Listening Skills

Effective communication dramatically distinguishes humans from other forms of life. It allows us to organize and work together in groups and develop a civilized society. In fact, without communication, there can be no social organization. Besides being important in todays changing business environment, effective communication is vital for personal satisfaction and success. Through communication, people are able to clarify their concepts and ideas. It enables us to understand, persuade, and work with other people. In many ways, our success in personal and corporate life is based on our ability to communicate effectively.After having laid so much importance on communication, we must also understand that communication is never one way. Communication in simple terms can be defined as ‘the process of sharing by which messages produce responses’ (Munter, 1987). It is always a two way process with a ‘sender’ sending a message and a ‘receiver’ providing a feedback of its reception. The success of an effective communication therefore rests on the ‘receiver’ who is at the listening end.A research proves that â€Å"Communication is 85 percent listening and 15 percent talking† (Pierce and Palmer, 2006). Not denying the significance of effectively putting across your message, listening to others is equally important and surprisingly difficult skill. We have to be an effective listener when we are brainstorming ideas with others, collecting data, talking on the telephone, resolving conflicts, attending lectures and even while conversing with our kids. We must remember that the person who is talking can sense whether listener is attentive or not.So, how to improve our listening skills? Various researchers have given various techniques to be an effective listener. There is however consensus on first removing the internal and external blocks which may be affecting our concentration. A major internal block stems from our ability to think so much faster than a speaker can possibly talk. People on average talk at about 125 words per minute but our brain can process information at more than 600 words per minute (Munter, 1987).With so much extra time available in our brain, we tend to wander to completely unrelated topics. Another important internal block to listening is emotional. It’s hard to resist jumping to conclusions, defending our own position, contesting new ideas, and indulging into a thought process of preparing our own response. The external blocks on the other hand can be your uncomfortable seat, distractions caused by various sounds, a glance at papers in our hands/desk or even some pleasant smell of perfume or food coming from nearby. Of all the external blocks, time is probably the most important. Removing all such blocks is the first step to effective listening.The second step in developing listening skills is adopting a suitable posture or ‘how we look’ when we are listening. A good listener needs to stand or sit with an ‘open posture’ that is facing the other person and looking alert. On the other hand ‘closed or aggressive postures’ like keeping the arms crossed, turning away, bowing shoulders or keeping hands on hips do not give a positive feedback to the person who is talking. Similarly ‘nervous gestures’ such as cleaning fingernails, drumming with fingers or keeping hands on or near the face tend to make the talker feel uncomfortable.Another aspect of improving the nonverbal signs of listening is the facial expression. A good listener needs to avoid a deadpan and stony face. Instead, look interested; raising and lowering of eyebrows, occasionally smiling or nodding can help establish rapprt. Perhaps the most important signal of attentive listening is maintaining the eye contact. Staring should be avoided however constantly looking away is also interpreted as lack of interest. The appropriate distanc e between the talker and listener also indicates the level of interest and involvement. The distance may be appropriate for conversational listening. Altogether, the importance thing to keep in mind about nonverbal signals of listening is how they make the speaker feel (Knapp, 1980).We can not fake good listening by merely adopting a suitable posture and maintaining an eye contact. Good listening must be sincere. The third step of improving listening skills is therefore embedded in controlling our feelings and thoughts (Knapp, 1980). Controlling our feelings is often difficult. We tend to interrupt or disagree before the person speaking is finished. To improve our listening skills, we need to be patient and give the speaker time. A good listener should avoid interrupting and do not block communication by arguing, criticizing or becoming angry too soon.To control your feelings, you must avoid prejudging either the topic or the speaker. Moreso, do not be overly affected by the initial impressions the topic or the speaker make on you. The best way to control our feelings is to empathize with the talker that is by putting ourselves in his or her shoes. Besides controlling the feelings, a good listener should think objectively and analytically. A good way of analyzing is to take notes mentally, write down key words, mentally summarize what the talker has said so far and weigh the evidence. Besides listening to the speaker’s content, a good listener will always analyze the speaker’s feelings so as to evaluate the motivation/intention behind his or her talk. Listen not only to what the speaker is saying, but how she or he says it. Be aware, in other words, of the speaker’s voice, volume, facial expression, and body language. Sometimes, people say one thing but a good listener can hear that they really mean something else.The last step to effective listening is ‘what to say.’ Obviously, most of the time you are listening you are not s aying anything. Humans by nature prefer talking to listening. A good listener should however learn to tolerate silence. Instead of feeling unconfortable with silence, think of it as a chance to let other person be heard. Although the most important listening skill is to listen and remain silent, however a good listener might have to say few things to encourage the other person to talk.Asking for clarifications, rephrasing/restating ideas for confirmation and asking few questions when given an opportunity to speak are few techniques not only to enhance own receptivity but are also indicative of the listener’s interest and involvement in the talk. For encouraging the speaker to talk, use small phrases such as â€Å"I see,† â€Å"Uh-huh,† and â€Å"Go on.† These phrases are not considered as interruptions rather these help to portray your interest in what the speaker is saying (Barker & Watson, 2000).To conclude, listening skills are important not only for a successful career, but are very helpful for becoming good students, parents, and friends. Its importance is much more highlighted in the corporate world which relies on good leadership and as it is pointed out that â€Å"Good leaders build teams by being willing to hire people better than themselves, staying secure in their own roles and by listening† (Maxell, 2006). The four step approach to effective listening discussed in this paper is not a final word on such an important aspect of human life but it gives a guideline for developing this skill in a methodological manner.In nut shell, to be an effective listener we need to first remove or minimize various internal and external blocks to listening, concentrate on how we look by adopting a suitable gesture, feel, analyze the content and intentions of the speaker and should know what to say at what time. We must remember that if we will not listen to people around us, under us or in our homes, they will take their ideas or pr oblems elsewhere; subordinates may feel discontended if they are not properly heard; colleagues and friends may even stop sharing their feelings with you; customers may take their business elsewhere, and at homes you will never get to know your children.ReferencesBarker, Larry & Watson, Kittie. (2000). Listen Up: How To Improve Relationships, Reduce Stress. NY: St. Martins Press.Knapp, K. (1980). Essentials of Nonverbal Communication. New York: Holt, Rinehart & Winston.Maxwell, J. (2006). The 360-Degree Leader. Business book review library, 23 (11), 1-11.Munter, Mary. (1987). Business Communications: Strategy and Skill. Eaglewood Cliffs, New Jersey: Prentice-Hall, Inc.Pierce, E., & Palmer, L. (2006). 24 Things Experts are Dying to Tell You. Redbook, 206 (6), 102-111.

Where Do Artists Get Their Ideas?

How does an artist really see the world? The real source of ideas for their masterpieces is a mystery. Many believe that the artists’ sources for their ideas are included in their surroundings and what they may have experienced. Well, those two things are the source of their ideas, but artists look at these things from a different perspective; much different from the normal point-of-view. To explain how artists decide on what to paint, there will be two paintings to be used as tools. Both of these paintings were made by artists from the Ancient world. The first painting, â€Å"Alexander the Great confronts Darius III at the Battle of Issos,† was created by Philoxenus of Eretria, a Macedonian artist who lived during the 4th Century B. C. , much later than Alexander’s rule (Smith 911). He was most likely requested to paint the masterpiece which was to be commissioned to King Cassander later on. With that statement, a clear reason for his decision to paint the masterpiece sprang out. During this period, artists were skilled-workers who had powerful clients; in his case, King Cassander. However, it still did not say why he chose that particular battle of Alexander the Great. By analyzing the painting itself, a person could easily conclude that it was recreated to assert Macedonia’s dominance over Persia. Besides that, Alexander the Great was the greatest Macedonian hero. This may very well be the reason why Philoxenus chose to paint the epic battle. It was simply fit for King Cassander, who was also known as the most powerful man in Macedonia during this period—Post-Alexander. A painting that defines power and Macedonia fits a man who defined power and Macedonia during his reign. This may have been Philoxenus’ idea after all. The second painting, â€Å"Battle of Centaurs and Wild Beasts,† was created by Zeuxis from Ephesus, a Greek artist who lived around 5th Century B. C. It was later on revealed that a mosaic of this was found in Roman Emperor Hadrian’s villa. Zeuxis was very well known for a host of Centaur paintings, one of which was the painting mentioned and the painting â€Å"Helen of Troy. Zeuxis’ central theme for this painting was the Greek mythological creature, the Centaurs, and their struggle against the wild beasts. It may have been an imagery of the imminence of the Persian invasion on Greek soil, since Xerxes was already amassing an army for the attack; the Greeks as the outnumbered but powerful Centaurs against the wild beasts as the invaders. Zeuxis lived around this period being knowledge of the upcoming or o ngoing Second Persian War. The painting, however, was most likely a symbolism of the First Persian War. One possible reason why he decided to paint this event could be because it was the most significant event at that time for most Greeks. He had the talent to portray the event on a panel or a wall, just as the artists at that time did, in an artistic way—sometimes with the use of characters similar to that of the painting. Unlike the first one by Philoxenus, this painting was more metaphorical or symbolic than direct. If the central idea was really about the Persian war—the first or the second—then it would be almost quite similar to that of the Alexander painting. These events were of great importance to the people and were great sources for flourishing art work, especially the heroes that played a major role in it. Heroism has greatly contributed to the formulation of ideas for the masterpieces. Philoxenus and Zeuxis, both artists from the Ancient world, depicted two great encounters by infusing them into art. Both were inspired by war against a common enemy but were separated by time. Both also told stories of heroism but were separated by earch artists’ painting styles. Works Cited â€Å"Kassander†. In2Greece. 11 March 2009. < http://www.in2greece.com/english/historymyth/history/ancient/kassander.htm> Mansfield, Elizabeth C. Too Beautiful to Picture: Zeuxis, Myth, and Mimesis. Minnesota: University of Minnesota Press, 2007. Philoxenus. Alexander the Great Confronts Darius III at the Battle of Issos. 11 March 2009 . Smith, William. A School Dictionary of Greek and Roman Antiquities. Boston: Little, Brown, and Company, 1870. Zeuxis. Battle of Centaurs and Wild Beasts. 11 March 2009 .

