Module 5 Discussion Taca Assignment Example | Topics and Well Written Essays - 250 words

Module 5 Discussion Taca - Assignment Example First, the author’s use of flashbacks in successive paragraphs ensures that the narrator gives us enough background of former events. It implies that Russell is concerned with merging both the present and the past for the essence of not only memory, but equally growing up. ‘Long after you have supposedly been cured of malaria, the fever can flare up, the tremors can shake you (Russell 3).’ Therefore, the sentence is favourite to me because it reminds of the narrator’s personal fears. My first reaction on reading it evoked the feelings of a timid childhood that were often characterized by small fears. It means the author evoked the reaction through the inclusion of the disease called malaria that is prevalent in different areas around the world. Second, the idea of growing up in Russell’s story has the connotations of symbolism of innocence of the Mother’s obsession with her child to suppress important memory of growing up and

A History Of The Gold Standard Economics Essay

A History Of The Gold Standard Economics Essay What is Gold Standard? The Gold Standard is a monetary system in which the standard unit of currency is a fixed weight of gold or freely convertible into gold at a fixed price. Under the Gold Standard system, paper money which circulates as a medium of exchange is convertible into gold on demand. The exchange rate between paper or fiat money and gold is fixed. Same thing happened to the rates of exchange between national currencies, it is fixed. The Gold Standard can be divided into two types: full Gold Standard and partial Gold Standard. A 100 percent reserve Gold Standard or full Gold Standard occurs when all circulating money can be represented by the appropriate amount of gold. Whilst in partial Gold Standard, circulating notes can be redeemed for their face value; it can be either higher than its actual value or lower. Why gold being selected as a reserve for most countries and even for today? Many nations hold the gold reserves in significant quantity in order to defense their currency and put a hedge against the US dollar. Some more, the weakness of the US dollar can be offset by strengthening the gold prices. Yet, compared to other precious metals or major competitors such as US dollar and real estate, none of them has the stability as the gold as well as its rarity and durability. Gold is also used as a store of value starting from the early monetary system since it is high value enough. It is high in utility and density, it is able to resist to corrosion, it is uniform, and it is divisible easily. As we know, banking began by depositing the gold into a bank and it could be transferred from one bank to another bank. Until today, gold remains to be the main financial asset for most of the central banks. By looking back at the past, before 2000 BC, the first metal that human being used as a currency in trade was silver. According to the history, we know that gold has been used as a mean of payment since long time ago. After 1500 years, the first coinage of pure gold was introduced. The adoption of Gold Standard was preceded after that. Yet, the fiat monetary system came and took over the Gold Standard system during the outbreak of World War I. This happened for most of the nations are due to the excessive public debt and the government is unable to repay all the debt in gold or silver. IMPORTANCE OF STUDY / RESEARCH IN GOLD STANDARD As a banking and finance student, we have to study and understand any history that regard to the field, included the topic of our assignment this time Gold Standard. This is because people live in present and they have to plan for and worry about the future. History is the study of past. It gives the information of the past in order to anticipate what is yet to come. Understanding history is important to develop the linkages to predict the future. Yet, history also provides us abundant of information about how the Gold Standard was formed and how it operated. Understanding the operations of the Gold Standard is difficult currently since it was collapsed and we cannot be exposed ourselves to it. The current data that we have is relied on what happened into the past. By using the historical materials, we can make our own analysis on the Gold Standard and understand its weaknesses and problems. Besides, the study of the Gold Standard can help us to understand the changes of the monetary system and how the financial world affects the global economies. From the historical information, we know when the adoption of the Gold Standard was and when the collapse of the Gold Standard was. Yet, we also know that the monetary system had been changed over time to time and which system was being created in order to take over the original system. For instance, Gold Standard was took over by Bretton Woods System and followed by Contemporary Monetary System. There is always a reason there for the changes made. This is because of the discovery of the shortages of the system. Once the deficiencies being located, the new system would be established. If there is still do not have any actions taken, it will affect the economies of the world since finance cannot be separated with the economy. In addition, as a financial student, we have to understand about the differences between fiat money and Gold Standard. From the project we done, we know that fiat money is money that no have intrinsic value and cannot be redeemed for any commodity. The paper currencies and coins that are available in markets nowadays are considered as fiat money and the strength of the economy of the issuing nation is the determinant used to determine the value of fiat money. Mostly, inflation will follow with the enormous issuing of fiat money. Whilst, The Gold Standard is a monetary system in which the standard unit of currency is a fixed weight of gold or freely convertible into gold at a fixed price. Under the Gold Standard system, paper money which circulates as a medium of exchange is convertible into gold on demand. The exchange rate between paper or fiat money and gold is fixed. PART II : THE GOLD STANTARD 2.1 HISTORY 2.1.1 History of Gold Standard The first nation that officially adopted the Gold Standard system is England (also called as Great Britain) in 1821. The list below is the dates of adoption of the Gold Standard system: 1821 England 1871 Germany 1873 Latin Monetary Union Belgium Italy Switzerland France 1875 Scandinavia(Monetary Union) Denmark Norway Sweden 1875 Netherlands 1876 France 1876 Spain 1879 Austria 1893 Russia 1897 Japan 1898 India 1900 United States During that century, there was a dramatic increase in global trade and production which brought enormous discoveries of gold. The discoveries aided the Gold Standard remain intact well on the following century. The