of capital in less developed and highly developed efficient capital in less developed and highly developed efficient capital market, listed the effect of leverage on the cost of capital of 28 Indian utilities and a sample of 77 American utilities.

The result for the American utilities were constant with M & M thesis; that after allowing for tax advantage of debt financing, the cost of capital is independent of capital structure. The results for the Indian utility are inconsistent with the independent hypothesis and it supports the traditional approach. Other studies that support the traditional view include Wippern (1996), Pandey (1984), and Kehinde (2002). Wippern study is designed to test the relationship between leverage and the value of the firm.

He measures leverage as the ratio of fixed charges to minimum expected income in other to avoid the conceptional and statistical biases of the debt/equity ratio measure. His findings provide support for the view that shareholders wealth is enhanced by the firm’s judicious use of fixed cost financing. Pandey in a modified model, to determine the empirical relationship between cost of capital and leverage using data of 4 industries, cotton (47), chemical (32) and electricity generation (20), from 1973-74 and 1980-81.

Introducing a proxy for risk variable measured by the co-efficient of variation of the net operating income (NOI), variables expected to influence the cost of capital and leverage were incorporated in the regression analysis equation. Two measures of leverage were used, the first measure included preference capital in the debt, while the other equity. When the (WACC) was regressed with leverage, while holding other variables constant, the result were consistent also with the traditional view of M & M tax corrected article, that the cost of capital will decline with leverage even in the absence of tax deductibility of interest charges.

Based on the various scholars reviewed a number of studies have confirmed a correlation between leverage and the cost of capital and the value of the firm. Masulia (1983), studying the effect of leverage on altering capital structure changes, the sample of exchange offers analyzed, consist of all those which occur in the US during the period of 1963-78. He developed a linear model to estimate firm valuation effect on firm stock announcement on returns and capital structure changes. His finding led to the conclusion that changes in stock prices are positively related to leverage changes.

Also confirming the relationship (positive) between leverage and the value of the firm, Ajimoko, Omotola and Abdusalam (1992) using the beverage sector of 20 (twenty firms) 1985-90, as a case study, simple multiple regression was used to measure the share price, the result shows support that leverage has significant effect on Earnings per Share, if the return on investment is higher than the cost of debt. Kehinde (2002) holds a contrary view on the extent of leverage on the value of the firm as a double edged sword; it increases the shareholders earnings as well as creating risk of loss to them.

He believes that leverage has benefits as well as costs, if the company does not make enough profit to cover the interest payable on debt, the earnings of shareholders will be negative and the company’s solvency is threatened, thus this will affect the value of the firm. Oloyede J. A. And Akinmulegun S. O. in their published work in the Nigerian journal of banking and financial issues, on the effect of capital structure on corporate performance. Their data was drawn from ten quoted firms on the Nigerian Stock Exchange.

They made a cross sectional analysis of the firms for four years between 1990 and 1993. A simple regression analysis of the ordinary least square was adopted in the study, to test the relationship between leverage and corporate performance measured in terms of Earnings per Share and Net Asset per Share. Their estimated results shows that although there is a positive relationship between leverage and Earnings per Share for 1990 and 1991, also between leverage and Net Asset per Share for 1991 and 1992, the relationship is however very weak as the co-efficient are not quite significant.

Also the relationship between Earnings per Share and leverage in 1992 and 1993; and Net Assets per Share and leverage in 1990 and 1991 were found to be negative and insignificant. The results are mixed and unreliable. They however concluded, based on the results of their findings that leverage has an insignificant impact on both Earnings per Share and Net Assets per Share of a firm, and hence the value of the firm, which then shows the irrelevancy of leverage on corporate performance.

From the various studies carried out, it has shown that a consensus has not been reached on the effect of leverage and the cost of capital, and leverage and the value of the firm. Some researcher’s findings led to the conclusion that leverage has positive effect on the firm’s value, while some say it is negative. But practically leverage will affect the value of the firm, based on the fact that the firms cost of capital under normal condition is supposed to be the weighted average of all sources of capital to the firm. The cost of equity capital is not the same as the cost of debt capital.

Variations in the debt equity ratio is therefore expected to bring changes in the overall cost of capital which in turn determines the value of the firm, and it is also believed that the cost of debt is lower than the cost of equity, if so, it is wise to conclude that increase in the use of debt will reduce the overall cost of capital of the firm and will also increase the financial risk of shareholders. Therefore this study, will undertake to improve on the empirical analysis carried out by Oloyede J. A. And Akinmulegun S.

O by increasing the number of quoted companies to twenty and the number of years to five so as to see if the result will prove otherwise or rather confirm the findings of their study and at the same time having the opportunity to add to knowledge on this contentious issue “the effect of leverage on the value of the firm (corporate performance). CHAPTER THREE RESEARCH METHODOLOGY INTRODUCTION The research methodology specifies the procedures for collecting and analyzing the information in the study. It deals with the sources of data used, the technique used in analyzing the data collected and hypothesis formulation.

This chapter is divided into two, the part that deals with the techniques of analyzing the data collected, the sources of data, model specification and the statement of hypothesis. The second part deals with the definition of variables in the study. METHOD OF ANALYSIS A linear function will be used in this study, which is referred to as ordinary least square method of regression analysis because it is mathematically simple. It has shown to provide a sufficiently close approximation to many, real world relationship.

In regression, we are interested in determining the mean value of y, the dependent variable for a given value of x, the independent variable. The ordinary least square method of regression will be employed in this study to measure the effect of leverage on the value of the firm. This method of analysis is issued to fit in some models to a cross sectional samples of twenty firms. The twenty firms to be examined consist of the following sectors in the economy, which are: Banking, Breweries, Building materials, Chemical and paints, Conglomerate, Insurance and Petroleum marketing sectors.

The analysis gives equal chances to all the items in the cross-sectional data and provides a brief and precise description of predicting the yield of leverage for a given amount of Earning per share and Net Assets per Share. MODEL SPECIFICATION Regression models formulated relating to leverage of the firm with Earning per Share and Net Assets per Share are given as: Y1 = a1 + b1 L1 + U1 Z1 = a2 + b2 L1 + U2 Where: Y1 = Earnings per Share of the firm Z1 = Net Asset per Share of the firm L1 = Leverage ratio 1 a2 = Constant terms b1 b2 = Slope of the regression (co-efficient) U1 U2 = Error terms The model (Y1) regressed on leverage ratio is the Earnings per Shares of the firm; while (Z1) regressed on leverage ratio is the Net Asset per Share of the firm. STATEMENT OF HYPOTHESIS To find out the effect of leverage on corporate performance measured in terms of Earnings per share (EPS) and Net Asset per Share (NAPS). The following hypotheses are formulated which are: i)H0: Leverage has no significant effect on Earnings per Share.

H1: Leverage has significant effect on Earnings per Share ii)H0 : Leverage has no significant effect on Net Assets per Share H1: Leverage has significant effect on Net Assets per Share. MEASURE OF LEVERAGE The amount of debt that a firm uses to finance its assets creates leverage. A firm with a lot of debt in its capital structure is said to be highly leveraged. A firm with no debt is said to be unleveraged. Leverage can be measured in a variety of ways, however for the purpose of this study; the Debt Ratio will be adopted for its analysis.

Debt Ratio This ratio is used to analyze the long-term solvency of a firm; the firm may be interested in knowing the proportion of the interest bearing debt in the capital structure. This is computed by dividing total debt by capital employed or net assets. This ratio is mostly used in capital structure studies and will be adopted for this analysis. MEASURES OF PERFORMANCE The performance of a firm could be measured through turnover, profit before tax, Dividend per Share, Net Assets per Share, Earnings per Share, Market Price per Share etc.

