Professional Documents
Culture Documents
Table of Contents
2.
3.
4.
Learning Outcomes.........................................................................................................................4
4.1.
4.2.
4.3.
4.4.
5.
6.
Feedback ........................................................................................................................................6
7.
7.1.
7.2.
7.3.
8.
9.
10.
10.1.
Core Materials.................................................................................................................................8
10.2.
11.
Cases ............................................................................................................................................10
1.
Module Details
Module Title:
Module Level:
Module Reference Number:
Credit Value:
Student Study Hours:
Contact Hours:
Private Study Hours:
Pre-requisite Learning (If applicable):
Co-requisite Units (If applicable):
Course(s):
Year and Semester
Unit Coordinator:
MC Contact Details (Tel, Email, Room)
2. SHORT DESCRIPTION
International business managers must have an understanding of all major business functions. They
must be able to work in teams of people who come from different backgrounds, cultures and
specialisations and understand how their own aims and priorities relate to larger corporate aims;
balancing marketing, financial and other objectives. This means that managers must speak the
language of finance, at least to the extent that they can use financial information to inform their own
decisions and to assess its relevance in different circumstances.
This unit seeks to provide a solid grounding in the disciplines of International Pricing and Finance. It
aims to build a flexible framework of reference points and analytical tools to enable marketing
managers to work with other functional specialists. It also seeks to provide the basis for
understanding effective cross-border marketing management through an extensive use of
international examples, cases and business situations.
Students taking the unit begin by developing basic numeracy skills for financial analysis. They work
through a variety of exercises designed to make familiar the terminologies, measures and
calculations of financial reporting, progressing to pricing calculations that extend this knowledge from
the domestic to the international arena.
3.
4.
a)
b)
c)
d)
LEARNING OUTCOMES
4.1.
Numeracy In this unit, students will use many forms of numerical analysis, including basic
statistics, financial ratios, cost/profit analysis and spreadsheets to expand and deepen their
understanding or academic theories, frameworks and concepts. (A1)
Students will develop a basic understanding of contemporary (and sometimes controversial)
theories at the forefront of academic re(search. This will be driven by reference to established
knowledge in marketing, or empirical generalizations. (A2)
Through casework and article discussions, students will also deepen their understanding of the
analytical techniques used for decision-making in international marketing (A4) and the ethical
dilemmas that are likely to be faced in implementing international strategies (A6)
4.2.
Intellectual Skills
Rational problem solving using quantitative tools This will be developed by means of case
study analysis, quantitative exercises and live company pricing analysis. (B1, B2) There will
also be analysis of company financial reports. (B3)
One key element of the unit is the student-lead group company project in which a team of
students will select a particular company, industry or issue that allows them to demonstrate the
financial implications of particular international marketing decisions (B4). In doing this project,
students will be expected to gather and evaluate advanced scholarship and research to argue
alternative approaches (B5)
4.3.
Practical Skills
Be able to:
4.4.
Transferable Skills
Report writing Students will prepare a variety of assignments in report format, beginning with
one-page memos and progressing to managerial reports based on case study analyses (D1)
Teamwork and interactive group skills Students can interact with and within groups to define
roles, negotiate problem solutions, devise recommendations and organise presentations. Group
work will primarily be seminar projects based on case studies. (D2, D3, D4)
IT skills Live case studies require students to gather current information from a many sources
and to manipulate data with a variety of tools and techniques. (D5)
Feedback through the seminars is meant to provide students with an indication of whether they
are mastering course concepts. There will be a concerted effort to provide substantive comment
and guidance on all seminar work, but especially the presentation and written paper.
The weighting and due dates of assessed course components is:
Week Due
Assignment
Word Limit
Weighting
Case # 1
250
10%
Case # 2
250
10
Case # 3
400
15
10
25
11
12
10
12
13
30
2,000-4,000
Assignments are due on before the days listed. This is important because cases will be
discussed in class in the week following submission.