emergence of the International Gold Standard is on 1871 since the Germany also started to use the system. By 1900, most of the developed countries were linked to the Gold Standard system, but surprise that the United States was the last nation to enter. This is because there was the present of a strong silver lobby that forbidden gold from being the sole monetary standard with the U.S. throughout the 19th century. The Gold Standard was at its pinnacle from 1871 till 1914. During the period, there were a near perfect ideal political contexts existed in the world. Governments tried to corporate nicely in order to make the Gold Standard system work, but the system was collapsed during the duration of the Great War in 1914. In 1925, it was reestablished. But due to the relative scarcity of gold, many countries adopted a gold-exchange standard, supplementing their gold reserves with currencies convertible into gold at a stable rate of exchange. Unfortunately, the gold-exchange standard was ended during the Great Depression. The United States had set a minimum dollar price for gold in order to aid for the restoration of international gold standard after World War II. In 1971, dwindling gold reserves and unfavorable balance of payments led the U.S. to abandon the Gold Standard system. 2.1.2 Timelines of Gold Standard 1717 The Kingdom of Great Britain went on to an unofficial Gold Standard. 1816 Gold was partially displacing silver as a standard. 1821 The Gold Standard was first out into operation in Great Britain. 1873 The Coinage Act of the United States Congress came into operation on 1st April and constituted the gold one-dollar piece as the sole unit of value. 1900 Gold Standard Act was established on 14 March 1900 and gold was the only standard for redeeming paper money. 1914 The abandonment of the Gold Standard by Russia. 1925 The return of the Gold Standard. 1971 The abandonment of the Gold Standard by the United States. 2.1.3 Timelines of Fiat Money 1690 There are three types of currency according to American History: Fiat money Certificates based on coin or bullion Bank notes (Fiat money is one type of currencies that being used during the time.) 1789 France was undergoing economic downturn and due to lack of money, fiat money being used. 1862 There was a paper currency that printed upon one side in green has been created with a promise to pay Greenbacks. 1878 An argument in favor of honest money and redeemable currency. 1896 Paper-based global economy has been collapsed. 1913 Establishment of Fed. Fiat money became the United States legal tender. The mercy of the fiat money system has led to the greatest debt bubble in world history. 1933 Inflation occurred. 2008 Under the fiat money system, money as debt. 2.1.4 History of Shifting Between Fiat Money and Gold Standard in U.S. As stated as below, there were a lot of shifting between a fiat money and gold standard had been made by the United States over the past 200 years which in order to avoid hyper-inflation. Hyperinflation occurs when the confidence in money had gone and it leads to no value in the money. As mentioned as earlier, the gold standard was over due to the reason of the government was unable to repay for the excessive of public debt in gold or silver that its countries owe. 1785-1861 Fixed Gold Standard : 76 years It was issued by American colonists for the Continent Congress in order to finance the Revolutionary War. It was produced by the United States Federal Government. It was authorized by the Act of March 3, 1849. 1862-1879 Floating Fiat Currency : 7 years The fiat money of the United States above is Greenbacks. It was created to pay for the enormous cost of the Civil War. It was the debt of the U.S. government which could be redeemable in gold at future without any specified date. It was circulated along with the Gold certificates. 1880-1914 Fixed Gold Standard: 34 years It was ended due to the financial needs of World War I. 1915-1925 Floating Fiat Currency : 10 years It was created to pay for World War I countries. There was insufficient of gold to support the paper currency. 1926-1931 Fixed Gold Standard : 5 years It was ended due to most of the nations tried to deposit their pounds and dollars for gold when the depression occurs. 1931-1945 Floating Fiat Currency : 14 years It was ended due to the outbreak of World War II. 1945-1968 Fixed Gold Standard : 26 years On 24 June 1968, a proclamation that Federal Reserve Silver Certificates could not be redeemed in silver was issued by President Johnson. 1971 Floating Fiat Currency : 5 months It was established by President Nixon on August 1971. 1971-1973 Fixed Dollar Standard : 2 years It was passed by the Smithsonian Agreement. 1973-today Fiat Currency : 37 years It was established by the Basel Accord. 2.1.5 Evolution of International Monetary Systems International Monetary System had been undergoing several stages of evolution which are stated as below: Bimetallism (before 1875) A double standard in the sense that both gold and silver were used as international means of payment. Some nations used the gold standard; some used the silver standard; and some used both. Both gold and silver were used as money and the gold or silver contents were the determinants used to determine the exchange rates among currencies. Classical Gold Standard (1875-1914) Most nations agreed that -Gold alone was assured of unrestricted coinage. -There would be two-way convertibility between gold and national currencies at a fixed ratio. -Gold could be freely exported or imported. Two countries relative gold contents were be the determinants used to determine the exchange rate between two countries currency. Highly stable exchange rates under the classical gold standard provided an environment that was conducive to international trade and investment. Misalignment of exchange rates and international imbalances of payment were automatically corrected by the price-specie-flow mechanism. Interwar Period (1915-1944) Exchange rates fluctuated as countries widely used predatory depreciations of their currencies as a means of gaining advantage in the world export market. Attempts were made to restore the gold standard, but participants lacked the political will to follow the rules of the game. The result for international trade and investment was profoundly detrimental. Bretton Woods System (1945-1971) Named for a 1944 meeting of 44 countries at New Hampshire. The purpose was to design a postwar international monetary system. The goal was exchange rate stability without the gold standard. The result was the creation of the IMF and the World Bank. The system was a dollar-based gold exchange standard. Flexible Exchange Rate System (1971-today) The system was declared acceptable to the International Monetary Fund (IMF) members. Central banks were allowed to intervene in the exchange rate markets. Gold was abandoned as an international reserve asset. Managed Float System (1973-today) 2.2 INTERNATIONAL GOLD STANDARD 2.2.1 Chronology of Gold and International Monetary System 1717 Master of the Mint, Sir Isaac Newton gave guinea statutory valuation of 21 shillings. Commence of the United Kingdom Gold Standard. 