However, it is evident that some of these measures have no link with debt financing of a firm. Therefore we have chosen two variables, which are of interest to investors, the Earnings per Share and Net Assets per Share. CHAPTER FOUR PRESENTATION AND DATA ANALYSIS INTRODUCTION This chapter explains the data used and method of analysis for the sourced data. It is subdivided into two units. Section One: Consist of two tables, which show the result of leverage regressed on Earnings per Share (EPS) and Net Assets per Share (NAPS) covering a period, 2005-2009 of twenty firms quoted on the Nigerian Stock exchange.

Section Two: Interprets the result of leverage regressed on Earnings per Share and Net Assets per Share. DATA PRESENTATION RESULT FOR TABLE A REGRESSION RESULT OF LEVERAGE ON EARNINGS PER SHARE YRSlope of Regression (b)Constant of value (a)Coefficient of Determination r2Calculated value of (ta)Calculated value (tb)Table value of 95% confidence levelTable value of 99% confidence level 20090. 501 (0. 044)-0. 706 (0. 998) 0. 510 -0. 707 11. 386 2. 101 2. 878 20080. 653 (0. 046)-1. 098 (0. 674) 0. 742 1. 629 14. 195 2. 101 2. 878 20070. 540 (0. 053)-0. 181 (0. 727) 0. 542 -0. 248 10. 188 2. 101 2. 878 20060. 472 (0. 054)-0. 304 (0. 499) 0. 555 -0. 609 8. 740 2. 101 2. 878 20050. 161 (0. 049)0. 428 (0. 812) 0. 132 0. 576 3. 285 2. 101 2. 878 Source: From Calculated Values NOTE: The values in parentheses are standard errors of the parameters. Hypothesis testing that leverage has no significant effects on Earnings per share RESULT FOR TABLE B REGRESSION RESULT OF LEVERAGE ON NET ASSETS PER SHARE

YRSlope of Regression (b)Constant of value (a)Coefficient of Determination r2Calculated value of (ta)Calculated value (tb)Table value of 95% confidence levelTable value of 99% confidence level 20091. 168 (0. 054)0. 098 (1. 337) 0. 638 0. 073 21. 629 2. 101 2. 878 20081. 285 (0. 080)0. 933 (1. 182) 0. 541 0. 789 16. 062 2. 101 2. 878 20070. 774 (0. 237)0. 702 (1. 264) 0. 345` 1. 346 3. 265 2. 101 2. 878 20060. 988 (0. 103)1. 067 (0. 840) 0. 345 1. 270 9. 592 2. 101 2. 878 20050. 810 (0. 044)-0. 190 (0. 730) 0. 855 -0. 260 18. 409 2. 101 2. 878 Source: From Calculated Values

NOTE: The values in parentheses are standard errors of the parameters. Hypothesis testing that leverage has no significant effects on Net assets per share Decision rule: In accepting or rejecting our calculated t values at 99% or 95% confidence level, the null hypothesis that b = 0 (b is not significantly different from zero) is accepted, but if the absolute value of calculated tb is less than the table value, conversely the null hypothesis is rejected (H1 accepted) if the absolute value of tb calculated is greater than the table value of tb. INTERPRETATION OF RESULTS

LEVERAGE ON EARNINGS PER SHARES The co-efficient of determination (r2) obtained for each of the years from 2005-2009 are 13. 2%, 55. 5%, 54. 2%, 74. 2% and 51. 0% respectively. It is a measure of the extent to which variation in Earnings per Share can be explained by changes in leverage. The result in 2009 shows that 51. 0% of changes in Earnings per Share is explained by variability in leverage, of which 49% proportion left is unexplained as a result of factors other than leverage. However, the result shows a relationship between leverage and Earnings per Share.

In other words, it suggests a significant correlation between leverage and performance, measured in terms of Earnings per Shares. The regression equation obtained for 2009 gives leverage co-efficient (b) of 0. 501. This figure is found to significant at both 95% and 99% because the calculated student t values of the coefficient (tb) is greater than the table value at both 95% and 99% confidence level. Based on the result for 2009, the null hypothesis that (b) is not significantly different from zero (b=0) is rejected and the alternative hypothesis is accepted.

This leads to the conclusion that leverage ratio has significant effect on Earnings per Shares. A similar analysis of leverage coefficient obtained for the other years such as 2008, 2007, 2006 and 2005, confirms the conclusion reached above for these years. The leverage coefficient was 0. 224, 0. 540, 0. 472 and 0. 161 and they were all significant at both 95% and 99% confidence level. The significance of the leverage coefficient for most of the years has therefore made the null hypothesis that leverage has no significance on Earnings per Share, ineffective in all the years.

We therefore accept the alternative hypothesis that leverage has a statistically significant effect on Earnings per Share. On the average, percentage change in leverage will lead to 49. 5% change in Earning per Share, in other words the average effect of leverage on Earning per Share is 0. 495. This is acceptable at both 95% and 99% confidence level. From the above analysis, the result of this study is clearly in support of the fact that leverage has significant effect on Earnings per Shares.

This result is not unexpected since the cost of debt is generally considered to be less than the cost of equity; increased use of debt will magnify Earning per Share if the return on investment project is higher than the cost of debt. LEVERAGE ON NET ASSET PER SHARE In year 2003, the coefficient of determination (r2) is 63. 8% which means that changes in Net Asset per Share can be explained by 63. 8% change in leverage; which means that the remaining 36. 2% is accounted for by other factors other than leverage. The leverage coefficient is 1. 68, which was found to be statistically significant at both 95% and 99% confidence level. This implies that for 2009, the null hypothesis that leverage has no significant effect on Net Asset per Share is rejected and the alternative hypothesis accepted. Similar conclusion is also reached for the remaining years of 2005, 2006, 2007, and 2008 also suggests a significant effect of leverage on Net Asset per Share. In summary, the r2 values were 63. 8%, 54. 1%, 34. 5% and 85. 5% respectively and this were found to be statistically significant in all the years under study.

For the fact that the result shows a positive relationship in all the years between leverage and Net Asset per Share we conclude that leverage has a significant on Net Asset per Share, so we will reject the null hypothesis and accept the alternative hypothesis. Based on the results of our study with respect to effect of leverage on Earning per Share and leverage on Net Asset per Share, we uphold the view that leverage has significant effect on corporate performance, despite the fact that we obtained average values of r2 coefficient of determination when compared to industry standard of 50% for analyzing a cross-sectional data.

The values are not particularly low, but however, this situation can be attributed to the fact that the study involved the use of a cross-sectional data and the companies that were used, were randomly chosen, which means that the companies themselves might have employed individual policies on the use of debt to finance its investment. In reaching this conclusion we reject the operating income theory or the independence hypothesis that the firm’s corporate cost of capital and common stock price are both independent of the degree to which the company chooses to finance leverage.

We conclude that capital structure has significant effect on corporate performance. However, we do not subscribe to the dependence hypothesis or the net income theory that the value of the firm will continue to increase indefinitely with leverage and that the firm will maximum value and the lowest cost of capital when it is all debt financed. Rather, we settle for the traditional theory that leverage will increase performance up to a reasonable level of debt usage beyond which the value of the firms declines even though this has not been tested for in this analysis.

However, the result of this study is sharp contrast from the one carried out by J. A. Oloyede and S. O. Akinmulegun, in which they came to a conclusion that leverage has no significant impact, both Earning per share and Net Asset per Share. The outcome of their result may have reflected the number of firms tested and also the number of years; which was improved upon in this study. This may have been the reason why the result of this study is quite different from theirs by concluding that leverage has a significant impact on both Earning per share and Net Asset per share.

