INVESTMENT ANALYSIS (SECURITY MARKET)

INVESTMENT ANALYSIS

Topic: SECURITY MARKET 

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Companies raise long term funds in the forms of equity and debt from the capital markets.  Capital market facilitate the buying and selling of securities, such as shares and bonds or debentures.  They perform two valuable functions:  Liquidity and pricing securities.

Liquidity means the convenience and speed of transforming assets into cash, or transferring assets from one person to another without any loss of value.  Cash is the most liquid asset as it can be readily converted into any other asset, or transferred to another person without any decline in value.  Capital markets make the securities liquid.  They help to reduce, if not eliminate transaction costs. 

The demand and supply forces help in determining the prices of securities. Since all information is publicly available, and since no single investor is large enough to influence the security prices, the capital markets provide a measure of fair price of securities.

CAPITAL MARKET EFFICIENCY

The capital market efficiency may be defined as the ability of securities to reflect and incorporate all relevant information, almost instantaneously, in their prices.

Three levels or forms of capital market efficiency

i.                    Weak-Form of Market Efficiency

ii.                  Semi-Strong Form of Market Efficiency

iii.                Strong – Form of Market Efficiency

Weak form efficiency: this is concerned with the adjustment of securities prices to historical price or returning information.  If the market is weak form, no investor can earn any excess or abnormal return base on historical price or returning information.

Semi-Strong Form: Semi – strong form efficiency is concerned with whether security prices fully reflect or publicly available information.  Semi – Strong form efficiency requires the market to be weak form efficiency.

Strong Form Efficiency: Strong form Efficiency is concerned with whether the security prices fully reflect all the information available to public or not. 

TYPES OF MARKET EFFICIENCY

There are two types of market efficiency:

1.      Internal Efficiency Market

2.      External Efficient Market

Internal Efficient Market is one in which brokers and dealers compete fairly so that the cost of transacting is low and the speed of transacting is high.

External Efficient Market is one in which information is quickly and widely disseminated thereby allowing each security price to adjust rapidly in an unbiased manner to new information so that it reflects investment value.

PRODUCTION MANAGEMENT - COST PLUS

PRODUCTION MANAGEMENT

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Question:

Why do you think cost-plus and target rate of return pricing are so prominent in Nigerian business? Does the use of these policies negate the validity of economic models based on the assumptions of profit maximization or sales revenue maximization? Explain

Answer:

 One of the most important objectives of a firm is to set price in order to achieve a target rate of return on investment.  In order to accomplish this objective, the firm will try to establish a price such that on the average, the return to the capital employed in producing the particular product will equal the predetermined level.  Capital for this purpose includes net worth Plus long term debt.  One method of accomplishing the above objective is using the cost-plus pricing mechanism.

COST-PLUS PRICING:  Cost-Plus Pricing is one of the most common methods of pricing used in the business world today especially in Nigeria.  This approach seems very simple.  In this method, the firm needs only to determine the cost of producing a unit of output and then to price it at that cost plus some mark-up. With this method, the firm must decide what costs should be included, at what volume of output should those costs be determined and how large a mark-up is appropriate.    As stated above that cost-plus pricing is the most widely used method of price determination in Nigeria, this is owing to reasons as enumerated below:

First, cost-plus pricing leads to a relatively stable price. For example, in industries whose output is used by others as a material input, price stability may be very important.  In negotiating contracts, many corporate buyers prefer a stable price since this reduces the time and expense they must exert in trying to get the best buy.

Second, cost – plus pricing may make price increase more acceptable to consumers.  If the consumers can be convinced that an increase in price is simply a reflection of increased costs, they are less likely to develop feelings of ill-will towards the seller. 

Third, cost-plus pricing is very compatible with the objective of many firms to achieve a specified rate on investment. 

Finally, once the methods to be used in determining the relevant costs and the mark-up are established, this pricing strategy becomes fairly simple.  It is possible to combine cost-plus pricing with the economic model of profit maximization and thereby account for demand factors.  We know that, for profit maximization, marginal revenue should equal marginal cost. 