1797 Occurrence of Napoleonic Wars. Bank of England abandoned gold payments. 1816 Establishment of UK Coinage Act. 1844 Bank of England obliged to buy gold. 1870-1900 Except of China, most of the nation abandoned Bimetallic Standard and switched to Gold Standard. 1913 The United States system of reserve banks was established by Federal Reserve Act. At least 40% of notes were gold-backed. 1917 U.S. prohibited gold exports. 1919 UK went off Gold Standard. Establishment of London Gold Fixing. 1925 Return of Gold Standard in the United Kingdom. Establishment of UK Gold Standard Act. 1931 The United Kingdom abandoned Gold Standard. 1933 Suspend of the United States convertibility. Prohibition of exports, transactions, and holding of gold. 1934 Presidential Proclamation of making dollar convertible to gold again. 1936 Establishment of Tripartite Agreement (Countries involved: U.S., UK, and France) 1939 Close of London gold market due to the outbreak of war. 1944 Establishment of Gold Exchange Standard as a result of Bretton Woods Conference. 1945 International Monetary Fund (IMF) Articles of Agreement became effective. 1954 Reopen of London gold market after World War II. 1961 Establishment of Gold Pool (Members: Belgium, France, Germany, Italy, Netherlands, Switzerland, UK and Federal Reserve Bank of New York) 1967 Buying of gold increased due to the devaluation of sterling. 1968 Close of London market. Abolishment of Gold Pool and establishment of 2-tier market. Establishment of Special Drawing Right (SDR). 1971 Suspend of U.S. convertibility to gold. Establishment of Smithsonian Agreement. 1972 Devaluation of the United States dollar. 1973 Suspend of dealing in foreign exchange markets by most of the central banks. Adoption of floating exchange rate regime. Abandonment of 2-tier gold market. 1975 Abolishment of restriction on citizen buying, selling or owning gold by U.S. First U.S. gold auction on January. Establishment of agreement between G10 countries and Switzerland on no attempt to peg the gold price. 1976 First gold auction by IMF on June. 1978 Disappear of formal role of gold in International Monetary System. 1979 Establishment of European Monetary System. Final U.S. gold auction on November. 1980 Last 45 IMF gold auctions on May. 1982 The United States Gold Commission reported to Congress. 1985 Establishment of Plaza Agreement on currencies. 1987 Establishment of Louvre Accord on currencies. 1992 Sign of treaty on European Union at Maastricht. 1998 Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain joined Economic and Monetary Union (EMU). 1999 Began of EMU. Announcement of Central Bank Gold Agreement (CBGA). 2004 Announcement of Second Central Bank Gold Agreement. 2.2.2 Gold Standard Went International *The picture above the gold and silver coins that available around the world during 19th century. From the chronology above, we know that most of the countries (except China) had abandoned their silver or bimetallic standard and went for a full gold standard between the years of 1871 to 1900. There is always a reason. German asked for war indemnity to be paid in gold by France right after the Franco-German War. German used this gold to finance a new gold standard in their home country. This had lead to an increase in the demand of gold and there was unload of tons of silver on the neighboring nations. Due to the fear towards silver inflation, the neighboring countries decided to follow German. The list below is the date of first gold standard: 1871 German 1873 Belgium 1873 Italy 1873 Switzerland 1874 Scandinavia 1875 Denmark 1875 Norway 1875 Sweden 1875 Holland 1876 France 1876 Spain 1879 Austria 1893 Russia 1898 India 1900 USA International Gold Standard existed when the following condition being fulfilled: Gold alone is assured of unrestricted coinage. There were two means of convertibility between gold and national currencies at a fixed ratio. Gold may be freely imported and exported.

Acid Rain Legislation :: essays research papers

Acid Rain Legislation Acid rain is a destructive force as a result of nature and man colliding. It is formed through harmful industrial emissions combining with contents of the earth's atmosphere; a dangerous combination. This prompted governments throughout North America to take action. Many laws and regulations have been implemented, yet the question still remains, "Should tougher legislation be implemented to force industries to reduce acid rain emissions?" To decide whether tougher legislation should be implemented, one must first understand the details of what exactly acid rain is. Acid rain is a result of mankind's carelessness. It travels a long one of the most efficient biogeochemical cycles on earth, the Hydrologic Cycle. This allows acid rain to distribute itself further away from it's source causing more than local problems. Sulfur Dioxide (SO2) is released by fossil fuels when they undergo combustion. Power plants and other fossil fuel burning industrial areas release various forms of nitrous oxides (Nox). These two chemical compounds combine with the water in the atmosphere to form what is known as acid rain. The main reason that has prompted legislation of industrial emissions from governments is because of the negative effects they can have on the environment. Acid rain is harmful to the environment because of it's low pH. It can harm the biotic components of earth, and also the abiotic components. It's high acidity degrades soil to the point where it cannot support any type of plant life. Trees in forests are killed over long-term exposure. When these trees are killed, an imbalance in the hydrologic cycle can occur. Without living trees to consume the precipitate, it must be consumed by the earth or any other plants. These will receive an excess of water, causing other problems in the hydrologic cycle. This in turn causes a chain reaction of death among our forests. Some regions are more susceptible to acid rain because they don't have enough Alkaline soil to "neutralize" the acid before it is able to destroy the rest of the soil or before it can run off into lakes or rivers. Aquatic environments can be greatly affected by soil runoff. Acidic soil may runoff into lakes and rivers due to erosion, causing acid rain to destroy more environment. Acid rain aquatic animals as well as aquatic plant life. When acid rain combines with water in major bodies of water, it not only destroys wildlife habitat, it destroys our drinking water. An aquatic ecosystem is very dependent on each and every aspect within itself. Once one species dies off, others that depend on it, will eventually begin to die off also.

