Friday, 27 March 2020
Thursday, 26 March 2020
Approaches of Capital Structure
Approaches of Capital Structure
3. Traditional Approach
As
per traditional theory, the financial risk increases with the increase in
amount of debt. Therefore, Cost of equity will increase. As a result, the
overall cost of capital will rise with the increase in amount of debt.
As
per traditional approach, a firm should make a judicious use of both the debt
and the equity to achieve a capital structure which may be called an optimal
capital structure.
This
theory states that value of firm increases with the increase in financial
leverage but upto a certain limit only. Beyond this limit, increase in
financial leverage will increase its weighted average cost of capital and
decline the value of firm.
Assumptions
Capital
structure theories are based on certain assumption to analysis in a single and convenient
manner:
•
There are only two sources of funds used by a firm; debt and shares.
•
The firm pays 100% of its earning as dividend.
•
The total assets are given and do not change.
•
The total finance remains constant.
•
The operating profits (EBIT) are not expected to grow.
•
The business risk remains constant.
•
The firm has a perpetual life.
•
The investors behave rationally
ABC
Ltd., needs Rs. 30,00,000 for the installation of a new factory. The new factory
expects to yield annual earnings before interest and tax (EBIT) of Rs.5,00,000.
In choosing a financial plan, ABC Ltd., has an objective of maximizing earnings
per share (EPS). The company proposes to issuing ordinary shares and raising
debit of Rs. 3,00,000 and Rs. 10,00,000 of Rs. 15,00,000. The current market
price per share is Rs. 250 and is expected to drop to Rs. 200 if the funds are
borrowed in excess of Rs. 12,00,000. Funds can be raised at the following
rates.
–up
to Rs. 3,00,000 at 8%
–over
Rs. 3,00,000 to Rs. 15,000,00 at 10%
–over
Rs. 15,00,000 at 15%
Assuming
a tax rate of 50% advise the company.
Ans.
The
secure alternative which gives the highest earnings per share is the best.
Therefore the company is advised to revise Rs. 10,00,000 through debt amount
Rs. 20,00,000 through ordinary shares.
4. Modigliani- Millar Approach
Modigliani
and Miller approach states that the financing decision of a firm does not
affect the market value of a firm in a perfect capital market. In other words
MM approach maintains that the average cost of capital does not change with
change in the debt weighted equity mix or capital structures of the firm.
Modigliani
and Miller approach is based on the following important assumptions:
•
There is a perfect capital market.
•
There are no retained earnings.
•
There are no corporate taxes.
•
The investors act rationally.
•
The dividend payout ratio is 100%.
•
The business consists of the same level of business risk.
Value
of the firm can be calculated with the help of the following formula:
EBIT (1-t)
ko
Where
EBIT
= Earnings before interest and tax
K
o = Overall cost of capital
t
= Tax rate
Ques: There are two firms ‘A’ and ‘B’ which are exactly identical
except that A does not use any debt in its financing, while B has Rs. 2,50,000
, 6% Debentures in its financing. Both the firms have earnings before interest
and tax of Rs. 75,000 and the equity capitalization rate is 10%. Assuming the
corporation tax is 50%, calculate the value of the firm.
Solution
The
market value of firm A which does not use any debt.
Vu = EBIT
ko
=
75,000
10/100
=75,000×100/10
=
Rs. 7,50,000
The
market value of firm B which uses debt financing of Rs. 2,50,000
Vt
= Vu + t
Vu
= 7,50,000, t = 50% of Rs. 2,50,000
=
7,50,000 + 1,25,000
=
Rs. 8,75,000
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Strategic Human Resource Management MS-228 Unit-3 Notes
Strategic Human Resource Management
Institutional Contexts IHRM trends
Complexity Challenges and Choices in Future
An
organizations structure is the spine that allows it to stand still, the HR
activities of the organization and all other activities will depend on the
support it gets from the structure. Thus HR has a greater responsibility in
designing the structure, the structure should be strong enough not only to
stand still against the internal environment but also against the external
environment as well. That is why in IHRM we look at aspects such as national
cultures, work practices, ethics, norms, behaviors etc. So that HR managers can
design a structure that is suitable for the external environment.