Imperialism and 1st World War Essay

The portrayal of the artists is indeed a true picture of the horrors of World War I which cannot be envisioned by just reading accounts of the war as given in different readings. The paintings reveal the disgusting events that will surely put the shivers into the generation of today in realizing the atrocities and soul stirring hardships that were experienced by all those who were part of the war. While the monarchy of the combating countries relaxed and simply gave orders it were the soldiers representing the states that bore the brunt of the chilling circumstances. Soldiers were silent observers in seeing their colleagues butchered in helplessness while they themselves were lucky to come back alive into their trenches unaware of what the next day had in store for them. The medical corps and nurses were always on the alert to receive the dead and grievously wounded soldiers while those who were captured had to submit to the inhuman tortures at the hands of their captors. Several soldiers were maimed in leading a life of revulsion, helpless in leading a life of misery. The onslaught of gas attacks made several soldiers to die in agony while many suffered psychologically in being unable to lead normal lives. The fear of gas attacks was so severe that soldiers had to always move with gas masks in specified territories. There was always a sinister plan underway and it became difficult for the combatants to judge about who friends are and whom to understand as enemies. There was always an ongoing process to build tunnels and infrastructure to face the challenges of enemy attacks in a war that never seemed to end. All who were physically fit could be expected to be called for war duties with little hope of returning alive. The war was extensively destructive as nothing was spared and all means were used to inflict the maximum damages irrespective of the intensity of suffering and loss to life. Human life appeared to have no value nor did the sufferings of the masses for the leaders who gave orders to fight with the sole objective of winning the war. The focus was on winning over the adversaries by whatever means that was possible in using weapons and other means that inflicted maximum loss and suffering. References Discussion, Imperialism and 1st World War, http://dl. bergen. edu/webct/entryPageIns. dowebct

Economic Forecasting Essay Example | Topics and Well Written Essays - 1250 words

Economic Forecasting - Essay Example The annual inflation rates in the US in the decade starting 2004 can be seen in Fig. 1. In this graph, the Bureau of Labor Statistics (BLS) published Current Consumer Price Index has been used to calculate the rates of inflation. Fig. 1 shows that in the last decade, the maximum inflation rate in the US has been recorded at 4.1% in 2007 whereas the lowest inflation rate was recorded at 0.1% in 2008. Coincidentally, the highest and the lowest values of inflation rate in the US have been recorded in one year from the start to the end of 2007. This may be attributed to the fact that the global financial recession had started in 2008, which is also why, the maximum variation in the inflation rate in one year was recorded from 2008 to 2009 when it soared up from the lowest 0.1% straight to 2.7%. The second largest variation was recorded from 2006 to 2007 when the inflation rate at increased from 2.5% to 4.1%. The year from 2010 to 2011 showed the third largest increase in inflation rate in the US from 1.5% to 3%. There has been very little variation in the rate of inflation in the US in the years from 2012 to 2014 compared to the preceding years when the rate of inflation unpredictably jumped up or down from one year to the next from 2005 to 2012. The annual inflation rate in the US was recorded at 1.7% in October 2014 for the third consecutive month because the decline in prices of energy sufficiently offset the increased costs of food and shelter. Energy prices year-on-year reduced 1.6% with a drop in the cost of fuel oil and gasoline by 6.5% and 5% respectively whereas the cost of food saw an increase by 3.1% (Trading Economics, 2014). Following an increase of 1.7% in the previous month, the index for all items less energy and food increased by 1.8%. There was seen an increase in the cost of services less energy by 2.5% with the index of transportation and shelter increasing by 1.8%

The German Creation of Colonies in Africa and the British Expansion of Term Paper

The German Creation of Colonies in Africa and the British Expansion of Its Colonial Empire in India and South Asia - Term Paper Example Nevertheless, it was involved in hard campaigns against the countries it was trying to possess. The Chancellor of Germany of that period Otto von Bismarck was not interested in the colonial expansion, but under the influence of German society and leadership that claimed that Germany needed colonies to maintain its economic domination in Europe, he agreed to take this step. After the unification of Germany in 1871 it was obvious that this action should happen because the pressure was too great. The main groups that were lobbying for the colonial expansion were the West German Society for Colonization and Export (1881) and the Central Association for Commercial Geography and the Promotion of German Interests Abroad (1878). Bismarck thought that the future German colonies would be stabilizing power that will influence domestic politics of the country. The colonies were to emphasize nationalism and to raise the prestige and greatness of Germany on the international level. In 1884-1885 Ge rmany was the host of the international Berlin Conference, where European claims in Africa were sanctioned. The requirement was that the claims of possession in Africa must be manifested by the physical occupation of the territories. In 1873 African Society in Germany (Afrikanische Gesellschaft in Deutschland) was organized. The goal of the society was geographical exploration of Africa. In 1882 German Colonial Society (Deutscher Kolonialverein) appeared. More than 15000 supporters of the colonial politics united in this society. In 1887 it joined the Society for German Colonization (Gesellschaft fur Deutsche Kolonisation), which goal was the practical realization of the colonial plans.2 Desiring to strengthen his political position, and counting upon the support of the National Liberal Party at the elections to Reichstag in 1884, Bismarck announced that the German government will take under its guardianship all the international possessions of the German businessmen. Besides that, he thought that this action will weaken the flow of German emigrants to America and will direct this flow to the German colonies. During that period of time the following territories were moved under the protection of the German government: The land purchased by the Bremen businessman Adolf Luderitz at the territory of the modern Namibia. In April 1884 German Southwest Africa was formed here. The lands of Adolph Woermann – German Cameroon in July of 1884. German Togo in July of 1884 German East Africa (Tanzania) that previously belonged to Carl Peters and The Society for German Colonization, in February of 1885. Protectorate of Witu (modern Kenia) that belonged to brothers Denhardt. German New Guinea and Bismarck Archipelago In 1885 Bismarck abandoned the idea of the consistent colonial politics, and concentrated his efforts on the relationship with England and France. Colonies were used only as a bargaining chip in negotiations. At the Berlin Conference of 1884-1885 years, A frica was divided among the European powers, and according to Helgoland-Zanzibar agreement of 1890 African protectorate Witu was traded for the strategically important for Germany island of Helgoland in the North Sea. Under Wilhelm II Germany tried to enlarge the sphere of its colonial influence by increasing the number of commercial representatives.

Marketing Plan Master Case Study Example | Topics and Well Written Essays - 2500 words

Marketing Plan Master - Case Study Example The electric motors based drive is suitable for low speed driving and hence is suitable for city roads while the petrol based drive is suitable for high speed rides on highways. The combustion engines charge the batteries during the ride and hence external charging is not required. Hybrid cars have been accepted by the customers because of the option of petrol based engine within the car although the cost is substantially high. However, fully electric cars (also called econocars) have not yet picked up markets because they cannot be driven at high speeds and the infrastructure supporting charging outlets is still not adequate. However, its market is expected to pickup substantially in light of latest technology innovations, tax savings, environment awareness programmes, and subsidization by government. This paper presents a marketing plan for econocar pertaining to the case study of Tomoco taking into account impacting factors like changing global dynamics in econocars, technology innovations, distribution networks, support networks (like charging outlets), grid capacity & availability, government support (subsidiaries, tax exemptions, value added services, local environmental laws, etc) and above all, change in user perceptions. The offer by Sandeep qualifies as social engineering attack on the employee of another organization to acquire confidential & commercially sensitive information of that organization which may be including their intellectual property rights (IPR). First & Foremost, this is an unethical gesture and hence no organization in this world should indulge into such activities. Secondly, if the organization (Ishimuru in this case study) files a lawsuit against the company indulging into the social engineering activity (Tomoco in this case study) as per the clauses against breach of confidentiality/trade secrets/Intellectual Property Rights as applicable in the legal system of the country, the global reputation of Tomoco would be at a serious stake whereby damages can be irreparable. Every country has own rules & regulations for protection of business secret information, trade secrets, commercially sensitive information & intellectual property rights of the companies operating within the political territory of the nation. Such information can only be disclosed against non-disclosure agreements (within the business contracts or else signed separately) that are enforceable within the jurisdiction where the agreements are being executed. Such agreements are not only signed with the suppliers or third parties but are also signed internally within the organization as a part of employment agreements with every employee and the articles of memorandum for the management & the board members. By invoking a social engineering attack on the employee of an organization to provoke him/her to divulge secrets, the

