WYSE Application NOV 2014

Below are some of the stakeholders you need to consider their interest in taking any business decision.
1 The Investors (debt or equity investors)
2 The Management of your Business
3 Your Employee
4 The Regulatory Authority in your environment
5 Your Suppliers
6 Your Customers
7 Your Banks

Price-Earnings Ratio - P/E Ratio

A valuation ratio of a company's current share price compared to its per-share earnings.
Calculated as:
Market Value per Share / Earnings per Share (EPS)
For example, if a company is currently trading at #43 a share and earnings over the last 12 months were #1.95 per share, the P/E ratio for the stock would be 22.05 ( #43/ #1.95).

EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken from the estimates of earnings expected in the next four quarters (projected or forward P/E). A third variation uses the sum of the last two actual quarters and the estimates of the next two quarters.
Also sometimes known as "price multiple" or "earnings multiple."
In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects.
The P/E is sometimes referred to as the "multiple", because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay #20 for #1 of current earnings.
It is important that investors note an important problem that arises with the P/E measure, and to avoid basing a decision on this measure alone. The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms of manipulation, making the quality of the P/E only as good as the quality of the underlying earnings number.
Things to Remember
• Generally a high P/E ratio means that investors are anticipating higher growth in the future.
• The average market P/E ratio is 20-25 times earnings.
• The P/E ratio can use estimated earnings to get the forward looking P/E ratio.
• Companies that are losing money do not have a P/E ratio.

SWOT Analysis:

A SWOT analysis (alternatively SWOT matrix) is a structured planning method used to evaluate the strengths, weaknesses, opportunities and threats involved in a project or in a business venture. A SWOT analysis can be carried out for a product, place, industry or person. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieve that objective. Some authors credit SWOT to Albert Humphrey, who led a convention at the Stanford Research Institute (now SRI International) in the 1960s and 1970s using data from Fortune 500 companies. However, Humphrey himself does not claim the creation of SWOT, and the origins remain obscure. The degree to which the internal environment of the firm matches with the external environment is expressed by the concept of strategic fit.
• Strengths: characteristics of the business or project that give it an advantage over others.
• Weaknesses: characteristics that place the business or project at a disadvantage relative to others
• Opportunities: elements that the project could exploit to its advantage
• Threats: elements in the environment that could cause trouble for the business or project
Identification of SWOTs is important because they can inform later steps in planning to achieve the objective.
First, the decision makers should consider whether the objective is attainable, given the SWOTs. If the objective is not attainable a different objective must be selected and the process repeated.
Users of SWOT analysis need to ask and answer questions that generate meaningful information for each category (strengths, weaknesses, opportunities, and threats) to make the analysis useful and find their competitive advantage.

Risk Register:

This is a Risk Management tool commonly used in Project Management and organizational risk assessments. It acts as a central repository for all risks identified by the project or organization and, for each risk, includes information such as risk probability, impact, counter-measures, risk owner and so on. It can sometimes be referred to as a Risk Log.

Risk register lists all identified risks that may affect the project, process or organization. It should be as comprehensive as possible to include all identifiable items that have probability of occurrences and generally includes estimated probability of the risk event to occur, severity or possible impact of the risk, probable timing and anticipated frequency.
A wide range of suggested contents for a risk register exist and recommendations are made by the Project Management Institute Body of Knowledge (PMBOK) and PRINCE2 among others. In addition many companies provide software tools that act as risk registers. Typically a risk register contains:
• A description of the risk
• The impact should this event actually occur
• The probability of its occurrence
• Risk Score (the multiplication of Probability and Impact)
• A summary of the planned response should the event occur
• A summary of the mitigation (the actions taken in advance to reduce the probability and/or impact of the event)
The risks are often ranked by Risk Score so as to highlight the highest priority risks to all involved.
Although risk registers are commonly used tools not only in projects and programs but also in companies, research has found that they can lead to dysfunctions, for instance Toyota's risk register listed reputation risks caused by Prius' malfunctions but the company failed to take action. Risk registers often lead to ritualistic decision-making, illusion of control, and the fallacy of misplaced concreteness: mistaking the map for the territory. However, if used with common sense risk registers are a useful tool to stimulate cross-functional debate and cooperation.

Cost of Capital:
The cost of funds used for financing a business. Cost of capital depends on the mode of financing used – it refers to the cost of equity if the business is financed solely through equity, or to the cost of debt if it is financed solely through debt. Many companies use a combination of debt and equity to finance their businesses, and for such companies, their overall cost of capital is derived from a weighted average of all capital sources, widely known as the weighted average cost of capital (WACC). Since the cost of capital represents a hurdle rate that a company must overcome before it can generate value, it is extensively used in the capital budgeting process to determine whether the company should proceed with a project
The cost of various capital sources varies from company to company, and depends on factors such as its operating history, profitability, credit worthiness, etc. In general, newer enterprises with limited operating histories will have higher costs of capital than established companies with a solid track record, since lenders and investors will demand a higher risk premium for the former.