This conclusion is supported by the findings of Sarma and Rao (1967), which concluded that the value of the firm rises, up to a leverage range that is considered “prudent”. Other studies that arrived at similar conclusion include Cherukeri and Robert Barge (1971), Wippern (1966), Pandey (1981), Ajimoko Omotayo and Abdulsalam (1992). CHAPTER FIVE SUMMARY, CONCLUSION AND RECOMMENDATION SUMMARY Making financial decision is one of the most important functions of the financial manager. Since, there are many forms of financing a firm, either through debt or equity.

The decision on whether to raise capital through debt has been an issue of concern to the financial manager and analyst; because debt finance makes no difference to shareholders returns and it also increases the risk of return. Thus the overall effect of using debt on the capital structure has been a subject of debate between analyst and financial managers. Effort to resolve these issues by the researchers through empirical studies have not been conclusive, as to whether firms should raise capital through debt or at what extent should debt and equity is used in financing a firm?

In other to resolve this issue, an empirical testing of the effect of leverage on corporate performance of existing literature on the subject reveals the inconclusiveness of the controversy over the most contentious area in the theory of finance; twenty firms from the following sectors of the economy, quoted on the Nigerian Stock exchange was used: Banking, Breweries, Building materials, Chemical and paints, Conglomerate, Insurance and Petroleum marketing sectors.

Regression analysis technique was employed to measure the effect on the performance of the selected firms in form of Earning per share and Net Asset per Share on leverage ratio of the firms. The results obtained from the empirical study shows that leverage has significant effect on Earnings per Share (EPS) and also on Net Asset per Share (NAPS). The implication of this result is that: I) the performance of this result is affected by changes in the capital tructure (Debt and Equity) and; The financial manager should be allowed by the management of the firm to decide whether to employ debt/equity in the firm’s capital structure since change in capital structure would significantly affect the value of the firm and enhance shareholders return. CONCLUSION From the result of this study we conclude that: Leverage has a significant positive effect on Earnings per share (EPS) There is a measurable effect of leverage effect on Net Asset per Share (NAPS) The average effect of leverage on Earning per Share is 49. % i. e. , a percentage change in leverage would lead to 49. 5% Change in Earning per Share while that of Net Asset per Share is 54. 4%. We therefore reject the null hypothesis in the study that leverage has no effect on the firm’s value and uphold the alternative hypothesis that leverage has significant effect on the firm’s value. However, it is necessary to point out some problems before the conclusion is accepted with some serious caution.

First, the study was based on certain assumptions, the invalidity of which may make the results subject to questions. One of the assumptions is the correctness of the published accounts, which serves as the basis of the study, the possibility of the accounts being window dressed was therefore ignored; Also, the Earning per share (EPS) which was used as a measure of performance being an accounting estimates may be significantly influenced by items, such as provision for depreciation, doubtful debt etc and the method adopted may be different from one another.

Therefore there is the possibility of the Earning figures being substantially different, if all the companies were to adopt the accounting policy. In addition to the above, the leverage ratio, which was used as our independent variable, was based on the book value; there is possibility of the ratios being significantly altered, if market values have been used instead. Finally, the number of firms examined limits the research.

Despite the above reservation, it is my opinion, as indicated by the result, that the performance of a firm will be significantly influenced by its financial decisions. RECOMMENDATION I would recommend the following to the financial manager or analyst in taking financing decision based on the study: 1) In deciding on the capital structure of the firm, all the important factors that might influence the decision is undertaken, where the financial manager is in doubt, to view and analyse all the factors involved in a more objective manner. ) More debt capital should be employed in order to increase return of shareholders. Although, excessive use of debt should be put in check, by firms in Nigeria. It has been argued that excessive use of debt capital affect level of commitment and consequently the performance of manager. When shareholders funds are employed, directors tend to pay more attention to the operations of the operations of the firm in order to ensure their success. They therefore should take steps that would motivate managers and ensure increased performance. ) Finance institution should be encouraged to finance firms through equity participation, in addition to loans. Only few financial institutions undertake such activities. This will make them to be more committed to the success of the firm, as monitoring officials or experts would be deployed to check on the financial position of the firm and advice, if there is any problem. 4) There should be a well organized and efficient capital market for the raise in equity financing. ) Nigerian firms suffers from shortage of capital resources, this is not unconnected with the continuous increase in the cost of capital, which is making it difficult for firms to acquire loans, the government should direct or appeal to banks through the Central Bank of Nigeria to lower the rate of interest, so that firms could acquire loan facility to ensure the survival of the firms in Nigeria. We would therefore, suggest that: The financial manager or analyst should undertake proper valuation of investment decision, design a debt/equity policy and appraise the benefit that would accrue before being embraced by management.

Firms in Nigeria should employ more debt capital structure, despite criticisms. It would help the firms in meeting their financial obligations. Conclusively, the financial managers should always bear in mind that adequacy of funds is fundamental to the survival of the firm, they should therefore ensure that optimum finance decision are undertaken by making sure that necessary factors are put into consideration before a final decision is taken how an investment should be financed. BIBLIOGRAPHY Anderson Williams (1999): Statistics for Business and Economics 7th Edition.

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J. D (2003): Financial Management Principles and Practice 3rd Edition Prentice Inc. Horgren, Sundem, Elliot (1999): Introduction to Financial Accounting 7th Edition Prentice Hall Inc. John E. Freund (1984): Modern Elementary Statistics 6th Edition Prentice Hall Inc. Kehinde . J S (2001): Foundation of Financial Management, First Edition, Life Spring House Publisher, Lagos. Masulia W. Ronald: The impact of capital Structure change on firm’s value, some estimate. Journal of finance Vol. XXVIII no 1 March 1983. Oloyede J.

A and Akinmulegun S. O (1999): Effect of capital structure on corporate performance of selected quoted companies in Nigeria. Nigerian Journal of Banking and Finance issues. Vol 2, no 1 pp 119-128. Pandey I. M (1995): Financial Management, Vikas Publishing House PVT Ltd. India. Richard A and S. Myers (1996): Principle of corporate finance fifth Edition Mc Graw Hills. Solomon E and Pringle: An Introduction to financial Management, Prentice Hall of India, 1978. Van Horne J. C: Financial Management Policy Prentice Hall of India, 1985.

Tax Law and Accounting Paper

Tax Law and Accounting Paper

Tax Law and Accounting Paper In today’s financial world, preparation and reporting of income taxes has become one among the other main reasons why individuals and businesses are keeping and maintain their financial records. However, there has been some controversy between tax laws and accounting under the General Accepted Accounting Principles (GAAP). Simply because IRS is not always agrees with GAAP’s principles and thus creates its own tax laws. This paper will discuss the objectives of modern income tax statutes, compare and contrast the GAAS and tax accounting, and differentiate between tax avoidance and tax evasion.

Objectives of Modern Income Tax Statutes The primary objective of the modern income tax statutes was to amend the U. S. Constitution to permit the passage of a federal income tax law in order to collect enough revenues for supporting all government operations (Anderson et. al. , 2008, p. 1-2). Simply because before this amendment, it was ruled by the Supreme Court in 1895, that the tax was in violation of the U. S. Constitution and people were taxed only when the government was in a huge need for more resources (Anderson et. al. , 2008, p. 1-2).

In addition, there are three more objectives of modern income tax statutes. First one is the economic objective that is mainly concerned with stimulation of private investment, reducing unemployment, and mitigate the effects of inflation on the economy (Anderson et. al. , 2008, p. 1-14). Another objective, was a governments attempt to increase certain activities such as creating a good opportunities for opening specialized industries and small businesses. The opportunities included the allowing to write-off all business expenses and paying taxes of the net income.