Hospitality marketing Essay Example | Topics and Well Written Essays - 1000 words

Hospitality marketing - Essay Example Quality is the first competitive advantage building block, which is defined as the manner in which a product is perceived by the market in relation to competitor products. Superior quality gives a product a competitive advantage compared to competitor products. Superior quality includes reliability, durability, quality design, and image. Quality is essential because customers prefer organizations which are reputed for offering superior quality products. The second competitive advantage building block is efficiency, which is defined as the rate at which an organization carries out its operations. Superior efficiency means that the organization will produce and market a large number of products within a short duration using minimal amount of organizational resources. Superior efficiency is necessary because it enables an organization to produce and supply products when demanded; hence, sustaining its supply chain. Third on the list of the building blocks is customer responsiveness. This can be described as the manner and speed in which the organization meets customers’ needs. An organization with superior customer responsiveness is that which is quick to act on customer needs and ensures that they are satisfied. This is vital because it enables an organization to always meet the needs of its customers. The last principal building block of competitive advantage is innovation. This can be described as undertaking strategic activities to find new and better products, and new work routines that will increase the organization’s efficiency. Innovation is critical because it enables the organization to keep up with the ever-changing tastes and preferences of the customers. Therefore, an innovative organization has a competitive advantage in the industry because it has the potential of offering products which have not been produced before. Building blocks can be utilized in marketing techniques in various ways. To

Organisation behaviour--business Essay Example | Topics and Well Written Essays - 1750 words

Organisation behaviour--business - Essay Example Emotional intelligence is such factor; emotional intelligence (EI) can be characterized as a quite complex framework, incorporating many different elements, as indicatively presented in Graph 1, Appendix. The relation between the EI and the employee performance is critically discussed in this paper. The theories and the empirical studies that have been developed in the specific field have been used in order to explore whether EI is related and at what level to the employee performance. It is revealed that EI has a key role in the increase of employee performance, but this role is likely to be perceived differently in organizations with different structure and culture. In any case, EI and employee performance are closely related being depended on one another using different paths and methods of interaction, as explained in the studies presented below. 2. Emotional intelligence and employee performance – presentation and analysis of their relation In accordance with Sala, Druska t and Mount (2006) emotional intelligence (EI) can directly affect the employee performance in the following way: employees are expected to interpret differently their leader’s decisions. ... The above problem becomes more critical because of the following fact: employee intelligence of employees cannot be controlled by the leader of the organization; on the contrary, employee intelligence is related to the background, knowledge and personal experiences reflecting the freedom of employees to develop their own views as members of the organization. In other words, the control of employee intelligence within a particular organization would be in opposition to morals and ethics. Moreover, the actual views of employees on one or more organizational issues are quite difficult to be retrieved; from this point of view, employee intelligence in the organization cannot be controlled because of its nature, being involved in personal thoughts, cognitive capabilities and emotions. The above conditions do not affect the importance of EI in the workplace. In fact, EI is closely related to job performance, as noted by many theorists who studied the particular field. At a first level,â₠¬â„¢ a positive relation has been identified between the job performance and the emotion recognition accuracy’ (Elfenbein, Marsh and Ambady 2002, in Sala, Druskat and Mount, 2006, 168). Another aspect of emotional intelligence is presented in the emotional intelligence model of Tao de Haas (2005, see Graph 2, Appendix). In the specific model it is made clear that EI is based on empathy – the ability to identify/understand the feelings of others; it is on this psychological characteristic that the responses of the employee in the workplace are based; in any case, a high level of EI would require an excellent ability to understand and manage the personal

What the role of organizational culture in organizational change Essay

What the role of organizational culture in organizational change - Essay Example This research will begin with the statement that organizational behavior in an organization develops over the years of the existence of the organization and is closely linked to its organizational culture. Every organization has a unique organizational culture that differentiates it from others. Organizational culture manifests â€Å"the values and basic assumptions shared among organizational members† and as such â€Å"these values tend to persist over time and are more resistant to change†. While organizational culture plays several key roles in an organization the two most dominant roles are: â€Å"adaptations to the organization’s external environment† and â€Å"coordination of internal systems and processes†. Coordinating the internal systems and processes will facilitate the formation of a common mission and this, in turn, will result in specific goals. Similarly, the reward systems for good performance as well as sanctions on poor performance are defined by the organizational culture. On the other hand, organizational change is usually manifested through the organization’s values, basic assumptions, and artifacts of which the most visible component is artifacts. Culture in organizations can be defined as â€Å"a pattern of shared basic assumptions that the group learned as it solved its problems of external adaptation and internal integration that has worked well enough to be considered valid and, therefore, to be taught to new members as the correct way you perceive, think, and feel in relation to those problems†.† (Schein 1997). The behavior within the organization is a part of its culture also. Organizational behavior can be defined as â€Å"the study of human behavior in organizational settings, the interface between human behavior and the organization, and the organization itself† (Shajahan, 2004, p. 3). As such, it can be seen that the organizational culture and behavior are extremely di verse between the two companies. Organizational culture plays a pivotal role in shaping the organizational goals and vision. In times of organizational change it is significant that mangers take effective steps to channelize employee behavior in tune with organizational culture and vision. Managing organizational behavior is a relatively complex process in normal situations, especially if a major change occurs like mergers and acquisitions or other important structural or managerial changes within an organization. This organizational change is quite often stressful to everyone concerned. There may be fears of loss of jobs, changes in duties and responsibilities, fears (or hopes) of change in the compensation structure, and the ever present attitude of resistance to change. Organizational change is inevitable under today’s competitive environment and hence companies should be ready with management of change for the purpose of staying competitive. As per Kurt Lewin’s three step model any organization that has impending large scale changes with regard to organizational culture, structure, and behavior should follow a three step process for smooth transformation from old to new. The relatively simple concept (in principle) needs an unfreezing, moving or transition, and refreezing of attitudes as behaviors (Burke, Lake & Paine, 2008, p. 233). Employees are attuned to the working atmosphere of their former employers and hence need an unfreezing of attitudes so that they are receptive to change. The next step is to move or transform the employees to the new behavior and culture that is required in the present situation. Once this is achieved, the next logical step is to freeze the newly learnt factors into their minds. The change in organization behavior hence will only be developed through a long term perspective and cannot be planned in minute detail. It has to be planned in such a way by observing where

The methods used by Dickens Essay Example for Free

The methods used by Dickens Essay The conditions of the workhouse were awful and they didn’t care about the children much they didn’t give them allot of food. This is implied by ‘It was his ninth birthday†¦ he was kept in the cold cellar†¦ after a sound thrashing†¦ for atrociously presuming to be hungry’. This shows that on Oliver’s ninth birthday he was locked in the cupboard and was starved to death. The word ‘atrociously’ shows us that Mrs Mann was a Cruel and Wicked women. Dickens is using the technique sarcasm because to show that people were treated badly and they wanted children to die. This makes the reader think that children at that time where treated really badly and makes the reader feel sorry for them for what they are going through. Oliver was looked after by Mrs. Mann who wasn’t a good person because she didn’t look after the children properly, she didn’t feed them well. This is implied by ‘it’s very likely it will be troublesome. Give it a little gruel if it is . This quote shows us that Mrs. Mann didn’t care much about the children, she was spiteful and she couldn’t be bothered to look after the children properly, also she didn’t care if the child dies and also she’s a hypocrite. The words ‘troublesome and gruel ’ means if the child starts crying and gruel is a cheap porridge , this shows that if the child is crying just give them some gruel to make it shut up and the child won’t bother them again . Dickens is using the technique sarcasm because to show that children weren’t that important at that time. This makes a modern reader think that people didn’t care much about the child and makes the reader feel sorry for them. The conditions of the workhouse were very bad and dirty. This is implied ‘At last the got so wild and voracious with hunger†¦ He was afraid he might sometime happen to eat the boy who slept next to him. ’ This portrays that the conditions in the workhouse were terrible and filthy. The word â€Å"voracious â€Å"shows us that Oliver was really hungry, he didn’t get feed well. He is using the technique sarcasm because to show people how hungry y he was and that he could eat people next to him. As a reader, I feel extremely sorry for the children in the past because they didn’t get feed well and the people there were really hungry that they could eat another person and also people didn’t care about the children much but they should have cared and the children didn’t have a good life. The conditions of the workhouse were really bad because they make people cry and feel scared and make them feel uncomfortable. This is implied by ‘made him answer in a very low hesitating voice whereupon a gentleman in a white waistcoat said he was a fool. What capital way of raising spirits, putting him quite at ease. ’ This quote shows us that Oliver was scared of the men as it said he trembled and went on to answer in a low and hesitating voice. It also shows us that the gentleman are not nice to children they think that they don’t know anything . The word ‘trembled ‘shows us how frightened he was the fact that he trembles shows just how would approved to the board and how he was feeling inside. He is using the technique sarcasm because to show us how he was feeling, and how the gentleman treats the children there. I feel this is unacceptable because they are making the kid cry and also making them feel frightened for no reason and they shouldn’t be allowed to do that and also the children didn’t have anything good to wear except rags .