There
were always something new to learn in etiquettes, because every culture has
their own unique way of conducting business.
The
important thing that we want to understand that no matter how qualified and
well equipped a manager maybe he can mess the whole thing up by just doing something
that is not excepted in that culture. That is how important etiquettes are. By
doing things according to the host’s culture you show that you respect them and
their culture.
Handling
these etiquettes should be one of the factors discussed in the expatriate
training programs. As it will help the future expats to handle business
smoothly, since then they know what they should do and what they shouldn’t.
The
interesting part is that you can damage a relationship by doing something, or
by not doing as well.
1. Globalisation
Global
competition is the new norm, with employers and employees seeing themselves as
global players in product and HR markets. The Australian Financial Review
competes every day online with the UK’s Financial Times, all because consumers
are flexing their purchasing muscle. Similarly, Apple and Google are recruiting
Aussie talent with the promise of an engaging career in California.
2. Demographic changes
Demographic
shifts are constantly changing workforce patterns. The most prominent aspect is
the ageing population, which raises two concerns: the potential loss of
organisational memory and intellectual property when ageing workers retire; and
the subsequent demand for post-retirement incomes/pensions, and public health
and welfare services. The other demographic pattern of concern is the emergence
of a new younger ‘lost generation’ – those neither in education nor employment,
and for whom prospects appear quite dismal.
3. Technological changes on the
employment market
The
structure of the workforce is changing too. The power of IT is causing a
permanent loss of jobs in the middle tier and at first-job entry level. Also
experiencing hardship are those with narrow industry-specific skills that are
becoming outmoded, such as automotive workers, and the future re-education
burden will be heavy.
4. Technological changes on how
work is undertaken
Technological
innovations provide both threats and opportunities. Fewer people need to work
in a central office location, and are instead able to do their jobs remotely.
On the other hand, these trends are increasing workplace diversity through the
growth of a multigenerational, flexibly skilled, cross-cultural workforce,
which is requiring more sophisticated people management practices.
5. Education
While
education responses are common solutions to demographic challenges, the
traditional educational sector is becoming a workplace challenge in itself.
Business practitioners are finding the divide between acquired formal
professional qualifications and workplace learning needs is getting wider.
Plus, the quality of tertiary and technical qualifications varies enormously across
institutional providers.
6. Smart work
Smart
work in the services sector is now dominating employment growth patterns. The
momentum of this is being met by relative reductions for labour required in the
agriculture and manufacturing sectors, and the social and political resistance
to this is finally crumbling.
7. Income distribution
Not
all our global changes are simple net positives. Many connote serious tensions.
Society’s standards for greater equity are intensifying demands for better
income distribution and benefit sharing between wages and profits, and to even
out regional growth disparities within Australia and internationally.
Cultural Foundation of
IHRM-Understanding Culture
Due
to rapid globalization companies now have to conduct their business overseas.
This requires proper management of the home country, host country and third
country employees. According to Ann Rennie and Rita McGee, (2012),
‘International HR management refers to an extension of HR that relates to
having people working overseas. These can be either expatriate staff, those who
are recruited from or work within their own home countries (locally recruited
staff), or even third-country nationals (individuals from neither the ‘parent’
nor ‘home’ country, but rather third country.’
‘Human
resource managers are well positioned to play an instrumental role in helping
their organization achieve its goals of becoming a socially and environmentally
responsible firm – one which reduces its negative and enhances its positive
impacts on society and the environment’. The human resource managers perform a
wide variety of functions.
Hofstede’s Dimensions of Culture
Hofstede
described five dimensions of culture which are as follows, Individualism or
collectivism: It describes the level of relationship between an individual and
other individuals in the society.Power Distance: The extent to which the
culture allows the misuse of power.Uncertainty Avoidence: The way in which any
specific culture handles the unpredictability of the future.
Masculinity/Femininity: The importance that a culture gives to different values
and practices that are related to the male and female gender.Long-term/Short-term
Orientation: It describes that whether the cultural values focus on the past or
present or the future.
Impact of Culture on Human Resource
Policies and Practices.