Multiple Governments and Intergovernmental Relationships Essay

Multiple Governments and Intergovernmental Relationships To be successful as a unified or United States, meaning a group with the same but often times different agendas, a few things had to become true. First the individual governments of these states had to feel that their best interests were represented within the united whole. Second that their powers within their borders would not be encroached upon too much, and lastly that the benefits of an overarching federal government would outweigh any loss they experienced. This is a delicate cooperation that we will explore more in depth hurricane Katrina as an example. Hurricane Katrina Hurricane Katrina hit the golf coast on Monday August 29 2005, the eye of the storm hitting Sothern Louisiana, between New Orleans, and Gulfport Mississippi. This storm cause severer damage all along the cost, destroying homes, roads, and bridges as far as 12 miles in land (â€Å"Hurricane Katrina†, 2013). This author lived in northern Mississippi, a five-hour drive from the gulf coast, and lost power for days, as well as severe damage to his home, and the loss of seven 100+ year old trees. The worst damage though was within New Orleans Louisiana, where most of the city is below sea level and protected by an intercut system of levees, and sea walls. These levees broke and flooded most of the city, mixing with raw sewage and underground gasoline stores making a lethal cocktail, not fit for human habitation. As a result of this and a lack of proper cooperation within our government many people died. Cooperation In a catastrophe this large, no one-government entity can handle the issues alone. There must be cooperation at all levels of government. The local communities, which are affected probably, do not have any government infrastructure or resources to deal with the event. Next, the states are not necessarily equipped to handle these events. This would require stockpiles of resources just waiting for an event like this to take place. The Good The federal government and state governments knew this was going to be a hard storm, but must felt that it would not be any worse than the hundreds of hurricanes, which have hit the area prior. Still, the local communities prepared in the same way as before, issuing evacuation warnings, prepositioning National Guard, water and food around the suspected areas. The federal government also prepositioned the coastguard, and other resources around the affected area. These would have been efficient for a normal hurricane, but not for what happened (â€Å"Hurricane Katrina†, 2013). The Bad Unfortunately, the events that took place, with the gulf coast, the water surge, and the levees breaking in New Orleans were not predicted. The flooding made most of the region un-passable by normal modes of transportation. It took supplies, and resources far too long to reach the injured, and others in need. This was only compounded by poor decision-making and political finger pointing on the part of many and unfortunately, this resulted in further lost lives, and more injuries. How Could It Have Been Done Differently This is one of those difficult questions. Of course, hindsight is always twenty-twenty, but there is no reason, considering how chaotic something like a hurricane can be that any possible catastrophe should be ruled out. Before the Hurricane, officials actually stated that there was no way the levee system could be breached by the sea. This shows that there was a concern about it prior to the storm, yet it was ruled out as a possibility. Contingency planning was a failure here. There should be a contingency plan for anything no matter how possible. For example, the space shuttle had no less than 100 emergency landing sites throughout the world. This contingency plan did not have one plan with a backup plan it had a contingency plan and each contingency plan had another. No possible eventuality should ever be foolishly ruled out. The contingency plan for the hurricane should of included supplies, personnel, and equipment stationed inside the hurricane zone, in case there was difficulty getting into the area, which it was. Agencies such as FEMA, should have moved resources in, and protected them for the storm as opposed to station it on the outside of the area, and expecting an ability to move it in. Stationing the supplies and help outside the area shows that our government was hoping for a best-case scenario when they should have planned for the worst. Reference Hurricane Katrina. (2013). Retrieved from http://www.history.com/topics/hurricane-katrina

Case Analysis on Capital Structure Pioneer Petroleum Essay

Introduction: This landmark case seeks to break the risk-reward trade off involved in calculating Capital Cost. The object of the solution must be to minimize project risks while maximizing project opportunities available. We want a rate and a rating system that does not unnecessarily reject â€Å"the best available projects – i.e. highest net positive free cash-flows at that time.† Particularly in times of excess capacity, this will marginally contribute to increasing company wide yields, but will not necessarily match the company-wide yield imposed by investors. History of the Company and Background of the Case: Sometime in July 1991, one of the critical problems confronting management and the board of Pioneer Petroleum Corporation, hereinafter referred to as Pioneer, is about Capital Budgeting; specifically they needed to determine the Minimum Acceptable Rate of Return, or MARR, on new capital investments. Their capital budgeting approach was to accept all proposed investments with a positive net present value when cash-flows are discounted at such appropriate cost of capital. Formed in 1924 through mergers of several formerly independent firms operating in the oil refining, pipeline transportation, and industrial chemical fields, pioneer Pioneer did vertical, horizontal, and backward integrations into exploration and production of crude oil, marketing refined petroleum products, plastics, agricultural chemicals, and later diversified into real estate development. In 1985 Pioneer restructured further into hydrocarbon-based oil, gas, coal, and petrochemicals. Statement of the Problem: What rate or rating system will consider specific, inherent risks of divisions and operating sectors AND consider benefits ascribed to the single-rate Weighted Average Cost of