Genting Group PEST Analysis

Genting Group PEST Analysis Genting Group is a subsidiary and affiliates operating under the Genting name and is recognize as one of the Asias leading and best manage multinationals company. There are currently 5 public companies and 3 jurisdictions in the group which is also operate under the name of Genting with a combined market capitalization of over RM131 Billion (US$41 billion) as at 30 November 2010 (Genting Group, 2010). The 5 public companies in the Genting Group which is including Genting Berhad, Genting Malaysia Berhad, Genting Plantations Berhad, Genting Singapore PLC, which is also the subsidiary company and Genting Hong Kong Limited is an affiliates company (Genting Group, 2010). These public companies and their subsidiaries and affiliates are involved in different businesses, including leisure hospitality, power generation, oil palm plantation, property development, biotechnology and oil gas. In this group, they have over 58,000 employees, 4,500 hectares of prime resort land and about 133,000 hectares of plantation land. Gentings well-known consumer brands in the leisure hospitality sector such as Resorts World, Maxims, Crockfords, Awana, Star Cruises and Norwegian Cruise Line (Genting Group, 2010). Genting Berhad is an investment holding and management company of Genting Group. The founder of the Genting Group Tan Sri (Dr.) Lim Goh Tong by the late in 1965, when he start the opening development works of constructing a 20 kilometre private access road, across rough mountainous terrains from the foothills to the top of Mount Ulu Kali which is located at 2,000 metres above sea level (Genting Group, 2010). On 30 July 1968 the company was set under the Companies Act 1965 in Malaysia under the original name of Genting Highlands Hotel Sdn Bhd to operate a hotel and casino, and to develop an integrated tourist complex in Genting Highlands. Gentings company registration number is 7916-A and the company changed its name to Genting Highlands Hotel Berhad and its switch into a public company on 24 July 1970. It believed its current name of Genting Berhad on 9 June 1978 (Genting Group, 2010). Genting Berhad 39.5% is owned by Kien Huat Realty Sdn Bhd, a private company controlled by the late Tan Sri (Dr.) Lim Goh Tongs family. Genting Malaysia Berhad also known as Genting Malaysia which is a private limited company on 7 May 1980 in Malaysia by shares under the name of Resorts World Sdn. Bhd. and the company was under the Companies Act of 1965 in Malaysia. The registration of the company is 58019-U and on 14 July 1989 the company changed its name to Resorts World Bhd and also change into a public company (Genting Berhad, 2010). On 30 August 1989, Genting Berhad and Genting Malaysia start a restructuring work, which resulted in Genting Malaysias control from Genting Berhad its whole gaming, hotel and resort operations including of goodwill and other related assets. Since 22 December 1989 Genting Malaysias shares have been listed on the Main Board of Bursa Malaysia (Genting Berhad, 2010). Genting Malaysia is mostly running in the hospitality and leisure business and the activities include theme parks, gaming, hotels, seaside resorts and entertainment. The most important place is Resorts World Genting which is included family leisure and entertainment resort at the peak of Genting Highlands successfully attracted 19.5 million visitors in 2009 (Genting Berhad, 2010). Known as Resorts World Genting, the resort include six hotels with 10 thousand rooms, over sixty fun rides, hundred seventy restaurant dining and some shopping outlets. Besides that there is also mega shows theatre, business convention facilities and endless entertainment in the resort (Genting Berhad, 2010). The six hotels at Resorts World Genting are Maxims Genting, Highlands Hotel, Theme Park Hotel, Resort Hotel, Awana Genting Highlands, Golf Country Resort and First World Hotel which is the worlds largest hotel with 6,118 rooms as acknowledged by the Guinness World Records and Ripleys Believe It or Not. Resorts World Genting was voted the Worlds Leading Casino Resort in the year of 2005, and 2007 to   2009 and Asias Leading Casino Resort from 2005 to 2009 by World Travel Awards (Genting Berhad, 2010). Apart from the Genting highland resort, Genting Malaysia also owns and operates two beautiful seaside properties name Awana Kijal Golf, Beach Spa Resort in Terengganu and Awana Porto Malai in Langkawi (Genting Berhad, 2010). The macro environment analysis of the company What is the PEST about? It is very important that an organization considers its environment before beginning the marketing process. In fact, environmental analysis should be continuous and feed all aspects of planning. In the macro environment PEST is mean that the P stand for Political factors, E stand for Economic factors, S stand for sociocultural factors, and T stand for technological factors (MarketingTeacher, 2010). The political arena has a huge influence upon the regulation of businesses, and the spending power of consumers and other businesses. Economic factors which are the marketers need to consider the state of a trading economy in the short and long-terms. This is especially true when planning for international marketing. Sociocultural factors are mean that the social and cultural influences on business vary from country to country. It is very important that such factors are considered. A technological factor is vital for competitive advantage, and is a major driver of g lobalization (MarketingTeacher, 2010). PEST analysis of Genting Malaysia. (P)olitical: In Malaysia, gambling legalization still faces cultural, religious and political opposition. However, politicians as policy-makers obviously support the conduct of Casino de Genting. On the other hand, other political issues that may be ignored that the casino is owned and operated by a powerful and influential group with high political connections. The money generated in such casino could be used in accessing political parties and contributing to campaign efforts or other political-related activities  (ThinkingMadeEasy, 2010). Because the Malaysian government experienced difficulties in stamping out horse-race betting as well as numbers games after independence was attained in 1957, the government officials set regulate gaming and privatising state-run lotteries and also taxing the trade. However, ethnic Malays are barred by law from casinos lone casino, the Casino de Genting which located 35 miles outside of Kuala Lumpur. Their ethnic Chinese countrymen, nevertheless, are free to mingle with the foreigners at the tables and slot machines. An idea to tap foreigners for gambling revenues, Malaysia becomes a home base for companies that operate only in other countries aside from the domestically operated Casino de Genting (Genting Group, 2010). (E)conomic: In spite of prohibiting Muslims and local citizens from playing, Casino de Genting is prosperous, and is expected to continue to do so. The casino has provided a major number of jobs as well as revenue for the government. The economic power of the country lies in the fact that Casino de Genting is a part of an important tourist destination. Casino de Genting is under the service industry which also provides profitability to other industries and sectors in Malaysia such as hospitality, transportation, retail and food and beverage. Casinos are also important venue where the interplay of goods and services takes place as well as the transfer of ownership, making it a productive sector (ThinkingMadeEasy, 2010). The continued support of the government to promote tourism in Malaysia proved to be significant in the success of Casino de Genting. The Visit Malaysia 2007 tourism programme was deemed successful, not to mention the lower currency rate in the country. Malaysian tourism strategy could highlight the superb gambling experience Casino de Genting could offer in their future tourism programmes. Major Asian cities with wealthier populations and foreign nationals access would be also an opportunity for Casino de Genting to exploit. As the only way forward, the growing consumer demand and market outlooks are forecasted to continually grow in scale and scope (ThinkingMadeEasy, 2010). (S)ocial: Social problems associated with casinos make governments hesitant in pushing gambling efforts. Even so, there are governments which chose to lessen the negative social impact by means of restricting the access of some or all locals or by building casinos in remote areas. The social problems that casinos cultivate include surging of mafia gangs, money-laundering, prostitution and other drug-related crime, and these social dilemmas are regarded to produce high social costs. Casino de Genting is not an exemption, like any other casinos in Asia and all over the world, casinos are perceived to be breeding grounds of high profile crimes and organised crimes (ThinkingMadeEasy, 2010). Besides that, there is a various training and conferences and team-building events were held in 2009, including GENMs 21st Senior Managers Conference at Sentosa Resort Spa in Singapore with the theme Branding and Leadership in a New Competitive Environment and GENMs 16th Human Resources Conference 2009 themed Championing HR Fundamentals held at Awana Genting Highlands. Team building workshops, annual family day events, Employees Appreciation Night and Genting Employees Carnival were also held by the business divisions of the Group to foster team spirit amongst executives and staff (Genting Group, 2010). (T)echnological: Casino de Genting combines the appeal of fast paced technology and the cyberworld. This slot machine haven is equipped with a wide selection of state-of-the-art electronic table games and cashless gaming systems for its machines, with neo-coloured lights and rich graphics, which aims at providing the customers with the ultimate gaming experience. Casino de Genting also makes use of eSourcing through Group Centralised Procurement (GCP). As such, requests for quotations/ proposal/ information will be conducted online and only online registered suppliers will be invited to undergo the selection process. Further, the casino also invests in SAS software to better understand the customers and extract from the informations gathered the most suitable strategies in dealing with them (Resorts World, 2010).   