6. FEEDBACK
Feedback will normally be given to students 7-15 working days after the submission of an
assignment, although some feedback will be immediate, in class. Feedback will take a variety of
forms; for example, in the week following case submissions there will be group feedback on the
case during seminar. There will also be individual feedback on all cases.
Other feedback will be given by students to each group after presentation of group company
reports (the feedback form is attached at the end of the unit guide). These student forms will
then be given to the presenting groups to use to refine their written reports. Verbal feedback will
also be given after group project presentations by the instructor(s).
Teaching and learning in this unit emphasises interaction, learning-by-doing and practicality.
Students undertake a variety of projects, case studies and practical exercises.
In presenting, students are expected to take the approach of not just demonstrating their
understanding of an issue, but of helping their colleagues to understand as well. Likewise,
discussions are intended to foster group-wide learning
7.4
Employability
Employability skills are embedded and developed within the teaching & learning of this unit.
These include numeracy, team working, time management and communication skills. In
particular, the project will develop specific skills to enhance employment potential for positions in
marketing.
Lecture Activities
Seminar Activities
Getting Organized
Team formation
Hand in Case Study 0
Hand in Case 2
Reading Week
10
11
Presentations
2 Groups each seminar
12
Presentations
Group Case write-ups
13
9. STUDENT EVALUATION
Module content and learning and teaching activities are continually updated based on
tutors and students experiences and reflection. Student evaluation of the module has
been consistently good: Students find it engaging (if demanding at times) and provides
a good, disciplined approach to university learning.
10.
LEARNING RESOURCES
10.1.
Core Materials
Emmanuel & Mehafdi, Transfer Pricing, 1994, Academic Press (Harcourt Brace, London).
Hammond, K & Ehrenberg, 2001 The case against price related promotions, Admap p30-32
th
Kotabe, M. & Helsen, K., Global Marketing Management, 2011, 5 International ed, (Wiley)
th
Nagle, Hogan & Zale 2011, The Strategy and Tactics of Pricing, 5 International Ed, Pearson
Scriven, J, 1999, The South Bank Pricing Tests, Research Report for The Ehrenberg Centre for
Research in Marketing
Background Reading
Sharp, B., Marketing: Theory, Evidence and Practice, 2012, Oxford University Press
Porter, E, The Price of Everything, 2011, Heineman, London
Hooley & Hussey, 1994, Quantitative Methods in Marketing, Academic Press
th
Kotler & Keller, Marketing Management, International, 2006, Prentice Hall, 12 Edition,
10.2.
Financial Times
The Wall Street Journal
Marketing Week
The Economist
Chartered Institute of Marketing: http://www.cim.co.uk/
A.C.Nielsen Corporation: http://www.nielsen.com/uk/en.html
Institute for Brand Leadership: http://www.instituteforbrandleadership.org
Marketing Week; www.marketing-week.co.uk
Marketing Power: www.marketingpower.com
Consumer Reports Magazine: Independent product and service evaluations and comparisons
Consumers International Organization: Consumer advocacy worldwide, research & reports
UK Office of Fair Trading: Consumer advocacy & shopper's rights
Que choisir? Magazine: Product and service evaluations and comparisons, consumer advocacy,
Union Fdrale des Consommateurs (in French)
Stiftung Warentest Magazine: Product and service evaluations, consumer advocacy (German)
Which? Magazine: Product and service evaluations and comparisons, consumer association
National Bureau of Economic Research: 'The law of one price' NBER paper, Haskel & Wolf.
National Bureau of Economic Research: 'Market Integration and Convergence to the Law of
International Pricing and Performance, 2014-15
Carnegie Mellon University, USA: 'The law of one price, consumer search and retail pricing'
University of Connecticut, USA: 'Convergence to the law of one price', by Parsley and Wei.
Harvard University: 'The Law of One Price over 700 years', by Froot, Kim, and Rogoff (PDF)
Bargaining
University of California at Berkeley: 'Competition, Bargaining, Information, and Price
Discrimination in Cambodia's Psah (Markets)', by Sophal Earl
Business Toolkit: Bargaining contract prices with employees and middlemen.