Capital approach? How can we help Pioneer Petroleum make an objective, rational choice on the hurdle or cut-off rates for evaluation of new projects in a fully integrated conglomerate of multiple divisions; determine whether they should use the SINGLE company wide Weighted Average Cost of Capital, which reflect the rates at their face value to the company, OR proposed MULTIPLE Divisional Cost of Capital, which reflects risk-profit characteristics inherent in various divisions and operating sectors. Objectives/ Directions of the Solution 1) The decision must help the management and board of directors of Pioneer Petroleum decide on the fair and objective Hurdle Rate/s that will fairly qualify new investment projects of Pioneer Petroleum divisions 2) Whatever the recommendation ought to be consistent with facts of the case, and provide consonance, rather than inconsonance, with the efforts of both the division and central or corporate management to execute strategy, leverage on strengths, and empower the company to make investments to gain and sustain competitive advantage. 3) The recommended project rate and rating system must be simple, objective and fair. 4) It must consider specific, inherent risks of divisions and operating sectors 5) It must also address the interest of stockholders to maximize return on their equity or investments. Case Facts and Assumptions: 1) It is the Policy of the board to balance the source of funds, or to keep the funded debt and equity ratio at 50:50 . Debt and Equity financial ratios are: a. D-E ratio for refining is 1.5:1, b. D-E for the exploration is 0.8:1. 2) The Income Tax Rate is given at 34%. 3) Revenue is $15.6 billion 4) Net income $1.5 billion. 5) It is given that dividends increased by 10% in 1990 and 1991, and therefore we will assume to use the higher target equity yields of 2.7 (add the 10%), rather than 2.45 the actual yield of 1989. 6) The company’s Corporate Debt was A-rated; this means it is deemed to carry much low risk than the general investing or borrowing public. 7) Capital Expenditure budget are enormous, $3.1 billion in 1990 and $4.5 billion in 1991, underscoring the significance of appropriate and accurate weights and calculations for Cost of Capital. Strengths and Opportunities. Pioneer was one of the primary producers of Alaskan Crude. The company’s gasoline are among the cleanest burning fuels. By 1990, total revenues exceeded $15.6 Billion and net income over $1.5 Billion. Pioneer supplied its own raw material for domestic petroleum liquids production and was also one of the most cost-efficient refiners of the West Coast and had an extensive West Cost presence. The company has clean, efficient running plants positioned to meet strict environmental guidelines capitalize on less polluted products. Capital expenditure investments ran at $3.1 Billion, with forecasted expenditures of almost $4.5 Billion in 1991. Pioneer was also heavily invested in Environmental projects. Its chemical unit produced 1/3 of the world’s supply of methyl tertiary butyl ether, MTBE, an ingredient making its gasoline one of the cleanest burning in the industry. The MTBE market had been growing with the global trends towards sustained development of the environment. Refining its cost of capital calculations will not only preserve its much-needed capital, but it also unlocks new capital — and maximizes existing capital — to capitalize on such huge opportunities, particularly the passing of the 1990 Clean Air Act with which came tremendous area in which Pioneer might capitalize on its eco-strengths. Weaknesses and Threats: To meet Pioneer expected to invest $3 Billion additional to meet the new law’s standards among other new environmental regulations. Its multinational status makes it vulnerable to foreign currency exchange risks, political risks, interest rate volatility, cultural risks, and transfer pricing and other transnational risks involving a complex network of sources, sinks and of moneys, products and services. Its fully integrated set-up requires spreads itself quite thinly, and requires seamless transnational collaboration and cross-border coordination to work. Management wanted synergy among global divisions to optimize overall performance, and obviously to decrease these complex risks. Methodology: The weighted cost of capital approach is applied, first apportioned pro rata based the usual cost of the fund source: i.e. debt and/or equity. The cost of debt would be prevailing interest rates, and the cost of equity would be â€Å"foregone† earnings on capital invested as equity – i.e. earnings per share over market value per share. The second approach is similar, but with multiple cutoff rates. First it is broken down by Divisional Cost of Capital – i.e. calculated using a weighted average cost of capital approach, but this time for each division or operating sector; before further drilling down by cost per fund source. Calculations would follow three (3) steps: a) First an estimate would be made of the usual capital structure, or debt to equity proportions, of independently financed firms operating in each sector. b) Given these proportions by sector, for each operating sector, the costs of capital – divisional debt and equity – would then be estimated in accordance with the concepts followed by the company in estimating its own cost of capital. This means Divisions are to use the WACC rules followed by the company, in estimating its own Weighted Average Cost of Capital. To describe this approach in a financial function: The Weighted Average Cost of Capital = WACC = sum of Divisional costs of capital = Sum total of [Divisional Costs of Debt plus Divisional Costs of Equity]3 Decision Alternatives for Selection of Marginally Attractive Rates of Return: Management and the board are choosing between two alternative approaches: 1) The Single WACC Rate, company-wide Weighted Cost of Capital approach, where specific rates weighted were those based on the sources of fund, debt and equity, in estimated proportion of future funds sourced; AND 2) Multiple Cut-off or Multiple Hurdle Rates for Divisional Costs of capital, involving determining the rates or weighted costs of capital for each main Operating Sector. 