Ãƒâ€šÃ‚   2: The international consideration In the year of 1993, Genting expanded its leisure and hospitality businesses into cruise line operations by establishing Star Cruises Limited. Star Cruises was listed in the Singapore Stock Exchange in April 1998 and in the Stock Exchange of Hong Kong in November 2000. In 1998, Genting Malaysia undertook an equity investment in Genting Hong Kong Ltd (formerly known as Star Cruises Limited), the leading cruise operator in the Asia Pacific. Genting Malaysia currently owns about 18.4% of Genting Hong Kong Ltd (ICMR, 2004). After all a while, Genting Singapore PLC (Genting Singapore) is a leading integrated resorts development specialist with over 20 years of international gaming expertise and global experience in developing, operating and marketing internationally acclaimed casinos and integrated resorts in different parts of the world, including Australia, the Americas, Malaysia, the Philippines and the United Kingdom (Genting Singapore PLC, 2010). It is a subsidiary of Genting Berhad and was incorporated in 1984 to invest in leisure and gaming-related businesses outside Malaysia. Genting Group is a collective name for Genting Berhad and its subsidiaries and associates. Genting Group is one of Asias leading and best managed multinationals. The Group is renowned for its strong management leadership, financial prudence and sound investment discipline (Genting Singapore PLC, 2010). Genting Singapore is listed on the Main Board of the Singapore Exchange Securities Trading Limited (Singapore Exchange). Genting Singapore has an experienced management team that is focused on and committed to growing its business globally. The Group is the largest casino operator in the UK and is developing a world-class integrated family resort in Singapore. Genting Singapore is continuously reviewing new opportunities in the gaming, leisure and hospitality businesses (Genting Singapore PLC, 2010). On 15 October 2010, Genting Malaysia completed its proposed achievement of casino businesses in the United Kingdom, Genting UK from Genting Singapore PLC. Genting UK is the largest casino operator in the UK and a leading innovator in the provision of high quality, customer focused gaming. Genting UK operates 5 casinos in London under renown brands including Crockfords, Maxims Casino Club, The Colony Club, The Palm Beach and London Mint; and a further 41 casinos located within the UK provinces under 3 key brands, namely Circus, Maxims and Mint. These casinos offer visitors a memorable experience with its various slots and table games in addition to restaurants, bars and other entertainments (Genting UK, 2010). On 13 September 2010, Genting New York LLC an indirect wholly-owned subsidiary of Genting Malaysia was selected as the developer and operator of a video lottery facility at the Aqueduct Racetrack in the City of New York, United States of America. The facility, set upon an area of 413,000 square feet will be known as Resorts World New York. Features of the facility includes approximately 4,500 video lottery terminals, 7,000 car parking lots, a 450-seat 2-storey fast food promenade, 2 high-end restaurants with 200-person capacity, a sports bar restaurant and lounge. Phase 1 is expected to contain approximately 1,600 VLTs to be completed by late spring 2011 and be fully operational by the end of 2011 (Lovett, 2010). 3: The growth of business Ansoffs product market matrix is a well known marketing tool was first published in the Harvard business review 1957 in an article called strategies for diversification. It is used by marketers who have objectives for growth. Ansoffs matrix offers strategic choice to achieve the objectives. There are four categories for selection which is Market Penetration, Market Development, Product Development and Diversification (MarketingTeacher, 2010). In the Genting Berhad, the corporation is targeting the new market in New York City, United States. So the company is using the market development section because Genting Berhad is selling the Casino and Hotel Product, so with the existing product range in the new market. This means that the product remains the same but it is marketed to the new audience (MarketingTeacher, 2010). Organization introduces their new products to the new market such as new countries in order to gain more customers and profit (ThinkingMadeEasy, 2009). In this New York gambling project, Genting Berhad spends $1.3 Billion according to its proposal submitted to state authorities. Genting New York will pay a licensing fee of $380 million, above the minimum $300 million required by the state. Genting New York intends to spend up to another $350 million to develop the facility, which upon full completion will span 413,000 square feet and contain more than 4,500 video lottery terminals, or electronic slot machines (Low, 2010). Dubbed Resorts World New York, the proposed three-storey facility will also contain several restaurants, water features, an outdoor terrace connected to the Aqueduct racetrack which will be able to accommodate up to 10,000 people and a 2,200-bay car park. Genting New York said it aims to complete the entire development of Resorts World New York within 12 months from the date it obtains formal approval from the state to proceed. As part of a wider development plan, Genting New York is also proposing to build three hotels of differing standards, shopping, recreation, spa and other resort facilities at a total cost of $650 million, and the whole project would take 1.3 Billion (Low, 2010). 4: New venture The Porters 5 Forces tool is a simple but powerful tool for understanding where power lies in a business situation. This is useful, because it helps corporation understand both the strength of the current competitive position, and the strength of a position corporation considering moving into. With a clear understanding of where power lies, corporation can take fair advantage of a situation of strength, improve a situation of weakness, and avoid taking wrong steps. This makes it an important part of corporation planning toolkit. Conventionally, the tool is used to identify whether new products, services or businesses have the potential to be profitable. However it can be very illuminating when used to understand the balance of power in other situations too (MindTool, 2010). The Five Forces Analysis assumes that there are five important forces that determine competitive power in a business situation. These are Supplier Power, Buyer Power, Competitive Rivalry, Threat of Substitution, and Threat of New Entry (MindTool, 2010). Threats of New Entrants Apart from the existing regional competitors, there are no major domestic competitors for Casino de Genting. There are rumours of potential new entrant of Genting Berhad will go into Macau (Ang, 2009). Malaysian analysts had said that the investments could pave the way for Genting to acquire a stake in MGM or to take over the US casino operators investment in MGM Grand Macau (Reuters, 2009). Substitute Products Domestically, there are no substitute products and services being offered by Casino de Genting. However, if we are going to look at the regional schema, China would be the greatest rival. There are at least four major gaming establishments in China as spread in Beijing, Hong Kong and notably, Macau (ThinkingMadeEasy, 2010) In terms of differentiation, Casino de Genting is strategically located complementary to other tourist destinations such as resort and hotels and theme park. Casino de Genting has a distinctive competency of the mixture of Monte Carlo and Las Vegas gaming environment and experience (ThinkingMadeEasy, 2010)    Bargaining Powers of Supplier Casino de Genting has a more advantageous position that its supplier. This is because the Genting Group has the sole autonomy on the gaming products and services, and that suppliers could be easily changes once the group becomes unsatisfied of a certain product or service. Gaming products and services that Casino de Genting considers are audio or visual, electrical and signage, chips and cards and game equipments as well as gaming development, cash handling and facility design and construction (ThinkingMadeEasy, 2010).    Bargaining Power of Buyers Based on the responses, the bargaining power of buyer is definitely weak due to the monopoly in Genting Highlands Resort. As a world-class gaming entertainment area, Casino de Genting has standards suitable for international clientele. If the group desires to monopolised the prices of the products and services, it will have the freedom to do so, which leave the buyers at a disadvantaged position (ThinkingMadeEasy, 2010).    Competitive Rivalry As already mentioned, Casino de Genting has no domestic rival to date, only regional rivals. The strong leadership position of Casino de Genting, however, would not be easy to defeat (ThinkingMadeEasy, 2010). Conclusion The overall appeal and demand of the gaming hospitality experience depends not on a single element. However, the casino brand design must put at the core a distinct defining factor for example the customers, it is also not enough that a casino collates extreme responses because strategic business decisions would not be met if feedbacks are either too good or too bad. Important to have for every casino is an ongoing talk to real casino customers in order to put real meaning to the figures in reports. The best customers also are perceived to be the most honest customers in the pool. They will say what they want, what they need and what is lacking about the brand and how it could be improved (ThinkingMadeEasy, 2010). Genting Group and the Casino de Genting must always bear in mind that customer is now a priority. All the decisions, whether top down or bottom line, shall put the interests of the customers. Several casino properties until now operate in line with the built it and they will come concept. But such stance is now an old mindset. What came to be as important as the corporate image or brand is the maximisation of the role of the customers in optimising the casino operation and the gambling industry as a whole. Competitive advantage is not enough but Casino de Genting must always strive for sustainable competitive advantage. It is recommended that Casino de Genting shall invest more on customer research and in those managers who will advocate customer knowledge management. Nevertheless, Casino de Genting must consider separately internal and external customers. There must be a 360-degree view of the customer by which the modern service standards must be based (ThinkingMadeEasy, 2010).