Moreover, the businesses were expected to pay the reduced corporate tax rates in addition to all individual tax deductions and exemptions, which help individuals and businesses to avoid suffering the tax increases due to the inflation increases. Third objective, was to create a pension plans for the people who are paying taxes, encourage people to contribute to charitable organizations, and discourage others from activities that are contrary to public policy. GAAP vs. Tax Accounting Generally Accepted Accounting Principles (GAAP) is a set of rules created by the Financial Accounting Standards Board (FASB) which are used to prepare ompany’s financial statements for reporting purposes. The GAAP simply provide guidance to financial statements preparers on how to account for various types of transactions (Ruppel, 2004, p. 2). While the tax accounting is mainly concerned with preparing statements and reports that are in compliance with the IRS tax laws. According to Plesko (2004), one of the differences between GAAP and tax accounting is that from a tax administration perspective, the book income under the GAAP accounting provides a separate measure of the income and expense items that can be compared to the values reported on the tax return (p. ). This mainly results because the GAAP allows any method for income recognition, but IRS uses the cash basis for tax returns. Other differences are the depreciation methods used for asset depreciation. The GAAP typically allows straight line or other acceptable methods, while the Tax Accounting prefers using the MACRS method (White, 2008, p. 1). Another difference includes the interest revenue recognition. Under the GAAP accounting interest revenue is recognized when earned, but under the Tax Accounting the municipal interest income is exempt for tax purposes.

Tax Avoidance vs. Tax Evasion Tax Avoidance is the process of minimizing the tax amount trough legal, but aggressive, tax planning strategies (Perez, 2008, Ch1). It is basically a legal process of avoiding paying too much taxes through finding tax loopholes, by using the existing tax laws at own advantage (Murray, 2008). One example of tax avoidance was shown by Browning in her article, IRS Aims to Curb Offshore Tax-Avoidance Tactic, where she showing on how internationally trading companies try to avoid taxes by using the transfer pricing tactics.

The transfer pricing tactic stands for companies transferring their income back overseas by undercharging or overpaying foreign subsidiaries for goods and services (2008, p. 6). While such companies are supposed to calculate those prices as if they were between independent entities and pay taxes, typically 35 percent, on profits brought back to the United States (Browning, 2008, p. 6). Other examples of tax avoidance include but not limited to various tax allowances for education, medical bills, to reduce some amount for each depended, etc.

Tax evasion, on the other hand, is the other side of the tax avoidance and is considered to be a crime. It is a willfully attempt to evade or defeat the payment of federal income taxes (Lectric Law, 2008). The tax evasion involves failing to report an income, or improperly failing deductions which are not authorized by the IRS. Stark (2008), provides some examples of tax evasion. First example includes sales tax evasion, when a retailer offers to let a customer pay cash and provide a false out-of-state address to avoid paying the city’s sales tax (2008).

Another example, includes evasion of business income tax by either inflating the business expenses, such as cost of goods, to lower the business tax liability, or by suggesting reporting only credit card sales, or the company’s owner decides to use his corporate credit card to pay for family vacations, entertaining personal friends, and buying flowers for his wife (Stark, 2008). In addition, tax evasions can be done be individuals same as by the businesses. For example, one can claim a different residence address on their tax return, from the state with lower tax rate, this can be a vacation home, etc. Stark, 2008). Conclusion Income tax is the percentage of money individuals and businesses pay on their income, which is necessary for supporting all government operations. All publicly traded businesses are required to prepare their financial statements in accordance with GAAP regulations. However, when preparing their income tax reports, businesses need to be sure that their financial statements in accordance with tax laws in order to avoid penalties. Simply, because tax laws are not always same as the GAAP regulations and therefore accountants need to know the differences.

Moreover, accountants need to know what the lawful tax avoidance is and what the unlawful tax evasions are. Reference AllBusiness. com (2008). What are Generally Accepted Accounting Principles? Retrieved May 6, 2010, from http://www. allbusiness. com/accounting/methods-standards-generally-accepted-accounting/1261-1. html Anderson K. , Kramer J. , and Pope T. , (2008). Prentice Hall’s Federal Taxation 2008: Individuals. Retrieved May 6, 2010, from University of Phoenix, open rEsources, Income Tax Accounting Course, 21st ed. , Pearson Education Inc. Browning L. , (2008), IRS Aims to Curb Offshore

Sci/220 Human Nutrition – Human Digestion Worksheet

Sci/220 Human Nutrition – Human Digestion Worksheet

University of Phoenix Material Human Digestion Worksheet [pic] The Digestive System and its Functions Review the diagram located on p. 1. In the space provided below, write the name of each organ or part, and explain the function of each one as it relates to digestion and absorption. Explanations must be written as complete sentences. Please make sure that you identify each organ or part below with the corresponding number located in the diagram. |DIGESTIVE ANATOMY |FUNCTION | |1 |Mouth |Mouth is the beginning of the digestive system and digestion starts here before you even take the | | | |first bite of a meal. The smell of food triggers the salivary glands in the mouth to secrete | | | |saliva. |2 |Salivary Gland – Parotid Gland |Saliva is produced in and secreted from salivary glands. T here are three major pairs of salivary | | | |glands: the parotid, the submandibular, and the sublingual glands. The parotid glands, the largest | | | |of the pairs, are located at the side of the face, below and in front of each ear. |3 |Pharynx |Pharynx (also called throat) is passageway for food and air that is responsible for swallowing and | | | |receiving food from the mouth. | |4 |Esophagus |Esophagus is located in the throat near trachea (windpipe), the esophagus receives food from your | | | |mouth when swallowed.

By means of a series of muscular contractions, the esophagus delivers food to | | | |your stomach. | |5 |Epiglottis |Epiglottis prevents food and drink from falling down the airway. It is a flap at the base of the | | | |throat, touches the back of the tongue and opens when swallowing occurs. It allows food and drink to| | | |safely pass into our digestive system.

Failure of epiglottis functioning results in choking or drink| | | |”going down the wrong way. ” This simply means that food or drink has been taken into the respiratory| | | |system by mistake, and it must be coughed up. | |6 |Trachea/ Windpipe |Trachea is a tube-like portion of the breathing or respiratory tract that connects the larynx with | | | |the bronchial parts of the lungs. |7 |Cardiac Sphincter |Cardiac sphincter is a ring of muscle that tightens and relaxes as the need arises. It opens to | | | |allow the food matter into the stomach, then closes behind it to ensure that it cannot rise back up | | | |into the esophagus. | |8 |Stomach |Stomach is an organ in the digestive tract that mixes food and secretes gastric juice. |9 |Pylorus |Main functions of the pylorus are to prevent intestinal contents from reentering the stomach when | | | |the small intestine contracts and to limit the passage of large food particles or undigested | | | |material into the intestine. | |10 |Duodenum |The duodenum breaks down carbohydrate into sugar, with the use of enzymes from the pancreas, and | | | |liver.