3) Hybrid or Combination thereof – taking the positive aspects or advantages of both methods; i.e. for example, the requirements of stockholders for return on equity on the one hand, AND the requirements of divisions or operating sectors to address specific local risks, and implications on local incentives. Case Analysis and Discussion. The two alternative approaches â€Å"purpose and benefits† are culled from the case, as follows: 1) The single, company-wide Weighted Cost of Capital approach, where specific rates weighted were those based on the sources of fund, debt and equity, in estimated proportion of future funds sourced; this gave a WACC rate of 9.0%. Proponents of the single rate might argue as follows: a. It is far simpler to calculate. b. It covers the actual rate or â€Å"cost of the source of funds† at face value of bonds or notes payable, or statements of stock or equity; c. It appears to be more conservative than divisional rates because it does not consider economies of scale of fully integrated conglomerates that benefit the divisions or subsidiaries in ways that not reflected in the divisional costs of capital or rates. d. The problem or effect of such diversification benefits on the rate is that Divisional Rates calculated independently, may be considered lower – in reality. Why charge sunk costs, one might ask to the division. The problem here is that the hurdle rate may be too high for many â€Å"projects,† and therefore unduly rejected; when in fact they ought to be accepted. IF they are accepted by competitors with similar integration benefits, perhaps, they will benefit from marginal income and grab this benefit from Pioneer’s subsidiaries. e. Pioneer’s shareholders expected the company to invest funds in the highest return projects available. f. Proponents of the single corporate rate argued that those advocating multiple rates were those who were not able to compete effectively for new funds, when measured against the corporate group’s â€Å"actual cost of capital.† g. Single-proponent advocates lacked confidence in the fairness and integrity of the process of selection of divisional rates. For example, the transport division had â€Å"unrealistically low hurdle rates† considering experience in tanker investments had been â€Å"disastrous for many companies.† There were also still some areas of ambiguity, such as how to treat environmental projects (or for this matter, central HQ projects over which Divisions have little or no control). h. Another concern was how the benefits of full integration – acquired through very costly mergers and acquisitions — would be considered in divisional rates. IF divisions lowered their rates, this might not be enough to cover central requirements. i. Reduced risk, economies of scale and other diversification premiums — remained unaccounted for in the proposed divisional costs of capital approach. There were considerably less risks for instance in subsidiaries of an integrated firm like Pioneer, than for independent petroleum dealers or non-members of the group. This being the case, was it fair to demand such a high hurdle rate given that the risks were much lower at some divisions than others? 2) Multiple Cut-off or Multiple Hurdle Rates for Divisional Costs of capital, involving determining the rates or weighted costs of capital for each main Operating Sector. The divisional rate approach seems far more complex, but proponents of divisional costs of capital argued included the following purposes and advantages of this scheme: a. The proponents of multiple divisional hurdle rates argued that a single companywide cost of capital (WACC) â€Å"subsidized the higher-risk divisions† at the expense of lower risk divisions. b. Because the cost of capital was too high for the low-risk divisions, too few low-risk investments were made. c. On the other hand, in the high-risk divisions too much investment occurred because the hurdle rate was too low. As evidence, proponents of multiple rates noted that Pioneer was the only major company that continued to invest heavily in exploration and development, and that it lagged behind its competitors in marketing and transportation inv estment. d. The divisional rates approach – there was nothing new in the calculations – except that sector rates would reflect the risks inherent in each of the operating sectors of the conglomerate. e. Evaluation of future capital expenditure or investments in each of the main operating areas of the company would be appraised pro rata based on the appropriate rate of return for that industry sector; f. For evaluation of actual financial performance — say, for incentives and bonuses — multiple cutoff rates would fairly represent the rates charged to each of the various profit centers for capital they employed or â€Å"borrowed from headquarters† so to speak; g. The proponents for multiple divisional hurdle rates also argued that the companywide cost of capital was too low, and that investments should be required to earn at least as much as an investment in common stocks. The average return since 1980 on the S&P index of common stocks of 16.25% substantially exceeded the 9% companywide cost of capital (see Exhibit 2). If Pioneer was serious about competing over the long run in industries with such disparate risk-profit characteristics, it was absolutely essential to relate internal target rates of return to the individual businesses. It was argued by proponents of the multiple divisional cutoff rates that for subsidiaries and sister firms of integrated firms like Pioneer, the inter-company-benefits mitigated the risks involved with large refinery investments. Thus in some cases rates lower than companywide rates of return were justified. There was a â€Å"diversification premium† which ought to be allocated back or deducted from the subsidiary discount rates, as calculated previously in proportion to the relation between the investment in each subsidiary and, say, the company’s total asset. Formula used for Weighted average cost of capital is WACC = K(d) + K(e) = Kd(1-t)*DEd + Ke*DEe Pioneer’s original calculations for WACC are summarized as follows From Exhibit 1 The case mentions however, that the interest used is a coupon of 12%, assuming it retains an A rating, and a 34% tax rate, this represented a 7.92% cost after tax. According to Investopedia, coupon is defined as the interest rate stated on a bond when it’s issued. The coupon is typically paid semiannually. This is also referred to as the â€Å"coupon rate† or â€Å"coupon percent rate†. The divisional cost of capital would then be calculated using a WACC approach for each Operating sector; i.e. as though each sector were an independent company competing in its own industry -Note that the same WACC formula above is used to estimate divisional cost of capital, except it is not company wide, WACC rates in specific operating sectors such as business.. The divisional perspective overlooked that each business was also part of an integrated company with â€Å"risk diversification benefits,† economies of scale and other integration benefits, say of a large refinery. The case pointed out the weakness of a single-rate policy. On the one hand, very few low risk investments were made, precisely because of the high rate of return on investment required by the pre-assessment. The hurdle rate was too steep for â€Å"low risk divisions.