FTSEs Capital Structure and Profitability Relationship

FTSEs Capital Structure and Profitability Relationship The capital structure of a firm has long been a much debated issue for academic studies and in the corporate finance world. It is the way a firm finances its assets through some combination of equity, debt, or hybrid securities the composition or structure of its liabilities. In reality, capital structure may be highly complex and include various sources. The question whether capital structure affects to the profitability of the firm or it is affected by profitability is crucial one. Profitability and capital structure relationship is a two way relationship. On the one hand profitability of firm is an important determinant of the capital structure, the other hand changes in capital structure changes affect underlying profits and risk of the firm. Traditionally it was believed that the debt is useful up to certain limit and afterwards it proves costly. There is an optimum level of capital structure exist up to that level increasing debt will improve profitability, beyond that it will reduce profitability. In 1945, Chudson carried out an extensive study that implies the possibility of a relationship between the capital structures practised by a firm with its profitability. The question he endeavours to answer was that, à ¢Ã¢â€š ¬Ã…“In what way does the structure of assets and liabilities of a firm reflect the kind of industry in it is engaged, its size and level of profitability?à ¢Ã¢â€š ¬? In 1958 Merton Miller and Franco Modigliani in their famous Miller-Modigliani (MM) propositions put forward the net operating income approach of and demonstrated that the capital structure is irrelevant in a perfect market. It states irrelevant of capital structure in a perfect market to its value, hence, how a firm is financed does not matter. The MM propositions forms the basis for modern thinking on capital structure, though it is generally viewed as a purely theoretical result since it is based on perfect market assumptions those are not prevailing in practice. The matter of capital structure has gained much interest and controversy, since the MM Propositions which assert that the value of a firm is independent of its capital structure. The hypothesis proposed by MM created tidal waves in the corporate finance academia. Different theory such as packing order theory and agency cost theory were proposed. Various aspects of capital structure have been put to test and researched by so many researchers. The question is if the capital structure is really irrelevant in a real market and whether a companys profitability and hence value is affected by the capital structure it employs? If not, why capital structure is relevant and which factors make the leverage matter? Apart from profitability, some other factors such as bankruptcy costs, agency costs, taxes, and information asymmetry are considered in determination of capital structure. This study aims and attempts to extend the knowledge of capital structure and profitability relationship in listed UK companies. This analysis can then be extended to look at whether there is in fact an optimal capital structure exist the one which maximizes profitability and hence the value of the firm. 1.1 Context and relevance of the Study The topic of capital structure has been widely explored, though the study is relevant in the different time period and different context to find out whether the evidence concerning the capital structure issue and its various aspects are relevant to a given set of companies in a given period. Given this significance, current study attempts to understand and research on capital structure and its effect on profitability, of large firms in UK in the present context for a period of five years (2005 -2010). Thus, this study attempts to contribute to the research on capital structure in the recent period for large publicly traded companies on FTSE 100. 1.2 Research Objectives The present study is aimed at achieving one main and two secondary objectives. The main objective is to scrutinise the relationship between the capital structure and profitability of the large publicly traded UK firms and to ascertain whether a firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s profitability is related with its capital structure or not based on the empirical evidence generated. Secondly, this study would attempt and investigate to determine if any optimal capital structure exist among the sample of FTSE 100 listed companies. Third objective is to find out any trend of capital structure being exhibited by the UK companies. 1.3 Research Questions and Hypothesis The above objectives are translated in two research question. The main research question is that whether a firms profitability is related with its capital structure or not based on the empirical evidence generated. Hypothesis The first questions can be presented as following hypothesis. The present study shall be undertaken to evaluate this hypothesis based on the tests of the null hypothesis. H1: The profitability of a company is significantly correlated to its capital structure. H0: The profitability of a company is not significantly correlated to its capital structure. The secondary objectives of this study are translated in the determinant question regarding the optimality and trend of capital structure. The second question, will be discussed descriptively is that, Is there an optimal capital structure exists among or any trend of capital structure being exhibited by FTSE 100 listed companies? 1.4 Scope and Limitations of the Study Scope This is an academic study that would shed some light on the matter of capital structure which has been discussed in various different perspectives since the MM propositions. The significance of this study is that it further enhances the research into capital structure of listed firms in UK. Profitability and Capital structure relationship is an ongoing issue and its relevance may change in different period because of the changes in macro and micro economic factors. For practitioners and corporate finance people such as finance executives, controllers and directors of listed firms, this study is relevant and of much interest to get insight of the capital structure and whether it has any effect on the profitability. Limitations The findings of this study will be limited from the following aspects: This study included only FTSE 100 listed firms on the London Stock Exchange (LSE). Hence, its findings were not applicable for all the listed companies in UK. The sample of listed companies for this study included only firms with at least five years of financial data. Firms which are younger than five years or whose five year data could not be obtained will not be included in this study. The study excludes financial utility and other highly regulated industry to avoid any distortions in the result due to industry specific requirements. The cross sectional correlation and regression analysis will be performed using excel formula. CHAPTER 2 LITERATURE REVIEW The various capital structure theories are developed by corporate finance academia for analysing how a firm could combine the securities to maximise its value. The Modigliani and Miller (MM) proposition (1958) were introduced under the perfect capital market assumptions. It refers to an ideal market where there are no taxes at both corporate and personal level, no transaction costs, no agency costs as and managers are rational. It further assumes that investors and firms can borrow at the same rate without restrictions and all participants have access to all relevant information. Thus it provides conditions under which the capital structure of a firm is irrelevant to total firm value. Most of studies focus on the determination of capital structure i.e. to what extent each of the assumptions in the MM model contributes to the determination of the firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s capital structure. Many theories such as the pecking order theory, the trade-off theory and the agency cost theory have been developed. Though much attention was not given to one major aspect of the capital structure, which is the impact of the value of the firm. The value comes from the future cash flow i.e. profit of the firm. Thus capital structure affects value of the firm through the profitability and hence there is a direct relationship between the capital structure and profitability of the firm. Capital Structure The term capital structure can be defined as: à ¢Ã¢â€š ¬Ã…“The mix of a firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s permanent long-term financing represented by debt, preferred stock, and common stock equity.à ¢Ã¢â€š ¬? (Van Horne Wachowicz, 2000, p.470) It can be defined as à ¢Ã¢â€š ¬Ã…“The mix of long-term sources of funds used by the firm. This is also called the firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s à ¢Ã¢â€š ¬Ã…“capitalizationà ¢Ã¢â€š ¬?. The relative total (percentage) of each type of fund is emphasized.à ¢Ã¢â€š ¬? (Petty, Keown, Scott, and Martin, 2001, p.932) One of the exhaustive and inclusive description was given by Masulis (1988, pl): à ¢Ã¢â€š ¬Ã‹Å"Capital structure encompasses a corporationà ¢Ã¢â€š ¬Ã¢â€ž ¢s publicly issued securities, private placements, bank debt, trade debt, leasing contracts, tax liabilities, pension liabilities, deferred compensation to management and employees, performance guarantees, product warranties, and other contingent liabilities. This list represents the major claims to a corporationà ¢Ã¢â€š ¬Ã¢â€ž ¢s assets. Increases or reductions in any of these claims represent a form of capital structure change.à ¢Ã¢â€š ¬? However in this study, for the sake of simplicity, the capital structure will be analysed in term of debt and equity in line with other prominent capital structure studies and theories restricted to the debt equity mix. Profitability The term profitability is a very common term in the business world. It refers to an all round measurement and indicator for a firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s success. Profitability can be defined as the ability of a firm to generate net income or profit on a consistent basis. It is often measured by price to earnings ratio. The accounting definition of profit can be given as the difference between the total revenue and the total costs incurred in bringing to market the product i.e. goods or service. Hence, profitability had come to mean different things for different people. It can be defined and measured in several ways depending on the purpose. It is a generic name for variables such as net income, return on total assets, earnings per share, etc. though the simplest and common meaning of profitability is the net income. 3.1 Early Study on Capital Structure by W A Chudson One of the earliest comprehensive researches into capital structure of business firms was done by Chudson Walter Alexander (1945) on a cross section of manufacturing, mining, trade, and construction companies in the US from the year 1931 to 1937. Although it has been more than two third of a century, that study is still relevant today as before due to the seven questions which he endeavoured to answer. Out of those questions the relevant to this study are as follows. In what way does the structure of assets and liabilities of a given concern reflect the kind of industry in which a concern is engaged, the concernà ¢Ã¢â€š ¬Ã¢â€ž ¢s size and level of profitability? Are there any elements in the corporate balance sheet, either on the asset or the liability side, whose range of variation is so narrow that it is possible to speak of a à ¢Ã¢â€š ¬Ã…“normalà ¢Ã¢â€š ¬? pattern of financial structure? The questions posed by Chudson could be interpreted into the research questions pertinent to this study which are the relationship between profitability and capital structure, the existence of an optimal capital structure, and also the trend of capital structure being practised by a sample of firms. Chudsonà ¢Ã¢â€š ¬Ã¢â€ž ¢s research showed there were undisputable relationships between corporate financial structure and the firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s profitability. As far as this study is concerned, Chudson had successfully proved the relationship between the profitability of a company with various capital structure variables including debt and equity capital. 