Industrial Negotiations Centre: Contextual Negotiations (PDF file)
Price and consumer evaluations
Price Scan: Price comparisons and product evaluations
Comparis Switzerland: Swiss price comparison site (in English, Dutch, French and Italian)
Consumer Reports Magazine: Independent product and service evaluations and comparisons
Stiftung Warentest Magazine: The leading German consumer association (in German)
Que choisir? Magazine: Union Fdrale des Consommateurs (French).
Consumers Union: Australian nonprofit publisher of consumer reports
Consumer Coalition for Quality Healthcare: American consumer group concerned with improving
the quality of US healthcare
International price tactics
World Trade Organization: WTO Antidumping gateway.
The Economist: 'When Grey is Good', EU and grey imports.
The Register: Examples of parallel imports
Charles Sturt University: 'Theory and practice of parallel imports', by Hazbo Skoko (PDF file)
Eur-Export: About price adaptation versus standardization.
European Court of Justice: Official website of the European Court of Justice
LLRX.com: A Guide to European Union Law
Market situations, competition and price agreement
US Federal Trade Commission: FTC Bureau of antitrust and competition.
US Federal Trade Commission: Promoting Competition, Protecting Consumers: A Plain English
Guide to Antitrust Laws
Asia Times: 'India: Pills for the world's ills' (India, AIDS, pharmaceuticals)
Kevin Hinde.com: Cartels and collusive behaviour (PDF file)
Japan Law: Japanese Foreign Exchange and Foreign trade Control Law (Roderick Seeman).
Cacex: The Brazilian authority for foreign trade and foreign exchange control (in Portuguese).
All Africa: Information about national contexts in African countries (may require registration)
International Monetary Fund: IMF world economic outlook and database
The World Factbook - CIA
https://www.cia.gov/library/publications/the-world-factbook
The observatory of Economic Complexity
http://atlas.media.mit.edu
globalEDGE International Business Resource Desk
globaledge.msu.edu/ibrd/ibrd.asp
Euromonitor International
www.euromonitor.com
Eurostat Home - European Commission
ec.europa.eu/Eurostat
Mintel: Global Market Research & Market Insight | Mintel.com
www.mintel.com
11.
Cases
Case 0.1
Goodman v Excelsior
Optional
The Goodman Company produces and distributes a product, which is differentiated from
competing products by a better design. The average market price is 50 and the total market
amounts to 1,000,000 units: Goodmans market share is 10%. The price elasticity for this
product category is in the range 1.7 to 2.0.
The operating data for Goodman are as follows:
Direct unit costs
Fixed costs
Expected rate of return
Invested capital
20
2,000,000
10%
10,000,000
The market research department has conducted a brand image study for Goodman and for its
priority competitor, the brand Excelsior, The attributes importance scores for the product
category are respectively:
.50 / .25 / .25; and the performance scores are:
10 / 6 / 9 for Goodman;
8 / 7 / 9 for Excelsior.
Calculate the target price, the value price and the optimum price. Which pricing strategy do
you recommend?
10
60%
23%
17%
11
3.0
350
3.5
275
4.0
200
4.5
100
The researcher also estimated the 280,000 annual fixed operating cost for the product and the capital
investment that depended upon the annual volumes produced.
Annual sales (tonnes)
Capital investment (000)
410
2,250
350
2,000
275
1,650
200
1,220
100
600
I assume you know that our average cost of capital is 12 per cent. Commented the finance officer.
All very impressive, said the brand manager, but what price should we charge? That all depends on
what you want to achieve. Replied the researcher.
1. Use the price and sales data provided by the marketing researcher to estimate price elasticities.
Show how you would use them elasticities in setting the Quitos price.
2. What prices give the highest sales value, sales volume, gross profit, gross margin, net profit, Return
on sales, ROCE, capital cost covered (C3), economic value added (EVA)? Choose a price at which
to market Quitos and explain why. How much room is there to manoeuvre around this price?