† Too few passed the gauntlet, so to speak. On the other hand, too much money was invested in high-risk divisions, because the hurdle rate on those operating sectors, was too low. Some members of top management felt that Company-wide cost of capital rates was too low, and investments should be required to earn at least as much as Common stocks – or over 14%. A couple of corrections need to be suggested on the single rate WACC of Pioneer. WACC = Kd + Ke Cost of equity, Ke. Note that â€Å"after prolonged debate,† Pioneer (management and board) decided to use 10%, which was the equivalent of $6.15 Earnings per Share divided by $63 Market Price per share. Using current earnings yield of their stock as the cost of both new equity stock and retained earnings.† In other words the 10% used was based on â€Å"actual† dividend yield and not the â€Å"projected† or the â€Å"required rate of return† for the company’s stock. Given a dividend growth rate of 10%, a share Market Price of $63, the next target dividend at $2.70 ( = $2.45 plus 10%), and the ratio of Equity to Debt at 50:50, then the cost of equity is therefore calculated as follows: Cost of equity: Ke = ((Target Dividend Value/Market Price)+Growth in dividends)*DEe = ((2.70/63) + 0.1)*(50%) = 14.3%. Cost of debt, Kd It seems the actual interest rate afforded Pioneer was not actually given in the case. What was used by management was the 12% coupon rate on bonds. Since Pioneer was an â€Å"A-rated† client, or deemed to carry very â€Å"low risk,† then this status ought to translate into a significantly lower cost of money or interest rate. To my understanding, a coupon rate would be like the hotel â€Å"rack rate† which would be much higher than what an A-rated client like Pioneer would be accommodated with. Let us assume a prime interest rate of 9%. Allow me to note that this assumption is just for the case exercise, but such information ought to be readily be available in the real world. The cost of debt is therefore: Cost of debt: Kd = Interest Rate * (1-Tax Rate) = 9% (1 – 34%) = 5.94%. Due to the 50-50 debt to equity capital structure, the actual cost of debt is 2.65%. The WACC is summarized as follows: The new WACC is 10.12%, as against the 9% estimated by Pioneer management. This means that companywide, projects that show a rate of return lower than 10.12% will not be approved. This is somewhat double edged, because it might mean that some projects which are less viable, but viable nevertheless, will be unduly rejected. It is suggested that rather than rejecting let there be a cap set on investments, and more flexibility be given on rates of return – sometimes this may be subject to abuse and manipulation. There are other countless foretelling signs of project success of failure than just numbers. As shown in this case, the hurdle rate WACC may vary, depending on the assumptions; for instance, if the debt to equity proportion changes, then the 50:50 â€Å"policy† might be irrelevant. Conclusions and Recommendations: FLEXIBILITY CUTOFF Rate Stop Loss Limits Forecasting Understand Risks, but also Opportunities Best-selling author of â€Å"Rich Dad, Poor Dad,† Robert Kiyosaki wrote, â€Å"Risk is a function of Ignorance.† It is always risky if it is not clear or understood. Unless objectively determined based on facts, a single, companywide rate of return used for expediency’s sake, is just as risky as a multiple-cut divisional cost of capital rate, that supposedly considers local risks of specific divisions or operating sectors. Conclusion and Recommendation Capital Structure2 is the mix (or proportion) of a firm’s permanent long-term financing represented by debt, preferred stock, and common stock equity, greatly affected by specific costs of capital or assigned hurdle rates, say in assessing weighted average costs of capital. CORE ISSUE – Hurdle rates2 are measures of the cost of capital, combined debt and equity, which a company targets for its projects to achieve in the planning period. The hurdle rate’s significance cannot be over-emphasized. If it is set too highly, it may spell tremendous losses in opportunities, or rejection of perfectly viable projects. This can also cause demoralization on the part of division personnel, who are rated based on such high hurdle rates. This means it is more difficulty to achieve, and thereby affecting managers and employees’ performance appraisals, bonuses and incentives. On the other hand, if we set hurdle rates too low [ in the game of golf, we might call this practice â€Å"sand-bagging,† or reporting a higher, more forgiving handicap to increase chances of achieving it ], this would be a major disservice to investors who expect maximum returns on their investments. They expect integrity in leadership, fair stewardship and good governance on the part of the board and senior management whom they have elected to run company affairs in their behalf. One limitation of classical estimates on Hurdle rates or Costs of Capital is that (1) investment and asset management decisions are held constant and (2) they consider only debt-versus-equity financing, which are not necessarily the only sources of financing. Recommendation: HYBRID SINGLE-MULTIPLE HURDLE RATE The solution must address specific legitimate needs of the different players, specifically the Stockholders, the Division heads, and top Management. Stockholders require better total returns on equity, and proponents of the Single rate assume that â€Å"the only way to achieve better overall returns on equity is to set company wide hurdle rates or weighted average costs of capital. They actually are not as concerned as division heads are, that some divisions are subsidizing others. This is not a sustainable practice. Pretty soon the winners who subsidize the losers will not find enough incentive to perform, and eventually leave. Division