3.2 M M Propositions In 1958 Merton Miller and Franco Modigliani in their famous Miller-Modigliani (MM) propositions put forward the net operating income approach of and demonstrated that the capital structure is irrelevant in a perfect market. Accordingly, the first Proposition holds that the value of a firm is independent of its capital structure. While the second proposition stats that when first proposition held, the cost of equity capital was a linear increasing function of the debt/equity ratio. As miller wrote subsequently these propositions implied that the weighted average of these costs of capital to a firm would remain the same no matter what combination of financing sources the firm actually chose. (Miller, 1988) In 1962, Barges tested and evaluated the MM propositions predominantly on the validity of the hypothesis that the cost of capital to the firms is unaffected by capital structure. According to Barges (p. 143): à ¢Ã¢â€š ¬Ã…“With respect to the empirical methods employed by MM it was found that, under very frequently encountered conditions, their methods will result in tests which are biased in favour of their propositions and biased against the traditional views.à ¢Ã¢â€š ¬? Barges had empirically proved the existence of some weaknesses in the research design and methodology of Modigliani and Millerà ¢Ã¢â€š ¬Ã¢â€ž ¢s study and concluded that (p. 147) à ¢Ã¢â€š ¬Ã…“Thus, on the basis of the evidence presented herein, the hypothesis of independence between average costs and capital structure appears untenable.à ¢Ã¢â€š ¬? Subsequently many studies were conducted with focus on the determination of capital structure and many theories were presented. 3.3 Profitability and Leverage theories Since MM propositions presented, many studies were conducted by releasing MM assumptions focusing on the extent to which each of the assumptions contributes to the determination of the firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s capital structure. All these theories explains the relationship between leverage and the value of the firm and hence profitability of the firm. There are various theories in order to further explain this relationship. Nevertheless, these theories are actually based on asymmetric information (Myers, 1984), tax deductibility (Modigliani and Miller, 1963; Miller 1977), Bankruptcy costs (Stiglitz, 1972; Titman, 1984) and agency costs (Jensen and Meckling, 1976; Myers, 1977). Two main theories are the pecking order theory and the trade off theory. Pecking Order Theory The Pecking Order Theory is based on information asymmetry between management and investors. So, the stock price of a firm may not reflect correct value of the firm. Myers and Majluf (1984) and Myers (1984) suggest that management issue the security which is overvalued and therefore, undervalued firms tend to avoid issuing equity. They argue that in imperfect capital markets, leverage increases with the extent of information asymmetry. They provided theoretical support to Donaldsonà ¢Ã¢â€š ¬Ã¢â€ž ¢s (1961) findings that firms prefer to use internally generated funds as a financing source and resort to externals funds only if the need for funds was unavoidable. According to (Myers 1995), the dividend policy is à ¢Ã¢â€š ¬Ã…“stickyà ¢Ã¢â€š ¬? and the firms prefer internal to external financing. Firms prefer using internal sources of financing first, then debt and finally external equity obtained by stock issues. Therefore, asymmetric information models seldom point towards a well-defined target debt ratio or optimal capital structure. All things being equal, the more profitable the firms are, the more internal financing they will have, and therefore we should expect a negative relationship between leverage and profitability. The various studies such as Ross (1977), and Myers and Majluf (1984), Harris and Raviv, 1991; Rajan and Zingales, 1995; Booth et al., 2001have supported this relationship that is one of the most systematic findings in the empirical literature. Agency Costs Theory The Agency Costs Theory (Organizational Theory of Capital Structure) emphasize that capital structure was influenced by conflicts between shareholders and managers, and between debt holders and equity holders. Major study into this area was done by Jensen and Meckling (1976) that showed managersà ¢Ã¢â€š ¬Ã¢â€ž ¢ natural tendency to extract too many perquisites and stresses on self-interested behaviour. Obviously, agency costs would increase as the managersà ¢Ã¢â€š ¬Ã¢â€ž ¢ personal ownership stake in the firm decreases. This supplied an argument for debt financing and against à ¢Ã¢â€š ¬Ã‹Å"publicà ¢Ã¢â€š ¬Ã¢â€ž ¢ equity which was contributed by non management investors who cannot monitor management effectively. Fama and Miller (1972), using agency cost theory, proved that leverage was positively associated with firm value. Firms with longer credit histories would have lower cost of debt. The Trade of theory The trade-off theory is based on the considerations of benefits and the costs of debt. This theory argues that firms optimise their capital structure by trading the tax deductibility of interests, bankruptcy costs, and agency costs. This theory is consistent with traditional approach of capital structure. This theory leads to an opposite conclusion. Accordingly if the firms are profitable, they should prefer debt to benefit from the tax shield. Further as the past profitability is a good proxy for future profitability, profitable firms can borrow more because the likelihood of paying back the loans is greater. However after a certain level of leverage, the profitability and the value of the firm will reduce due to interaction of bankruptcy costs and agency costs. 3.4 Various Studies on Capital Structure As the issue of capital structure gained prominence and interest, a number of studies had been done over the years to explore the relationship between capital structure and a firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s various characteristics e.g. growth opportunities, non-debt tax shields, firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s volatility, asset systematic risk, asset unique risk, internal funds availability, asset structure, profitability, industry classification, and firm size. This study is concerned particularly on the relationship between capital structure and profitability. Most of the studies had concluded that capital structure measured by debt/equity ratio had an inverse relationship with profitability measured by Return on Investment (ROI). Professor Myers of MIT had written in 1995 that à ¢Ã¢â€š ¬Ã…“the strong negative correlation between profitability and financial leverageà ¢Ã¢â€š ¬? is one of the à ¢Ã¢â€š ¬Ã‹Å"most striking facts about corporate financingà ¢Ã¢â€š ¬? (p.303). It is worthy to mention here that the aforesaid studies were the most comprehensive ever carried out in the US. One significant research was conducted by Bradley, Jarrell and Rim (1984) using Ordinary Least Squares method to analyze the capital structure of 851 industrial firms over a period of 20 years (1962-81). They concluded that an optimal capital structure actually existed as proposed by finance theorists. Bradley, Jarrell and Kimà ¢Ã¢â€š ¬Ã¢â€ž ¢s findings were supported by El-Khouri in 1989 who studied a sample of 1,040 Companies in US from 27 different industries covering a period of 19 years (1968-86). El-Khourià ¢Ã¢â€š ¬Ã¢â€ž ¢s major findings were that there exists an optimal capital structure, and profitability was significantly but negatively related to capital structure. 3.5 Rajan and Zingalesà ¢Ã¢â€š ¬Ã¢â€ž ¢ Study Rajan and Zingales (1995), in their study of determinant of capital structure find that profitability is negatively or inversely related to gearing consistent with Toy et al. (1974), Kester (1986) and Titman and Wessles (1988). Given, however, that the analysis is effectively performed as an estimation of a reduced form, such a result masks the underlying demand and supply interaction which is likely to be taking place. More profitable firm will obviously need less borrowings, although on the supply-side such profitable firms would have better access to debt, and hence the demand for debt may be negatively related to profits. Most of such studies were conducted in US using local companies and hence represents financing and profitability relationship in US economy and might not be applicable in other countries around the globe. Some of the studies conducted in UK as well though changing business and economic environment and time period may have their impact on such capital structure and profitability relationship. Further as discussed earlier much attention was not given to one major aspect of the capital structure, which is the impact on the profitability and hence the value of the firm. So understanding the effect of capital structure on the profitability and hence the value of the firm in the current economic and business environment is the main motivation for this study. CHAPTER 3 RESERCH FRAMEWORK I intend to use two major sets of variables (Ratios) i.e. Debt and Profitability to ascertain the relationship between the capital structure and profitability. The first set includes Gearing ratios Debt/Equity Ratio and Debt Ratio. The other set includes profitability ratios Return on Equity, and Return on Assets. The variables will be analyzed using the descriptive/time-series Correlation and regression technique. 2.1 Data Sample The data used for the empirical analysis will be derived from Hemscott database contains balance sheet, profit and loss and certain Key Ratio information for FTSE 100 companies in UK. For the purposes of this dissertation, I expect to utilise this data to obtain the required variables for all non-financial companies. 2.2 The Model and Research Methodology The following model outlines the framework for research. It consist two major components i.e. the profitability of a firm as the dependent variables and the capital structure of a firm as the independent variables. The arrow pointing to the right indicated the expected direction of causality. However profitability and capital structure relationship is a two way relationship. DEBT RATIO ROE DEBT/EQUITYRATIO ROA The model gave the foundation for analysis which was to explain the relationship among the two main groups of variables. In as much as possible, variables will be selected on the basis of the literature being reviewed. Thus, while this study is expected to give exciting results, there will be direct ties to earlier studies although may reflect the changing requirements of the time. One prominent issue here is the direction of the causality in the model. This research is based on the notion that the capital structure being practised by a firm would affect its profitability. This particular cause-and-effect relationship had been proved in various studies as found in the literature being reviewed. Though it should be kept in mind that there were a number of researchers who had argued that it was profitability which would influence the capital structure (Chudson 1945, Lamothe 1982, Bowen, Daley and Huber 1982). However, it is not within the scope of this study to determine the direction of causality in this particular relationship but rather to focus on the significance of such a relationship. 