3. At a price of 3,500 per tonne, sales levels for advertising levels are shown below. What level of
advertising should the company should invest in? Explain the financial implications.
Advertising (000)
Sales (tonnes)
Capital investment (000)
25
180
1,100
50
210
1,250
100
280
1,650
200
360
2,050
400
420
2,300
4. Quitos can use a manufacturing process with a direct cost of 1500/tonne and fixed cost of 300,00,
or a new plant with direct cost of 2,500/tonne and a fixed cost of 50,000. Which is best? Why?
International Pricing and Performance, 2014-15
12
13
14
Case 3
Billing Boats AS
15
cooperative wholesale-retail operations in Norway. Like most cooperatives, this organization began
with agricultural products: however, the product range of the company now includes virtually every
conceivable consumer product. The present contract states that the cooperative will purchase eighty
Billing 16 boats per year for the next three years.
The Swedish market is served by a selling agent, although this representative has not been
particularly effective. Because Sweden is also the home of many sailboat builders, the company has
tried to market only the 35 in that country. In Denmark, France, Holland, Germany and the United
Kingdom, Billing has marketed the 33 through importers. These importers operate marinas in addition
to selling new sailboats. They purchase the boats from Billing for their own accounts and mark up the
price by 60 percent or more. In return for exclusive marketing rights in their respective countries, they
agree to purchase a minimum number (usually three or four) of the 33 design per year. None of these
importers is interested in marketing the 16 or the 35; the shipping cost for the 16 is too high compared
with the value of the boat, and there is little customer interest in the 35.
Billing is planning to introduce a new sailboat. Whereas the present products were designed by
people in the company who were relatively unknown (to the customers), the hull of the new sailboat
has been designed by an internationally known boat designer. The cost of these design services was
a $160,000 initial fee plus a $2,200 royalty fee to be paid for each boat produced. The new sailboat,
the Billing 29, has an interior quite similar to that of the Billing 33 because the same people designed
the interiors and decks of both sailboats.
The new boat is a motor sailer that sleeps six people in three separate compartments, is 28 feet 9
inches long, weighs 4 tons, and has a joined cabin space and a separate aft cabin, small galley, toilet
and shower facilities, and a 22 horsepower diesel engine. Because a new construction technique
greatly reduces the amount of fibreglass required, the variable costs to construct the boat are only 60
percent of the cost for the 33. With a preliminary
selling price of 195,000 Norwegian Kroner, the
Billing 29 is receiving favourable attention, and
the company is concerned that sales may have
an adverse effect on sales of the 33.
The company categorizes the marketing
expenses as fixed costs because allocating
these expenses to specific products is difficult. The major element of the program is participation in
international boat shows in London, Paris, Hamburg, Amsterdam, Copenhagen, and Oslo. The initial
purpose of participating in these shows was to locate suitable importers in the target markets;
however, this effort is maintained in order to support the marketing programs of the importers. The
importers are also supported by advertising in the leading yachting magazines in the national markets.
Billings selling effort consists mostly of servicing the importers and agents and staffing the exhibitions
at the boat shows. Most of the sales promotion costs are the result of the sales brochures that the
company has developed for each boat. The costs are increased however by having to print a relatively
small number of each brochure in Russian, Polish, French, English, German and Swedish. The
brochures are provided to the agents and importers and are used at the boat shows.
Enter the Dragon
At a recent boat show held at Earls Court Exhibition Centre in London, after a long series of
discussions, Billings company president received a proposal from the president of Sea Dragon Boats,
a Chinese company located in the formerly Portuguese colony of Macau. The company is like Billing
in that it sells several hundred traditional style sailing craft per year within China, and to the Chinese
communities around Asia. But although the company has made boats in the traditional manner for
over 200 years, it is beginning to shift its focus: from commercial coasting boats, to boats configured
as luxury yachts, and from wood construction to fiberglass and composites. For that reason it recently
built a modern fiberglass and composites production facility in Zhuhai Special Economic Zone (SEZ).