Lipase from the pancreas breaks down fats in the duodenum to produce fatty acids. | |11 |Small Intestine |Small intestine is a tube-shaped organ of the digestive tract where digestion of ingested food is | | | |completed and the majority of nutrient absorption occurs | |12 |Liver |Liver is an organ in the abdominal cavity that secretes bile which is necessary for fat digestion | | | |and absorption. |13 |Gallbladder |The gallbladder’s main function is to store bile, a dark green digestive liquid produced by the | | | |liver. | |14 |Common bile duct |The duct formed by the union of the cystic duct and the hepatic duct that carries bile from the | | | |liver and the gallbladder to the duodenum. Bile breaks fats down into smaller droplets so they can | | | |be worked on by fat enzymes. |15 |Pancreas |Pancreas is an organ that secretes digestive enzymes that bicarbonate into the small intestine | | | |during the digestion. | |16 |Villi |The function of the villi is to increase the surface area of the intestine so as to increase its | | | |capacity to absorb nutrients and liquid from food passing through it. |17 |Ileocecal Sphincter |The ileocecal sphincter has two main functions. The first is to prevent the backflow of fecal | | | |contents from the colon to the small intestine. The second is to prevent the contents of the ileum | | | |from passing into the cecum prematurely. | |18 |Large Intestine |Large Intestine is the portion of the gastrointestinal tract that includes the olon and rectum, | | | |where some absorption of water and vitamins takes place. | |19 |Rectum |Rectum is where feces are stored until they leave the digestive system through the anus as a bowel | | | |movement | |20 |Anus |Anus is the lower opening of the digestive tract through which the feces leave the body. |

Employment and Starbucks

Employment and Starbucks

In 1971, three coffee fanatics – Gerald Baldwin, Gordon Bowker and Ziev Siegel founded Starbucks in Seattle, Washington (Moon & Quelch, 2006). Howard Schultz, who is now the CEO, joined the marketing team. He made a trip to Italy and became obsessed with the idea of how people were drinking coffee in the cafes. A few years later Howard Schultz bought Starbucks from the three founders and started to expand the coffee brand. Starbucks is the leader in the coffee industry and is one of the most recognized brands in the world. Now let us take a deeper look into the Starbucks organization.

The 21st century has brought new trends in the labor force composition that surely affects human resource management (HRM). Starbucks has to deal with these changes in order to make their employees happy and to run their business successfully. One of the examples of a trend that affects HRM is an aging workforce. By now the worker age range of 45 to 64 has grown dramatically and continues to grow (Noe, Hollenbeck, Gerhart & Wright, 2010, p. 32). Starbucks is following the trend. For instance, the company has recently purchased the workshop that is called Aging Workforce (PR Newswire, 2010).

Another example of a trend that puts a big impact on the workforce is an increased diversity level. Starbucks understands the importance of a diverse workforce for the company future and “reflects a comparable dedication to diversity as an essential component” in the way they conduct business (Starbucks, 2010). Starbucks states that they hire people regardless to the applicants’ race, national origin, gender, and any other bias (Starbucks, 2010). For example, 28% of Senior Officers (Senior Vice President and above) are female and 22% are people of color (Starbucks Annual Report, 2010).

The next change affecting the workforce is that companies have begun empowering their employees. Employees are given “responsibility and authority to make decisions regarding of all aspects of products development or customer service” (Noe et al. , 2010, p. 40). Starbucks workers are encouraged to make their own decisions, be enthusiastic and initiative, do everything possible to make Starbucks customers happy, and make the Starbucks experience worth coming back to (Starbucks, 2010). All Starbucks employees are encouraged to work as a team and this is the next trend that influences HRM.

Starbucks managers are trying to get every employee to feel part of the team. Company employees are encouraged to support each other and work together to reach the goals of Starbucks while providing delightful customer value. That is the reason why the company says that working at Starbucks is more like working with friends (Starbucks, 2010). Nowadays, the role of HRM at a company has increased a lot. Organizations look at HRM “as a means to support a company strategy” and managers treat HR professionals as “strategic partners” (Noe et al. , 2010, p. 42).

The HR managers at Starbucks support the company’s business strategy. At Starbucks HRM supports strategies that involve Total Quality Management (TQM), International Expansion and Downsizing. TQM is “a companywide effort to continuously improve the way people, machines, and systems accomplish work” (Noe et al. , 2010, p. 43). In order to promote quality HRM at Starbucks, the HR managers support creativity, individual decision-making, and the communication within the organization. For instance, workers such as baristas can always communicate with their supervisors and managers.

Starbucks HRM has always supported the company’s strategy that involved international expansion. Starbucks currently operates in 47 countries with over 4500 coffeehouses. In the future, Starbucks has an intention of expanding into new countries since their passion is transcending language and culture” (Starbucks, 2010). However, due to the world economic crisis, Starbucks’s strategy of global expansion has changed to downsizing. For instance on July 1, 2008 Starbucks closed 600 stores in the U. S and by August 3, 2008 they closed 61 stores in Australia (Starbucks, 2010).

Starbucks HRM supports the downsizing strategy of the company and tries to do everything possible for the workers who have been laid-off and for those workers who are threatened by losing their jobs. As a company hiring and managing a large number of employees across thousands of Starbucks locations, it is necessary to establish and enforce company policies and procedures. Policies and procedures are important in an organization because it is essentially the backbone of the company. Expectations are set and are expected to be met and followed.

This will help to eliminate any discrimination, sexual harassment, or any other case of unfair treatment. According to the text by Noe et al. , the “Equal Employment Opportunity Commission is the government commission to ensure that all individuals have an equal employment, regardless of race, color, religion, sex, age, disability, or national origin (p. 116). Therefore, the EEOC investigates and resolves such cases. To establish expectations, every employee at Starbucks is given a twenty-seven-page manual, which contains the business ethics and compliance guidelines. This is the bible of any organization.

All workers are required to read, understand, and adhere to company policies and procedures. In order to ensure that every employee cooperates, Starbucks is very strict on monitoring and making sure these guidelines are followed correctly. Any employee that breaks these guidelines will be immediately terminated. Even though guidelines have been set, there have been several cases filed against Starbucks for either discrimination and/or harassment. Lawsuits can be very expensive and often times require the organization to pay the victim hundreds of thousands of dollars.

An ongoing case involves a 16-year-old barista who is suing Starbucks because a 24-year-old supervisor made demands for sex. Cases like this happen quite frequently in large organizations and can be very costly. That is why it is critical for an organization to closely monitor and enforce guidelines to prevent these situations from occurring. Another problem that organizations are faced with is employee and customer safety. Safety is an important issue in any organization and continues to be a growing concern. Federal and state governments regulate Starbucks, like any organization.

One of the prominent government agencies that oversee the health and safety in organizations is the Occupational Safety and Health Act (OSHA). OSHA is “the law that authorizes the federal government to establish and enforce occupational safety and health standards for all places of employment engaging in interstate commerce” (Noe et al. , 2010, p. 138). It is the responsibility of Starbucks to provide every employee with a safe and clean place of employment. OSHA conducts unannounced inspections to ensure compliance of health and safety standards. There are four main components of the OSHA inspection. First, the compliance officer reviews the employer’s records of deaths, injuries, and illnesses” (Noe et al. , 2010, p. 139). The next component entails the compliance officer to do a walking tour of the organization. Third, the officer may conduct employee interviews. The final component is the compliance officer notifies the employer of any violations found. Violations can result in citations, which can be very expensive depending on the seriousness. In some cases, criminal penalties are enforced. There is a huge responsibility for Starbucks to maintain a healthy and safe working environment. Without safe working onditions, employees at Starbucks could cause harm to themselves, as well as, to Starbucks customers. This could create an expensive disaster for the company. Aside from health and safety issues, one of the major problems that Starbucks was facing in the early 2000s was the workflow analysis. The problem was not the actual product that Starbucks was offering but rather the “output” of customer service they were providing to the customer. The CEO of Starbucks decided to change the organizational structure of the company in 2008 because according to his research, the current organizational structure was lacking communication.