There
is a clear link between the cultural variables and the HRM policies of the
organization. Mostly culture has an impact on the structure of the
organization. It also has an impact on the recruitment style, the manner in
which the employees are paid and the pattern of compensations and benefits. For
example, an organization may opt for performance based pay if it is operating
in a country which is ranked high on individualism.
Impact on Recruitment and Training: The workforce recruitment for overseas assignments
is quite different from that of domestic assignments. As the employees have to
work in an entirely different culture so due to this cultural difference, the
third country or home country employees are selected on the basis of their
experience of working internationally, their ability to speak various
languages, the extent to which they can handle stress, their experience with
different cultures and their personality (extroverted people are the preferred
ones). The ideal candidates is the one who has got managerial competence and is
willing to get trained about the culture and the language of the country in
which the organization is operating and is adaptable that is he can adjust in
the culture of the host country.
Impact on Training: Employees are generally trained about cultural
components when the business is conducted globally. The purpose of the training
is to help employees accommodate in the new culture while they are overseas on
assignments. They are not trained regarding new technologies instead the major
components of training are language, culture, goal setting and managing family
and stress. Cultural training is very important for the success if various
assignments, although cultural issues are not discussed openly but if managers
are not aware of the cultural norms then they can fail badly. For example, when
Revlon expanded its business in Brazil, the company launched a perfume with
Camellia flower scent. The managers obviously did not know that Camellia flower
was used in funerals in Brazil and the product failed badly.
Impact on Compensation and Rewards: When working in different cultures, organizations
may go for a standardized payment method. This means that no matter in which
country you are working you will be given the same salary. But this strategy
ignores the fact that the livelihood in one country can be expensive as
compared to the other country. Therefore, organizations usually pay their
employees through a banding system which is based on regions. This payment
strategy is known as alocalized payment strategy. Microsoft and kraftwoods use
this strategy.
Impact on Performance Evaluation: There is a great deal of confusion regarding who
should rate the home country employees. Cultural differences make the
evaluation process ineffective as the host country managers may rate the home
country employees harshly or they may rate them politely. For example, in
Indonesia employees and managers value harmony, so the managers may rate the
home country employees high in order to maintain harmony in the organization.
Impact on HR Priorities: Culture has an influential impact on human resource
priorities as the first priority shifts from employee retention to leadership
development. And in q global environment the managers are not highly concerned
about employee retention rather they are interested in developing leaders who
can survive in the new culture and can train their workforce to operate
effectively in the global environment.
Roles Played by an International HR
Manager
Due
to the increased internationalization, the human resource department and its
responsibilities have changed a lot. The human resource management is the most
important business aspect in today’s culturally diversifying and growing world.
Almost all the organizations are developing their HRM functions as major
structures that support the globalization and internationalization process.
(Sparrow, 2006) The HR managers have to play an important part in managing the
vastly multicultural environment of an organization (especially in case of
multinationals and organizations with international employees). On the whole
the functions of the HR managers can be categorized as follows:
Planning
the HR of an organization: It is the most important and critical function of
the HR managers. Planning the HR has many phases including the determination of
the number of HR required in various departments or business units, number of
HR that should be made redundant, desired professional and other competencies
of the new vacancies, possible transfers etc.
HR
managers can make the organization an efficient work place by planning the
human resources in the most suitable manner. When an HR manager conducts the
proper planning before hiring the employees at a new overseas branch of a
multinational organization, it would lead the organization to have the best
possible employees inducted and transferred from other locations. The manager
would be well aware of the job requirements and will end up having the most
suitable candidates, who are well taught in their areas to contribute towards
the progress. Further, the cultural issues that might arise will be highlighted
beforehand; therefore, precautionary measures and steps will be taken to avoid
major issues. This also includes designing and implementing the most efficient
global HR policies.
Recruitment and Selection: Recruiting and selecting the most suitable
candidate for any vacancy is also an important function of HR manager. As a
selection of the most appropriate candidate will lead the effective management
of the job and timely completion of the tasks. This will positively contribute
towards the success of the organization.
Since,
human resources contribute directly towards the success and failure of any
Organization, especially those working around the globe, the HR manager has to
take into consideration the local as well as international requirements and
available candidates throughout the globe.