At Earls Court, Sea Dragon proposed entering into a 49-51 joint venture for Sea Dragon to
produce the B-29 for the Chinese market. Billing would need to transfer its design and production
expertise to Sea Dragon. In return, Sea Dragon would handle production and marketing across Asia
for the B-29. The advantages of the JV are that Macau has direct linkages with the Zhuhai SEZ, in
which taxes are not paid on goods that are exported, so export prices are generally competitively low.
Sea Dragon also said that its production costs in Zhuhai would be 25 percent lower than Billings own
International Pricing and Performance, 2014-15
16
Norwegian production cost, and suggested that this would make Chinese-produced boats profitable in
the European market, even after transportation costs to Europe.
Sea Dragon had previously hosted Billings executives at the Macau Yacht show which showed
Billings that there was rising demand for sailing yachts in Asia, that yachts were assuming a rather
global character and style, and that Chinese buyers were keen to obtain the latest in yacht designs.
Billings executives also felt the Chinese factory was suitable for production of the B-29, though the
production workers would need careful training.
Going forward
The company is in the process of preparing its production and marketing plan for the coming year
in order to arrange financing. The president is strongly committed to the continued growth of the
company, and the market indications suggest that there is a reasonably strong demand for the 16 in
Norway and for the 33 in most of the other national markets. The sales results of the previous and
present years are shown in Table 1: the profit statement for the present year is shown in Table 2.
Table 1
Billing AS Sales
Last Year
B-16
B-29
B-33
B-35
Present Year
No.
Ave
a
Price
Revenue
200
30
4
28,500
341,000
199,900
5,700,000
10,230,000
799,600
No.
240
36
5
Average
a
Price
Revenue
29,700
356,000
207,900
7,128,000
12,816,000
1,039,500
16,729,600
a
20,983,500
All prices are manufacturers prices: prices and revenues are in Norwegian Kroner: 1.00 NOK = U.S. $0.175
Table 2
In NOK
Sales Revenue
Variable costs (direct labor and materials)
Fixed costs:
Production (buildings, production management salaries, etc.)
Product design costs (salaries, prototypes, testing, consultants)
Administration costs (salaries, insurance, office expenses)
Marketing costs (salaries, advertising, boat shows, sales promotion,
travel, etc.)
Total Fixed costs
Profit before taxes
a
20,983.500
13,640.000
65.0%
945.000
1,345.000
650.000
4.5
6.4
3.1
2,300.000
11.0
5,240.000
2,103.500
25.0
10.0
All prices are manufacturers prices: prices and revenues are in Norwegian Kroner: 1.00 NOK = U.S. $0.185
The main problem in developing the plan for next year is determining the price for each sailboat in
each market. In previous years, Billing had established its prices in Norwegian Kroner, on an exfactory basis. Management has become convinced however that it must change the terms of its prices
in order to meet competition in the foreign markets. Thus, the company has decided to offer CIF
prices to its foreign customers in the currency of the foreign country. The use of truck ferries between
Norway and Sweden, Denmark, Poland, Russia and Germany is expected to make this pricing
approach more competitive.
17
Billing would also like to assure its agents and importers that the prices will remain in effect for
the entire year, but the financial manager is concerned about the possible volatility of exchange rates
because of the varying rates of inflation in the market countries. The present exchange rates,
expected inflation rates, and the estimated costs to ship the Billing 35 to Stockholm and the Billing 29
and 33 to the other foreign marinas are shown in Table 3.
Table 3 Shipping Costs for Billing 35 to Sweden and Billing 29 and 33 to Other Countries
Present Exchange
Rates in Norwegian
Kroner
Expected
Inflation
Rate
3%
Denmark
15,500 NOK
Russia
Rouble = 4.22
15
25,000 NOK
Poland
Zloty = 2.02
22
19,000 NOK
Sweden
12,500 NOK
United
24,500 NOK
Euro = 7.91
22,500 NOK
Kingdom
Germany
Norway
A second difficulty in pricing the product line for Billing is to establish a price for the 29 that will
reflect the value of the boat but will not reduce the sales of the 33. There are three schools of thought
concerning the pricing of motor sailers. The predominant theory is that price is a function of the overall
length of the sailboat. A number of people, however, believe that the overall weight of the craft is a
much more accurate basis. The third opinion argues that price is a function of the special features and
equipment. Table 4 was prepared by a Swiss market research firm and shows the relationship
between present retail prices and the length of new motor sailers in the West European market.