This caused customer satisfaction to decrease (Starbucks, 2010). In order to fix the customer satisfaction problem, Starbucks needed to change the organizational structure from two divisions to four divisions (Starbucks, 2010). The new structure is a geographic structure which consists of four regions: Western/Pacific, Northwest/Mountain, Southeast/Plains and Northeast/Atlantic (Starbucks, 2010). Each division contains individual departments, which consist of the major functions of the company like finance, marketing and human resources.

These are called partner resources and each unit reports to the head of the division, which is the Senior Vice President. In turn each Senior Vice President reports to the President of that division. The President of each division in turn reports directly to the CEO, which is Howard Schultz. This new structure will help focus on the customer and will increase customer satisfaction according to Schultz because it will maximize communication throughout the different channels (Starbucks, 2010). With this new organizational structure, there will be work redesign in the company because Starbucks is going to eliminate or “consolidate” jobs.

There were 600 jobs eliminated because of this new organizational structure that was implemented by Schultz, the CEO. With the elimination of 600 jobs, there was consolidation because the jobs had to be handled by other employees; so the job description became larger for the partners (employees) because they had to pick up the slack from the 600 jobs that were lost. The job description for the barista is to: develop satisfied customers, provide quality drinks consistently to the customers, maintain quality store operations, contribute to store profitability, and to learn all aspects of he barista job (Starbucks, 2010). This is a very demanding job description to ask for all the baristas of the company to perform and then to also pick up the other responsibilities that the lost jobs had as well. The managers have a job description as well. Their job description is not as long, nor as defined as the baristas because the baristas need order; whereas the managers just need to get things done in order to remain profitable. Managers have three responsibilities, which are: financial contribution, develops partners, and maintains quality store operations (Starbucks, 2010).

Starbucks expects the managers to do more than just their job description that they have a great deal of responsibilities, and they must go above and beyond the call of duty, or above the job description. An example of this is when managers give employees their personal phone numbers and they are able to call them for problems at any time. The job design has changed over the years for the baristas at Starbucks. In the 1990s, they were able to make all the drinks offered on the menu in an eight-hour shift, but now that has changed (Moon, 2006).

With a widely expanded menu, baristas now spend sixteen full eight-hour shifts in order to make every single drink that they offer (Moon, 2006). The job design has evolved with the company expansion. Baristas do not have the same tasks today as they did even a few years ago because there are now so many different drinks that they need to know how to efficiently make for the customer. It is fundamental for an organization to execute a human resource planning process to gain a competitive advantage. “The process consists of forecasting, goal setting and strategic planning, and program implementation and evaluation” (Noe et al. 2010, p. 193). The first step in the HR planning process is forecasting, which involves “determining the supply of and demand for various types of human resources to predict areas within the organization where there will be future labor shortages or surpluses” (Noe et al. , 2010, p. 193). Goal setting and strategic planning are the building blocks of HR. A specific quantitative goal should come from the labor supply and demand analysis. This goal “should include a specific figure for what should happen with the job category or skill area and a specific timetable for when results should be achieved” (Noe et al. , 2010, p. 197). Once these goals are established, the firm needs to choose from the many different strategies available for redressing the labor shortages and surpluses” (Noe et al. , 2010, p. 197). In the final stage of the HR planning process, “programs developed in the strategic-choice stage of the process are put into practice in the program implementation stage” and then those results are evaluated to check whether the company has successfully avoided any potential labor shortages or surpluses (Noe et al. , 2010, p. 207). Planning the human resource process ahead of time is crucial for improving the business performance of Starbucks.

Due to the current economic downturn, Starbucks has forecasted labor surpluses across its stores, roasting plants and its regional offices (“Starbucks Corporation Fiscal 2008 Annual Report,” 2008). This analysis has led Starbucks to set specific quantitative goals that provide a benchmark for determining the relative success of any programs aimed at redressing a pending labor surplus. Since early 2008, Starbucks has aimed to cut 18,400 jobs and close 975 stores in the US in order to save $300 million in annual operating expenses (Allison, 2009).

The strategy Starbucks performed to reach its quantitative goals in order to reduce the labor surplus is downsizing. “Downsizing is a planned elimination of large number of personnel designed to reduce costs and boost profits”, which was Starbucks’ main objective during this recession (Noe et al. , 2010, p. 198). The downsizing strategy is then implemented and the results are evaluated to confirm that Starbucks has resolved labor surplus issues in 2009 when it closed 975 stores and laid off 18,400 employees in the US; and in 2010 Starbucks had 30,000 fewer employees worldwide.

Once an organization has successfully planned its human resource process, it could initiate a recruitment method if the need to hire personnel arises. “Human resource recruitment is defined as any practice or activity carried on by the organization with primary purpose of identifying and attracting potential employees” (Noe et al. , 2010, p. 210). Recruitment involves personnel policies, recruitment sources used to solicit applicants and the characteristics and behaviors of recruiters (Noe et al. , 2010, p. 211).

Next we will discuss only the first two areas (personnel policies and recruitment sources) of recruiting through Starbuck’s perspective. The third area (recruiter’s characteristics and behaviors) will not be discussed since it is more subjective and less factual. Starbucks must make decisions regarding the three areas of recruitment to enable the company to attract and identify potential employees. The personnel policies that make a job at Starbucks more attractive are the opportunity for internal recruiting and providing all employees both extrinsic and intrinsic rewards.

Internal recruitment is offered to existing employees that want to continue their career at Starbucks (“Partner Career Opportunities,” n. d. ). These candidates must apply for position other than the Barista, Shift Supervisor, Assistant Store Manager, and the Store Manager and are required to have their current job for at least 12 months, perform at a Meets Expectations or better, and have not been on a Performance Improvement Plan within the last 6 months (“Partner Career Opportunities,” n. . ). Starbucks offers extrinsic rewards to all of its employees through a cafeteria-style benefit plan called “Your Special Blend” (“The Partner Experience,” n. d. ). The intrinsic rewards offered at Starbucks are the opportunity to grow within the company and several mingle events where employees can meet vendors who offer discounts, and learn about groups that help employees share interests and find a work/life balance (“The Partner Experience,” n. d. ).

The recruitment sources used at Starbucks to solicit applicants come from external sources, such as electronic recruiting through Starbucks website, direct applicants, referrals, local events like job fairs and from internal resources that was explained above (“Retail Careers,” n. d. ; “Professional Services Careers,” n. d. ; “Roasting Plant Careers,” n. d. ; “Candidate Frequently Asked Questions,” n. d. ). When it comes to the selection process, Starbucks does an excellent job of picking the right candidate for the job.

They are known for their excellent customer service, which would not be possible without the right employees. As we read in chapter 6, “any organization that intends to compete through people must take the utmost care with how it chooses organizational members” (Noe et al. , 2010, p. 232). Starbucks calls their employees “partners” because of the “direct and open relationship they share with them” (Starbucks Corporation, 2010). They want their “partners” to be passionate about what they do.

In a diverse atmosphere where everyone treats each other with respect, Starbucks wants their employees to make personal connections, after all their mission statement is “to inspire and nurture the human spirit one person, one cup, and one neighborhood at a time” (Starbucks Corporations, 2010). The selection process is very critical for Starbucks. They host job and management hiring fairs to seek out qualified and personable employees. Once you submit your resume, two separate people will interview you.

They must recognize certain characteristics that potential employers will need on the job; such as outstanding people skills and friendliness that will make customers feel a sense of belonging. Starbucks conducts situational interviews in which they use an “interview procedure where applicants are confronted with specific issues, questions, or problems that are likely to arise on the job” (Noe et al. , 2010, p. 248). They want their employees to get to know their customers by name and what they order. Making the connection really allows the customer to feel at ease and will motivate them to keep returning for that addicting caffeine.