heads will be split into to. Winners, or Performers, and Losers, or non-performers. Top management must listen to winners and ought to reward them, outrageously, if they are to keep performing for the long term. This means that for winner industries, the practice of attaining a â€Å"hurdle rate† which in players’ perception is â€Å"too low†Ã¢â‚¬ ¦ becomes a disincentive over time. On the other hand, in â€Å"non-performing† divisions, good players that find the â€Å"hurdle rates† too high, are totally disillusioned and demoralized when standards are lowered to accommodate them. On a wider scope, Pioneer Petroleum needs to find a fair way to â€Å"allocate central costs in accordance with responsibilities† and to determine â€Å"strategic and financial measures† – including, but not limited to the Cost of Capital – between the central or corporate headquarters and its divisions and subsidiaries. This leads to less inter-departmental and inter-company conflicts, and more cooperation and synergy, which are necessary to for any breakthroughs to happen, i.e. in the direction of better project execution, better decisions and a more positive working environment. The recommended solution may be described as follows. 1) The policy we recommend is simply: Company Wide WACC = Sum of Divisional WACCs = Sum of [ Local Costs of Debt plus Local Costs of Equity] 2) The 50:50 capital structure does not seem like a well founded â€Å"policy† and must be revisited. The objective must also include maximization of risks and returns, and not to literally â€Å"balance† debt to equity capital structure. 3) An evaluation and rating system must be set up to allow managers to think global, but to act local. This means we do a Hybrid system of Corporate-and-Divisional hurdle rates, maximizing the benefits of both, and ascribing responsibility for the rate, where it is rightfully assigned. For example, the division management is responsible for maximizing its return rate, given the resources it is allowed access to, and given the authority and responsibility in its portfolio. Division managers are not responsible for a â€Å"company-wide rate† just as much as it does not have any control over other companies, or over corporate financial, operating or marketing strategy. 4) The total company-wide Rates of Returns (e.g. 10-15%) on Inv estments or capital expenditure, are the responsibility of top management, and to achieve this, there are other ways, besides imposing this global rate on every single operating division or subsidiary. 5) A fair system of multiple hurdle rates ought to reflected the specific risk-profit idiosyncrasies of its business divisions and operating sectors in which the company’s subsidiaries operated. 6) Using multiple hurdle rates will actually combine the strengths of performers in both â€Å"winner† and â€Å"loser† industry divisions. Fact is, the latter are not actually â€Å"losers†; just lower yields but still positive yields, which might be descriptive of industry performance. The key hurdle rates to accommodate this, might therefore be industry-specific MARRs or WACCs. As mentioned, the rate or rating system must consider specific, inherent risks of divisions and operating sectors – and at the same time – consider benefits ascribed to the single-rate Weighted Average Cost of Capital approach. 7) Aside from just calculating a â€Å"fair† rate, as financial advisors, we must equip Pioneer Petroleum top management with a better designed, more objective and more rational (less emotional) rating system; to help them rationally choose the corporate-and-divisional hurdle rates for evaluation of new projects in a fully integrated conglomerate of multiple divisions; determine whether they should use the SINGLE company wide Weighted Average Cost of Capital, which reflect the rates at their face value to the company, OR proposed MULTIPLE Divisional Cost of Capital, which reflects risk-profit characteristics inherent in various divisions and operating sectors. 8) The above rating system will help the management and board of directors of Pioneer Petroleum decide – every year – on the fair and objective Hurdle Rate/s that will fairly qualify new investment projects of Pioneer Petroleum divisions. a. It considers specific, inherent risks of divisions and operating sectors b. It addresses the interest of stockholders to maximize return on their equity or investments, which is ultimately the responsibility of TOP corporate management. c. It still uses the familiar Weighted Average Cost of Capital approach in calculating both single-company wide HURDLE rate, and divisional YIELD and HURDLE rates. d. Finally the solution MAXIMIZES OPPORTUNITY available in that it does not unnecessarily reject â€Å"the best available net positive cashflow projects at that time† which contribute to increasing company wide yields, but do not necessarily match the company wide yield. I believe this solution is easy to execute. It clarifies what rates to use as hurdle rates to truly evaluate . The solution must be win-win and acceptable proponents of both single and multiple rates References: 1â€Å"Pioneer Petroleum Corporation,† Case on Divisional Cost of Capital. Copyright  © 1991 by the President and Fellows of Harvard College. Harvard Business School Case 292-011. 2â€Å"Capital Structure.† Chapter 17, Fundamentals of Financial Management, 12/e  © Pearson Education Limited 2004; Slides by: Gregory A. Kuhlemeyer, Ph.D., Carroll College, Waukesha, WI 3â€Å"Investors need a good WACC.† Bill McLure, Investopedia Contributor, www.investopedia.com, http://www.investopedia.com/articles/fundamental/03/061103.asp 4â€Å"Definition of Weighted Average Cost of Capital.† Bill McLure, Investopedia Contributor, http://www.investopedia.com/terms/w/wacc.asp 5â€Å"Which is a better measure for capital budgeting, IRR or NPV?† Rob Renaud, Spotting Profitability with ROCE. http://www.investopedia.com/ask/ViewFAQPrintable.aspx?url=%2fask%2fanswers%2f05%2firrvsnpvcapitalbudgeting.asp ‘Accounts Receivable and Inventory Management’ Chapter 10, Fundamentals of Financial Management, 12/e,  © Pearson Education Limited 2004, Slides Created by: Gregory A. Kuhlemeyer, Ph.D. Carroll College, Waukesha, WI ‘Debt and Stocks,’ Chapter 20, Fundamentals of Financial Management, 12/e,  © Pearson Education Limited 2004, Finance Decisions and Investments,  © 2012 Lecture Notes by Dean Atty Joe-Santos Bisquera, LLB, CPA, MBA, De La Salle University College of Business – Graduate School