18
Table 4 Retail Price in the European Market of sailing yachts as a function of Length
Note: All boats to the right of the bold line are priced above $150,000.
19
To:
27/01/2015
Re:
This project is an opportunity to investigate a firms international marketing activities and the effects on
the companys financial situation. You may choose any firm, provided that you can get both marketing
and financial information about it. For that reason, it might be best to choose a publicly traded firm, and
one that is currently doing something newsworthy internationally.
Each group will review the organizations current position and likely future strategies, applying relevant
models/theories/analysis schemes as appropriate.
Methods
1.
Obtain a business or start-up guide. These typically lay out all the essentials of successful
business (at least in bankers views). This is for background information to see what bankers want
to know about a company, and what kind of issues they feel are important.
2.
Choose a firm--probably publicly traded so that company accounts can be obtained. It should also
be marketing-oriented. A particular product category or division within a firm may also be selected
so that the project is more manageable. (newsworthy events such as the introduction of a new
product/brand/technology to a foreign market make good starting points).
3.
Describe the firms industry: Structure, Competition, Factors required for success, Major industry
developments, etc. Groups should draw on readings, lectures and discussion and should use any
information relevant to their project. Quantify whatever possible.
4.
Outline the companys present marketing strategyand critique it. Quantify whatever possible.
5.
Discuss the activity under investigation (new market entry, new product, etc.) and the likely results
of that activity. Reflect further on how this will affect the companys overall situation. Quantify, etc.
6.
Clearly show how your work has resulted in new or better understanding of the financial implications of
marketing activity.
Assignment
Give a 20 minute presentation to the class in session 11 or 12
Provide a written report of 2000-4000 words (excluding appendices) detailing findings, conclusions and
implications, incorporating feedback, one week or less after presentation.
Evaluation Criteria
1. Effective communication (verbal and written) in response to the brief;
2. Accuracy, currency, and relevance of information;
3. Realistic and supportable conclusions (suitable to presentation to a company board);
4. Evidence of good team-work and organization, and contribution from all members;
5. Teach something to the class that they did not already know
20
Regular
price
10%
discount
Percentage
change
1.00
100
100.00
0.90
105
94.50
(10.0)
5.0
(5.5)
Regular
price
10%
discount
Percentage
change
Sales
Price ($)
Sales (units)
Sales ($)
1.00
100
100.00
0.90
105
94.50
(5.5)
0.50
100
50.00
0.50
105
52.50
5.0
50.00
42.00
(8.0)
Gross Profit
Net profit (NP)
Gross profit shows the contribution made to the company by each unit sold but neglects many
other trading expenses. These include fixed costs like rates, staff, and so forth, and strategic
expenditure like research and development. Interest paid on debts is sometimes not included
because this depends upon the capital structure of the company.
The fixed cost means that net profit is more volatile than gross profit. This sensitivity
encourages companies to convert some of their fixed costs into variable ones, for example,
hiring trucks rather than buying them:
Regular
price
Action
Sales ($)
10%
discount
Percentage
Change
100
94.5
(5.5)
50
52.5
(5.0)
50
42.0
(8.0)
40
40.0
0.0
Net profit
10
2.0
(80.0)
Action
Sales ($)
Net profit ($)
100
10
10.0
10%
discount
Percentage
change
94.5
2.0
(5.5)
(80.0)
2.1
ROS
ACTIVITY
NP
Sales
Sales
Assets
By turning over its assets four times each year a supermarket can achieve a 20% return on
capital employed although its return on sales is only 5%:
Supermarket ROCE
=
5
x 100 = 20 per cent
=
100
25
In contrast, an exclusive clothes shop has very high margins but turns its assets over slowly.