Starbucks has over 16,000 locations worldwide and must select the most appropriate candidates to fill open positions. When an applicant is looking for a career with the organization, there are three different categories a candidate can select from: Retail careers, Professional Service careers, and Roasting Plant careers. For the Retail career path they hire baristas, shift supervisors, store managers, district managers, and regional directors (Starbucks Corporation, 2010). Starbucks has a long line of Professional Services careers.

They hire for administrative and support services, business development, call center, communications, design engineering, facilities development, legal, marketing, operations, procurement, project management, quality, research and development, sales, social responsibility, and supply chain management (Starbucks Corporation, 2010). A third career path is in the Roasting Plant field which has locations in five different domestic regions and one international: Kent, Washington; Portland, Oregon; Minden, Nevada; York, Pennsylvania; Columbia, South Carolina and Amsterdam, Netherlands (Starbucks Corporation, 2010).

Starbucks is very proud of their selection process. CEO Harold Schultz has stated “We’re in the business of human connection and humanity, creating communities in a third place between home and work” (Schorn, 2006). They put in a great deal of effort to select employees with enthusiasm. “If there’s one accomplishment I’m proudest of Starbucks, it’s the relationship of trust and confidence we’ve built with the people who work at the company” (Schultz & Yang, 1997). He is proud to announce that their turnover rate is less than half of the industry’s average. When employees have self-esteem and self-respect they can contribute so much more to their company, to their family, to the world” (Schultz & Yang, 1997). Starbucks takes great pride in their training program it that is offered to all its partners and has been known to actually spend more on partner recruitment and development than it does on advertising; a number that annually tops $50 million (Weber, 2005). This endorsement by senior executives highlights the importance that Starbucks feels its human resources are to attaining the business strategy of the corporation.

It promotes the concept of “if you are going to sell a premium product, you need to offer premium service as well” (Weber, 2005). Careful thought and execution is placed into the training process for each new member of the Starbucks team or partner as they refer to all employees. Training begins immediately with the invitation for employment and is an in-house experience. Starbucks does not use external training, coaching or mentoring companies; rather all training is done by existing members of staff who themselves are store managers (Young, 2005). Every partner/barista hired for a retail job in a Starbucks store receives at least 24 hours training in the first two to four weeks (or first 80 hours of employment for part-time)” (Thompson, 1999). Training includes instruction on coffee history, drink preparation, customer service and retail skills. Drink preparation takes a good majority of the time as great emphasis is placed on consistency, memorization of correct ingredients and proper presentation.

In this way Starbucks utilizes organizational socialization to transform new employees into effective company members by having them learn about their company history, goals, language, people and performance proficiency (Noe et al. , 2010, p. 326). Management trainees receive additional training and typically spend 8-12 weeks of their initial employment learning a much more comprehensive scope of the structure of Starbucks. This training includes “store operations, company practices and procedures, information systems and instruction on the basics of managing people” (Thompson, 1999).

One of the main objectives is to ingrain the company’s values, principles, and culture and to impart their knowledge about coffee and their passion about Starbucks. Training for store managers is very hands on and includes spending time behind the counters of a few different locations to get a real feel for the job requirements needed for their employees. As a global corporation, Starbucks also supports the training of stores in new markets around the world. “Each time a Starbucks opens stores in a new market, 8-10 weeks in advance, a major recruiting and training effort is put in place” (Thompson, 1999).

Experienced managers and baristas from existing stores are engaged in leading the store-opening effort and to conduct one-on-one training formatted after the company’s formal classes. International partners spend up to three months in Seattle learning about coffee, Starbucks culture, values and information about the corporate way to do business. This information is shared internally within the organization when they return to their specific locations. Starbucks encourages continuing education of all employees and actively promotes all partners to advance their learning through ongoing personal and professional development programs.

Taking this to a higher level, the company closed all locations on February 26, 2008 in an unprecedented move designed to “energize partners and transform the customer experience” (Starbucks, 2009). What they accomplished in three and a half hours was to retrain more than 135,000 baristas in approximately 7,100 stores. Even the tenured partners were “impressed by the fact that Starbucks was taking the time to focus on something that is so important to them and to their customers” (Weinstein, 2008).

Additionally, Starbucks does promote cultural immersion, which according to the HR textbook is a “behavior-based diversity program that sends employees into communities where they interact with persons from different cultures, races, and nationalities” (Noe et al. , 2010, p. 322). Employees can visit regional coffee plantations, support philanthropic endeavors and promote diversity in many ways. Diversity is promoted at Starbucks with current employees comprised of 31% minorities and 66% women. So how is Starbucks doing today as a company in this downward trending economy?

Once ranked 11th in the Fortune’s “100 Best Companies to Work for” they slipped in 2009 to 24th and is currently ranked 93rd (Starbucks, 2010). There are 30,000 fewer employees worldwide than last year because of store closings and other cutbacks. Still, baristas love working at Starbucks because of the camaraderie (Fortune, 2010). Last year over 150,000 applications were submitted for employment, but with the economic struggles that even this giant organization faces they expect one-year job growth to be -27%, which equates to over 5,000 fewer jobs.

Yet, the company provides partial health-care coverage even to its part-time employees, a group which currently makes up 90% of the employee population. Work-life balance can be achieved for corporate employees through on-site childcare and a fitness center; job sharing program; compressed workweeks; telecommuting as well as the opportunity to earn a decent salary. The most common hourly job is the machine operator with an average annual pay of $36,769 and the most common salaried job is that of store manager with pay averaging $44,434 (Fortune, 2010).

In conclusion, Starbucks has had its’ problem just like every other company, but with a strong workforce and culture the future looks promising. References Allison, M. (2009). Correction: Howard Schultz says no more layoffs planned at starbucks. McClatchy – Tribune Business News, doi: 1654391581 Fortune’s 100 best companies to work for in 2010. (2010). Fortune Magazine. Retrieved from http://money. cnn. com/magazines/fortune/bestcompanies/2010/full_list/ Moon, Y. & Quelch, John. (2006). Starbucks: Delivering Customer Service. Harvard Business School database. Noe, R. A. , Hollenbeck, J. R. , Gerhart, B. Wright, P. M. (2008). Human Resource Management: Gaining A Competitive Advantage (7th ed. ). New York: McGraw-Hill/Irwin. PR Newswire (2006) National Ergonomics Conference & Expo in Las Vegas to Reflect Growing Diversity of Ergonomics Market; Expo to Feature Record Number of New Products. (16  November). PR Newswire. Retrieved January 30, 2010, from ABI/INFORM Dateline. (Document ID: 1163272451). Schorn, D. (2006). Howard Schultz: the star of Starbucks. Scott Pelley meets the man behind the coffee empire. CBS, Retrieved from http:www. cbsnews. com/stories/2006/04/21/60minutes/main1532246. html Schultz, H, & Yang, D. (1997). Pour your heart into it:how Starbucks built a company one cup at a time (Google Books), Retrieved from http://books. google. com/booksidg Starbucks (2009). Retrieved from http://www. starbucks. com/aboutus/pressdesc. asp? id=829 Starbucks Coffee Company. (2010). Starbucks Coffee. Retrieved from the World Wide Web: www. starbucks. com. Starbucks Corporation. (2009). Starbucks Corporate Fiscal 2008 Annual Report. Retrieved from http://media. corporate-ir. net/media_files/irol/99/99518/reports/StarbucksAnnualReport. pdf Thompson, A. A. , Gamble, J. E. (1999). Starbucks Corporation.