Every company has to chart out its game plan for financing the business at an early stage. The cost of capital thus becomes a critical factor in deciding which financing track to follow – debt, equity or a combination of the two. Early-stage companies seldom have sizable assets to pledge as collateral for debt financing, so equity financing becomes the default mode of funding for most of them.

The cost of debt is merely the interest rate paid by the company on such debt. However, since interest expense is tax-deductible, the after-tax cost of debt is calculated as: Yield to maturity of debt x (1 - T) where T is the company’s marginal tax rate.

The cost of equity is more complicated, since the rate of return demanded by equity investors is not as clearly defined as it is by lenders. Theoretically, the cost of equity is approximated by the Capital Asset Pricing Model (CAPM) = Risk-free rate + (Company’s Beta x Risk Premium).

The firm’s overall cost of capital is based on the weighted average of these costs. For example, consider an enterprise with a capital structure consisting of 70% equity and 30% debt; its cost of equity is 10% and after-tax cost of debt is 7%. Therefore, its WACC would be (0.7 x 10%) + (0.3 x 7%) = 9.1%. This is the cost of capital that would be used to discount future cash flows from potential projects and other opportunities to estimate their Net Present Value (NPV) and ability to generate value.

Companies strive to attain the optimal financing mix, based on the cost of capital for various funding sources. Debt financing has the advantage of being more tax-efficient than equity financing, since interest expenses are tax-deductible and dividends on ordinary shares have to be paid with after-tax naira. However, too much debt can result in dangerously high leverage, resulting in higher interest rates sought by lenders to offset the higher default risk.

Activity-Based Costing - ABC:

This is an accounting method that identifies the activities that a firm performs, and then assigns indirect costs to products. An activity based costing (ABC) system recognizes the relationship between costs, activities and products, and through this relationship assigns indirect costs to products less arbitrarily than traditional methods.
Some costs are difficult to assign through this method of cost accounting. Indirect costs, such as management and office staff salaries are sometimes difficult to assign to a particular product produced. For this reason, this method has found its niche in the manufacturing sector.
Put simply, Activity-based costing (ABC) is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. This model assigns more indirect costs (overhead) into direct costs compared to conventional costing.
CIMA (Chartered Institute of Management Accountants) defines ABC as an approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs. Resources are assigned to activities, and activities to cost objects based on consumption estimates. The latter utilize cost drivers to attach activity costs to outputs.
Methodology of ABC focuses on cost allocation in operational management. ABC helps to segregate
• Fixed cost
• Variable cost
• Overhead cost
The split of cost helps to identify cost drivers, if achieved. Direct labour and materials are relatively easy to trace directly to products, but it is more difficult to directly allocate indirect costs to products. Where products use common resources differently, some sort of weighting is needed in the cost allocation process. The cost driver is a factor that creates or drives the cost of the activity. For example, the cost of the activity of bank tellers can be ascribed to each product by measuring how long each product's transactions (cost driver) takes at the counter and then by measuring the number of each type of transaction. For the activity of running machinery, the driver is likely to be machine operating hours. That is, machine operating hours drive labor, maintenance, and power cost during the running machinery activity.

Absorption costing :

A managerial accounting cost method of expensing all costs associated with manufacturing a particular product. Absorption costing uses the total direct costs and overhead costs associated with manufacturing a product as the cost base. Generally accepted accounting principles (GAAP) require absorption costing for external reporting.

Absorption costing is also known as "full absorption costing".

Some of the direct costs associated with manufacturing a product include wages for workers physically manufacturing a product, the raw materials used in producing a product, and all of the overhead costs, such as all utility costs, used in producing a good.

Absorption costing includes anything that is a direct cost in producing a good as the cost base. This is contrasted with variable costing, in which fixed manufacturing costs are not absorbed by the product. Advocates promote absorption costing because fixed manufacturing costs provide future benefits.

Marginal Cost of Production:

The change in total cost that comes from making or producing one additional item. The purpose of analyzing marginal cost is to determine at what point an organization can achieve economies of scale. The calculation is most often used among manufacturers as a means of isolating an optimum production level.

Manufacturing concerns often examine the cost of adding one more unit to their production schedules. This is because at some point, the benefit of producing one additional unit and generating revenue from that item will bring the overall cost of producing the product line down. The key to optimizing manufacturing costs is to find that point or level as quickly as possible.

life-cycle costing:
This is a way of assessing asset's cost over time. A method of calculating the total cost of a physical asset throughout its life. Life-cycle costing is concerned with all costs of ownership and takes account of the costs incurred by an asset from its acquisition to its disposal, including design, installation, operating, and maintenance costs.

Terotechnology as it is generally called is a multidisciplinary technique that combines the areas of management, finance, and engineering with the goal of optimizing life-cycle costs for physical assets and technologies. Terotechnology is concerned with acquiring and caring for physical assets. It covers the specification and design for the reliability and maintainability of plant, machinery, equipment, buildings, and structures, including the installation, commissioning, maintenance, and replacement of this plant, and also incorporates the feedback of information on design, performance, and costs.