Clothes shop ROCE
=
=
40
100
100
300
These are powerful ratios that can define how a company can do business. Aldi, the German
discounter, succeeds with margins half those of many grocers. Its margins are very low (2-3%)
but it keeps its return on capital employed high by high stock turnover and keeping its other
International Pricing and Performance, 2014-15
22
assets low it has a small range of products, buys in great bulk and trades in less costly goods
than traditional grocers.
The main benefits from increasing asset turnover are: improved return on capital employed and
reduced fixed costs. The firm hiring trucks rather than buying them reduces its fixed costs and
therefore its sensitivity to volume changes. Also, by reducing its assets it increases its activity
ratio and return on capital employed. Increased assets turnover is one of the direct benefits of
Just in Time (JIT) stock management, lean manufacturing and re-engineering. JIT cuts down
the assets tied up in stock, and improves quality. Lean manufacturing reduces investment in
plant while re-engineering can reduce capital investments, costs and working capital.
Capital cost covered (C3)
Assets cost money and return on capital costs takes that into account. It is a powerful tool
because it combines three critical business ratios:
C3 = ROS x ACTIVITY x CAPITAL EFFICIENCY
C3
NP
Sales
Sales x
Assets
Assets
Cost of capital
The cost of capital is the weighted average cost of debt and shareholder equity. For a
supermarket the figures could be:
Debt
(after tax)
Equity
Debt/equity split
0.50
0.50
4.00
16.00
2.00
8.00
Weighted average
cost of capital (%)
10.00
At 4%, debt cost less than equity (16%), so by having both, the firm reduces the average
weighted capital cost to 10.00%. A firm can reduce its average cost of capital by taking out
more debt but the amount used is limited by the risks involved.
Debt is relatively cheap because it bears no risk; equity is relatively expensive because it bears
the whole risk of the business. If a firm tries to increase its lending too much, a bank, or other
lending body, will refuse to give more money or demand a higher interest rate.
For the supermarket an asset of $25m would cost $25m x 010 = $2.5m to finance. Therefore:
C3 =
5 x
100
100 x
25
25
2.5
NP
CC
= 2.0
In other words, the net profit is double the capital cost the company is healthy. This ratio is
more discriminating than the familiar distinction between profit and loss. If the capital cost
covered is below zero a firm is making a loss. A capital cost covered above zero indicates a
profit. However, capital cost covered between zero and one shows a firm is in profit but not
adding value its profit does not cover its cost of capital.
23
Profit, economic value added and capital cost covered, are related concepts: profit shows how
a companys trading is going, economic value added shows a companys wealth creation in
monetary terms, while capital cost covered gives the rate of wealth creation.
C3
EVA
NP
Economic state
>1
>0
>0
II
1>0
<0
>0
III
<0
<0
<0
Category
The supermarket is a clear category I company; this contrasts with the clothes store whose
capital is more expensive because the clothes market is cyclical and fashion-dependent:
Clothes store
Debt
Equity
Debt/equity split
0.25
0.75
5.0
20.0
1.25
15.1
Weighted average
cost of capital (%)
16.25
EVA ($m)
Supermarket
2.0
2.5
Clothes store
0.8
(9.5)
40
II
NP ($m)
Category
__________________________
Sources: Alan Wolfe, Price Wars, Marketing Business (November 1991); Shawn Tully. The real key to creating
wealth, Fortune (20 September 1993), 24-30. Raj Srivastava, Emory University, Liao & Feng, An all-around Analysis
of EVA: An Evaluating Indicator of Operating Performance, China-USA Business Review, 2005
24
Category
Below
40%
Assessment Mark
40-49%
50-59%
60-69%
70-79%
Above
79%
Content, of which:
Introduction
Main Body - information
Main Body - coverage
Main Body - analysis
Conclusions & Recommendations
Q & A Session
Presentation Skills, of which:
Graphics/Visual Aids
Delivery
Teamwork
Conviction
Timing
Overall Quality of Presentation
Overal Grade/Mark
25
26