Promotion Mix for Samsonite

Promotion Mix for Samsonite

AIM: To find out the communication mix and promotional tools used by the Samsonite to popularize its product trekking bags and to suggest promotional ideas to make its advertisement and promotion better. OBJECTIVE: Marketing communication tools are the means by which firm attempt to inform, persuade and remind consumers, directly or indirectly, about the product and brand they sell. In sense, they represent the voice of the company.

Marketing communication mix consist of eight major modes of communication – advertisement, sales promotion, events and experiences, public relation and publicity, direct marketing, interactive marketing, word of mouth and personal selling. Now we have to discuss about what tools are used by samsonite to maintain its brand name and value and what tools I can suggest. INTRODUCTION ABOUT COMPANY: Samsonite Group is one of the world’s largest and most recognized designers and distributors in the luggage industry.

With a rich heritage that includes nearly a century in business, Samsonite has a proud tradition of developing innovative, high-quality products that integrate style, functionality and design technology to meet the changing lifestyle needs of people on the move. Samsonite’s tagline – ‘Life’s a Journey’ – embodies the brand’s belief and vision, symbolizing the role Samsonite has in the multi-faceted lives of travelers. The Samsonite brand was born in 1910 when founder Jesse Shwayder began producing luggage for turn-of-the-century travelers – a small and affluent group who appreciated the Company’s unique, durable and finely crafted products.

As travel evolved into a mainstream activity, Samsonite’s product mix evolved with it, growing to encompass a diverse range of items for a host of travel needs. Along the way, Samsonite continued to anticipate and fulfill the changing requirements of travelers by introducing a string of “firsts”, including the first matching luggage sets, the first lightweight luggage and the first wheeled suitcases, to name just a few.

Today, the global travel industry continues to grow, and Samsonite continues to lead through the continuous introduction of innovative technologies, materials and design concepts, which we market through some of the most recognized brand names in the world. And while each of our brands is specifically focused on its own clearly defined customer group, every product we create continues to embody the same values on which Samsonite was founded – high quality, fine craftsmanship, exceptional reliability and enduring style. ABOUT TREKKING BAGS: Special bag for digital photo and video cameras •Comfortable access to the equipment, lid-opening away from the body •Flat front compartment for memory cards •Mesh pocket integrated in the lid •Carrying handle, shoulder strap and belt loop •Rain-protection cover METHODOLOGY USED: Secondary research: For find out the various communication tools used by Samsonite , secondary research has been done. With the help of internet, various site related to samsonite, its website, its communication tools are search with hard work and analysis is done to reach at conclusion.

OBSERVED COMMUNICATION COOLS USED BY SAMSONITE: Internet: The main communication tool samsonite is internet. Through the help of various e-shopping site like amazon. com and ebay. com it sell their product. On these site, different attribute of trekking bags, their price and various offer with these bags. Electronic media (T. V. ) and sponsorship: CNN International has announced that Samsonite will sponsor its new multi-platform feature series, ‘My City, My Life’; a program where celebrities show audiences the highlights of their favourite cities.

The sponsorship has taken effect from 3rd May 2008, signals the premium travel brand’s first television advertising campaign in four years and is a significant evolution of Samsonite’s traditionally spot-driven association with CNN International. For Samsonite, its sponsorship of ‘My City, My Life’ marks the next phase in its long term global communications campaign ‘Life’s a Journey’. The campaign is a compelling mix of brand and product advertising and will extend Samsonite’s brand footprint to connect with CNN International’s upscale audiences across Asia, Europe, Middle East, Africa, and Latin America.

It will also reach audiences globally via CNN. com. Print media: Samsonite’s new advertising campaign features Nick Knight, a well-known fashion photographer. The campaign launched in late March 2008 and will run till the end of June across Europe, Asia, India and Latin America. It will run in Singapore from May to June, predominantly in print media such as magazines and the Straits Times and Business Times. Initiative is Samsonite’s local media agency. Sales promotion: Various sales promotion tools are used by the Samsonite: •Free coupons •Free gift stuff •Free shipping •Gift cards •Grocery coupon •Discount offer Guarantee of 10 years SUGGESTION FOR IMPROVING THE COMMUNICATION TOOLS: Samsonite’s trekking bags are very high quality, have very good looking design which can easily attract to youth. Technical, it is very advanced like it has Separate compartments for memory cards and a cleaning cloth and Separate compartments for charged and empty rechargeable batteries and rain cover. But after that it is not as popular as it should be especially in India. To gain the competitive advantages, it is necessary for every product to use various communication tools instead of depending on one or two communication tools.

Samsonite totally ignore the direct marketing and personal selling for promote its trekking bags. It much more depends on internet for promotion, buying, giving offers etc. but internet is not the mass media. By internet one can know about the product but personal shopping experience is totally missing in this aspect. So there are some suggestions which I think can improve the communication strategy of samsonite, especially in India. These are as follows: Direct marketing: Samsonite can use this tool very effectively.

It can persuade the customer to purchase the bags by sending the emails, fax, voice mails, catalogues, so that brand awareness could be generated among people. It can find all the photographer phone number from the phone directory and then can make calls to them to provide them trekking camera bags and tell them about the distinct features of bags. It can arrange the database of employees from various sources and then can use this tool by making phone calls to them or use other method described earlier. It can also provide customized bags to various consumers s per their requirement. Trade show and fairs: Samsonite can participate in various trade shows and fairs in various cities time to time because by this they can interact with the potential customers and make them aware about the best features of trekking bags. It can also organize trade show and fairs at the various tourist places because tourists need the trekking bags very mush. Exhibition: Like trade fairs, Samsonite can also organize the exhibition in various cities to attract the consumers. It can establish a small stall in busy market and sell the bag.

Personal selling: Personal selling is the consumer specific medium through it can promote their bags. It can use the sales representatives so that they can fix a sales meeting. The best thing is that in this tool that consumer can investigate all the aspect and features of the bag and representative also can tell about the best of the product directly and in effectively manner to consumer. Advertisement: Samsonite can promote its bags by giving ads on the ticket of various transportation medium like air-tickets, rail-ticket, bus-tickets. It can also collaborate with some travels agencies and can use their tickets for ads also.

Public relations and publicity: Samsonite also can improve its brand name among consumers by maintain g good relations with them. It can provide free holiday package to the selected consumer through lottery system. This strategy will surely help in word –of-mouth publicity too. CSR promotion: Samsonite can also participate in various social activities to improve its brand image like it can participate in maintain the greenery and environment at various tourist places through campaigns and create awareness among people to maintain the heritage of tourist places. LIMITATION: Limitation of the project is the absence of primary research.

This project totally depends upon the secondary research. CONCLUSION: Communication tool are the effective medium for promote the product but company should be aware of that which tools are effective or not. According to market need, consumer group starget, and competitor communication strategy, one should decide about the communication tools. Samsonite has good product as trekking bags which has a good potential to be popular among customer especially amongst tourists but it has to more focus on various tools so that it can make the people aware about its product.

REFRENCES: 1)www. dealtaker. com/Samsonite-coupon-code-a331-c. html 2)www. samsonitecompanystores. com/… /samsonite-india.. /prodSA3978XX-cCOL-c460-. html 3)www. amazon. co. uk/Samsonite-Trekking… /B0009V8XV8 4)www. cgi. ebay. com. sg/ws/eBayISAPI. dll? ViewItem&item 5)www. javno. com/… /milla-jovovich-and-husband-pose-for-samsonite_155758 6)www. medianewsline. com/news/120/… /2008-05-03. html 7)www. hama. de/specials… /samsonite_trekking… /index. hsp 8)MARKETING MANAGEMNET- PHILIP KOTLER ,KEVIN LANE KELLER 13TH EDITION