PRODUCTION MANAGEMENT (Definition and Scope of Production Management)

PRODUCTION MANAGEMENT

Topic: Definition and Scope of Production Management    

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Question:

Discuss the scope of production management and the relevance of production in the context of present – day Nigeria.

Answer:

Definition and Scope

Production is to the manufacturing enterprise – what the engine is to the automobile.  It keeps it in constant motion with the primary objective of delivering convenience and comfort to customers through its products.  Production management refers to those activities involving planning, organizing, directing, integrating, controlling and evaluating the entire process of manufacturing, goods or providing services at the right cost and in its right time, quantity, quality and place.

It is closely related to other functional areas of the manufacturing operation.  It is observed that production is closely connected with all other functional areas of manufacturing and must not be treated as an independent or isolated activity.

The importance of production cannot be overemphasized in the context of continuity and availability of essential goods and services been made available to the consumers (The Nigerian Populace)  and empowering the average Nigerian entrepreneur .

To achieve success in the global market place, a firm must have an appreciation of the part production plays, how it fits into corporate  organization and the unique capabilities it brings to supporting and influencing the corporate overall strategic goals.

In the competitive environment that exists today, no business can afford not to use its resources.  If the production function is not allowed to contribute or put more strongly, not expected to contribute to the development of the goals of the company, there is not much hope for long term success.

This shows the importance of production in Nigeria in today’s context added to the employment generation to its teeming pollution, income generation etc.. Production could be said has helped establish the fulcrum upon which growth, progress and development of the Nigerian economy has been sustained.  

PRODUCTION MANAGEMENT (Past Q & A)

PRODUCTION MANAGEMENT

Topic: Past Questions and Answers   

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Question:

Explain the reasoning that underlines each of the following:

a.      Odd number pricing

b.      Pricing below the market price

c.       Pricing lining

SOLUTION:

ODD NUMBER PRICING: Most of the products we buy at the retail level are priced at odd values. For example, N5.98 rather than N6.00, N6.89 rather than N7.00 and so on.  It is no accident that these odd value prices are used rather than their even valued price.  This strategy is based on an assumed psychological force which causes consumers to perceive a slightly lower odd number price as significantly less than its even number counterpart.

PRICING BELOW AN ESTABLISHED MARKET PRICE: It is sometimes preferable for a firm to set price below the current market price for its product group.  Two particular cases of this type are most important. Consider first, the case in which a firm wants to expand its product mix to utilize excess capacity and in which the new product must compete with established brands already on the market. 

Setting the price on its new entry somewhere below the prevailing price of competitors will provide a wedge to help it become established in the market. The rationale for setting price below the market price is clear.  With an elastic demand, a lower price will result in greater total revenue.  This method of pricing is often referred to as “Penetration Pricing” because it provides a mechanism whereby a new product can penetrate an existing market.

 
Penetration Pricing may also bring consumers into the market that may even surprise the firms involved.  If a new product is innovative in some respects, a penetration pricing policy may be helpful in getting innovator and early adopter groups to try the product.  Once the product has gained acceptance in the market place, the firm may try to reduce or eliminate the price differential.

Once more, this can be related to the concept of price elasticity.  This acceptance of the product by consumers implies a growing inelasticity of demand.  The case of setting price below the current market price assumes that the product is essentially the same quality as those already on the market and is sold with the same type of service and warranty and is available through comparable channels. 

PRICE LINING:  This pricing strategy is particularly common in furniture, appliance and department stores.  A particular class of product will be offered in more than one line based on quality or design characteristics.

In all likelihood, at least, three lines will be offered to the prospective consumer, like the: 

Ø  Basic model

Ø  Basic model with added quality and design features

Ø  A top line model with all features 

Price lining has been quite widely used in a variety of situations.  A single manufacturer may produce their product in different lines to appeal to various income groups.