Exercising
this function properly emphasizes on the selection of the suitable international
employees that meet the requirements of a job and lead the organizations
towards the achievement of their vision, as well as ensuring compliance with
the requirements of the host country. Recruitment and selection function of the
international HR managers also grants the organization acceptance in a new
culture and location by smartly recruiting the locals and gaining the trust of
the new society.
Employee Participation and
Motivation: In order to succeed
as a multinational and multicultural organization, the HRM function should take
steps to keep the employees motivated by creating and maintain a culture of
mutual respect and understanding between all the employees. Cross cultural
issues, religious and social diversifications, society issues etc shall be
eradicated from root and an environment of open mindedness and general
acceptance shall be created to ensure full participation of all the employees.
HR managers play a crucial role here by designing policies, conducting surveys
/ trainings etc to help employee gel with each other. Making teams and groups
to carry out certain tasks and organizing events (such as dinners, picnics,
etc.) also help in achieving the state of maximum employee motivation and
participation.
Performance Management and
Appraisals: In order to ensure the
continuous development of the employees and to check out that the cross
cultural and other differences are not interfering with the success and growth
of the organization, the HR managers play a grand role in developing and implementing
the performance measurement and appraisal policies. By conduction regular
appraisals the defects and issues can be highlighted and communicated at all
the levels, ensuring early resolution of all the problems and eradication of
potential problems amongst the employees or with any specific employee. Here
too the mangers of to use tact and intelligence to stay away from society
issues and pressures regarding local and international employees respectively.
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Wednesday, 25 March 2020
Capital Budgeting Practical Questions
Here you can practice the questions of Capital Budgeting.
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Strategic Human Resource Management MS-228 Unit-3 Notes
Socio Cultural Contexts of IHRM
![]()
There can be three types of employees in an international firm. Employees from where the firm is headquarted is known as Parent Country Nationals, employees from where the subsidiary is located are known as Host Country Nationals, other country nationals are known as Third Country Nationals.
The IHRM is focuses more on how to select, recruit and retain managers for international operations, rather than focusing on how to manage international employees.
Now, we moved along, “expatriates”. An expatriate is an employee who is working and temporary residing in a foreign country. The fundamental difference between domestic HR and IHRM is that staff are moved across national boundaries, thus expatriates e are born. Hence it is natural in an IHRM subject to focus more on handling these expatriates.
Cross-cultural communication
Similarly, among various countries cross-cultural communication is very necessary so that they can understand each other’s through religion ,culture, art , literature, foreign policies ,fiscal polices ,etc. such type of bridges of understanding will help to lessen and minimize the gap between two culture.
Cultural Differences
That culture played a major role in IHRM as it involves understanding and handling a new culture and a new social system. what aspects should an international HR manager should focus on and how he should respond to cultural differences in an international arena. But the topic had lot more to offer than what I initially anticipated.
Individualism vs collectivisms
In a individualistic country people would priorities them self ( USA) where as collectivism country people would priorities group needs.
Uncertainty avoidance
People would try to minimize risk they face in a situation ( avoiding paralysis through analysis ) usually countries with long history and traditions have a high uncertainty avoidance. Countries such as USA well come higher risks.
Masculinity / femininity
Masculine- tough value dominant Eg; success, money, satiates, competition
Feminine- tender values dominant such as personal relationships, care for other’s, quality of life etc. When we take Sri Lanka for a example I think we have feminine culture even though have many masculinity futures. The best example for this is during the tsunami situation whole county get together to help the tsunami victims within ours.
This is an excellent model where you can get a quick idea about something complex as a national culture. we believe this simplicity itself is the major short coming of this model. Hofstede selected a country and gave marks to each dimension, thinking that the culture is static. But we all know that in today’s context culture is anything but static, it changes at a rapid pace, thus a country which was once collectivist could now be individualistic due to many reasons such as economic pressure, government policies etc.
But overall the model is excellent to get a glimpse of what an unknown culture would look like, but we do not believe that you can make sound business decisions based on this model.
Now we had understanding about how to analyze a national culture, and also the importance of culture to employees and international HR managers. It was evident that this should be the starting point of any international HR plan. Decisions should be taken where culture is kept at the center, as the success of implementation will depend on how well international employees accept your plans.
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