2.3 Variables In the first instance, great care was taken to define the dependent and independent variables to be used in the descriptive, co variance and regression analysis. As there are several alternative measures of profitability and gearing, only relevant measures are chosen for this cross-sectional analysis. Dependent Variable Profitability is dependent variable in this analysis and two measures of profitability employed in this analysis are Return on Equity (ROE) and Return on Assets (ROA). ROE is the return on equity and is measured as earnings before tax (EBT) divided by ownersà ¢Ã¢â€š ¬Ã¢â€ž ¢ capital or equity. ROE = EBT/EQUITY ROA is return on assets and is measured as earnings before interest and tax divided by total assets (Titman and Wessels, 1998; Fama and French, 2002 and Flannery and Rangan, 2006). The ratio of earnings before interest and tax (EBIT), to the book value of total assets (TA) ROA = EBITDA/TA Independent Variables Gearing Ratio represents capital structure. Therefore, in order to examine the sensitivity or otherwise of their cross-sectional results to the profitability following two ratios are used in this analysis and defined as: Debt to Total Assets: This is a simple ratio of total debt to total assets DEBT RATIO= TD/ TA Debt to Equity Capital: This is the ratio of total debt to capital, with the capital calculated as total debt plus equity, including preference shares. DEBT/EQUITY RATIO = TD / (TD + ECR + PS) PS the book value of preference shares. Research Plan and Implementation Schedule Research work starts from week beginning from October 4, 2010 and is expected to complete in 10 weeks time. The work is scheduled as follows. Research Plan Week Star Date : 04-10-2010 Week 1 2 3 4 5 6 7 8 9 10 Background reading and literature review X X Research design and plan X Choice of methodology X Gathering data X X X Data analysis and refine X X X Writing up draft X X X Editing final document X X Produce final document X Document passed to supervisor to read X Resources I intend to use following resources Hemscott database for data collection. MS Excel for analysing data. University of Wales online library, internet, and some books on finance. FTSEs Capital Structure and Profitability Relationship FTSEs Capital Structure and Profitability Relationship The capital structure of a firm has long been a much debated issue for academic studies and in the corporate finance world. It is the way a firm finances its assets through some combination of equity, debt, or hybrid securities the composition or structure of its liabilities. In reality, capital structure may be highly complex and include various sources. The question whether capital structure affects to the profitability of the firm or it is affected by profitability is crucial one. Profitability and capital structure relationship is a two way relationship. On the one hand profitability of firm is an important determinant of the capital structure, the other hand changes in capital structure changes affect underlying profits and risk of the firm. Traditionally it was believed that the debt is useful up to certain limit and afterwards it proves costly. There is an optimum level of capital structure exist up to that level increasing debt will improve profitability, beyond that it will reduce profitability. In 1945, Chudson carried out an extensive study that implies the possibility of a relationship between the capital structures practised by a firm with its profitability. The question he endeavours to answer was that, à ¢Ã¢â€š ¬Ã…“In what way does the structure of assets and liabilities of a firm reflect the kind of industry in it is engaged, its size and level of profitability?à ¢Ã¢â€š ¬? In 1958 Merton Miller and Franco Modigliani in their famous Miller-Modigliani (MM) propositions put forward the net operating income approach of and demonstrated that the capital structure is irrelevant in a perfect market. It states irrelevant of capital structure in a perfect market to its value, hence, how a firm is financed does not matter. The MM propositions forms the basis for modern thinking on capital structure, though it is generally viewed as a purely theoretical result since it is based on perfect market assumptions those are not prevailing in practice. The matter of capital structure has gained much interest and controversy, since the MM Propositions which assert that the value of a firm is independent of its capital structure. The hypothesis proposed by MM created tidal waves in the corporate finance academia. Different theory such as packing order theory and agency cost theory were proposed. Various aspects of capital structure have been put to test and researched by so many researchers. The question is if the capital structure is really irrelevant in a real market and whether a companys profitability and hence value is affected by the capital structure it employs? If not, why capital structure is relevant and which factors make the leverage matter? Apart from profitability, some other factors such as bankruptcy costs, agency costs, taxes, and information asymmetry are considered in determination of capital structure. This study aims and attempts to extend the knowledge of capital structure and profitability relationship in listed UK companies. This analysis can then be extended to look at whether there is in fact an optimal capital structure exist the one which maximizes profitability and hence the value of the firm. 1.1 Context and relevance of the Study The topic of capital structure has been widely explored, though the study is relevant in the different time period and different context to find out whether the evidence concerning the capital structure issue and its various aspects are relevant to a given set of companies in a given period. Given this significance, current study attempts to understand and research on capital structure and its effect on profitability, of large firms in UK in the present context for a period of five years (2005 -2010). Thus, this study attempts to contribute to the research on capital structure in the recent period for large publicly traded companies on FTSE 100. 1.2 Research Objectives The present study is aimed at achieving one main and two secondary objectives. The main objective is to scrutinise the relationship between the capital structure and profitability of the large publicly traded UK firms and to ascertain whether a firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s profitability is related with its capital structure or not based on the empirical evidence generated. Secondly, this study would attempt and investigate to determine if any optimal capital structure exist among the sample of FTSE 100 listed companies. Third objective is to find out any trend of capital structure being exhibited by the UK companies. 1.3 Research Questions and Hypothesis The above objectives are translated in two research question. The main research question is that whether a firms profitability is related with its capital structure or not based on the empirical evidence generated. Hypothesis The first questions can be presented as following hypothesis. The present study shall be undertaken to evaluate this hypothesis based on the tests of the null hypothesis. H1: The profitability of a company is significantly correlated to its capital structure. H0: The profitability of a company is not significantly correlated to its capital structure. The secondary objectives of this study are translated in the determinant question regarding the optimality and trend of capital structure. The second question, will be discussed descriptively is that, Is there an optimal capital structure exists among or any trend of capital structure being exhibited by FTSE 100 listed companies? 1.4 Scope and Limitations of the Study Scope This is an academic study that would shed some light on the matter of capital structure which has been discussed in various different perspectives since the MM propositions. The significance of this study is that it further enhances the research into capital structure of listed firms in UK. Profitability and Capital structure relationship is an ongoing issue and its relevance may change in different period because of the changes in macro and micro economic factors. For practitioners and corporate finance people such as finance executives, controllers and directors of listed firms, this study is relevant and of much interest to get insight of the capital structure and whether it has any effect on the profitability. Limitations The findings of this study will be limited from the following aspects: This study included only FTSE 100 listed firms on the London Stock Exchange (LSE). Hence, its findings were not applicable for all the listed companies in UK. The sample of listed companies for this study included only firms with at least five years of financial data. Firms which are younger than five years or whose five year data could not be obtained will not be included in this study. The study excludes financial utility and other highly regulated industry to avoid any distortions in the result due to industry specific requirements. The cross sectional correlation and regression analysis will be performed using excel formula. CHAPTER 2 LITERATURE REVIEW The various capital structure theories are developed by corporate finance academia for analysing how a firm could combine the securities to maximise its value. The Modigliani and Miller (MM) proposition (1958) were introduced under the perfect capital market assumptions. It refers to an ideal market where there are no taxes at both corporate and personal level, no transaction costs, no agency costs as and managers are rational. It further assumes that investors and firms can borrow at the same rate without restrictions and all participants have access to all relevant information. Thus it provides conditions under which the capital structure of a firm is irrelevant to total firm value. Most of studies focus on the determination of capital structure i.e. to what extent each of the assumptions in the MM model contributes to the determination of the firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s capital structure. Many theories such as the pecking order theory, the trade-off theory and the agency cost theory have been developed. Though much attention was not given to one major aspect of the capital structure, which is the impact of the value of the firm. The value comes from the future cash flow i.e. profit of the firm. Thus capital structure affects value of the firm through the profitability and hence there is a direct relationship between the capital structure and profitability of the firm. Capital Structure The term capital structure can be defined as: à ¢Ã¢â€š ¬Ã…“The mix of a firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s permanent long-term financing represented by debt, preferred stock, and common stock equity.à ¢Ã¢â€š ¬? (Van Horne Wachowicz, 2000, p.470) It can be defined as à ¢Ã¢â€š ¬Ã…“The mix of long-term sources of funds used by the firm. This is also called the firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s à ¢Ã¢â€š ¬Ã…“capitalizationà ¢Ã¢â€š ¬?. The relative total (percentage) of each type of fund is emphasized.à ¢Ã¢â€š ¬? (Petty, Keown, Scott, and Martin, 2001, p.932) One of the exhaustive and inclusive description was given by Masulis (1988, pl): à ¢Ã¢â€š ¬Ã‹Å"Capital structure encompasses a corporationà ¢Ã¢â€š ¬Ã¢â€ž ¢s publicly issued securities, private placements, bank debt, trade debt, leasing contracts, tax liabilities, pension liabilities, deferred compensation to management and employees, performance guarantees, product warranties, and other contingent liabilities. This list represents the major claims to a corporationà ¢Ã¢â€š ¬Ã¢â€ž ¢s assets. Increases or reductions in any of these claims represent a form of capital structure change.à ¢Ã¢â€š ¬? However in this study, for the sake of simplicity, the capital structure will be analysed in term of debt and equity in line with other prominent capital structure studies and theories restricted to the debt equity mix. Profitability The term profitability is a very common term in the business world. It refers to an all round measurement and indicator for a firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s success. Profitability can be defined as the ability of a firm to generate net income or profit on a consistent basis. It is often measured by price to earnings ratio. The accounting definition of profit can be given as the difference between the total revenue and the total costs incurred in bringing to market the product i.e. goods or service. Hence, profitability had come to mean different things for different people. It can be defined and measured in several ways depending on the purpose. It is a generic name for variables such as net income, return on total assets, earnings per share, etc. though the simplest and common meaning of profitability is the net income. 3.1 Early Study on Capital Structure by W A Chudson One of the earliest comprehensive researches into capital structure of business firms was done by Chudson Walter Alexander (1945) on a cross section of manufacturing, mining, trade, and construction companies in the US from the year 1931 to 1937. Although it has been more than two third of a century, that study is still relevant today as before due to the seven questions which he endeavoured to answer. Out of those questions the relevant to this study are as follows. In what way does the structure of assets and liabilities of a given concern reflect the kind of industry in which a concern is engaged, the concernà ¢Ã¢â€š ¬Ã¢â€ž ¢s size and level of profitability? Are there any elements in the corporate balance sheet, either on the asset or the liability side, whose range of variation is so narrow that it is possible to speak of a à ¢Ã¢â€š ¬Ã…“normalà ¢Ã¢â€š ¬? pattern of financial structure? The questions posed by Chudson could be interpreted into the research questions pertinent to this study which are the relationship between profitability and capital structure, the existence of an optimal capital structure, and also the trend of capital structure being practised by a sample of firms. Chudsonà ¢Ã¢â€š ¬Ã¢â€ž ¢s research showed there were undisputable relationships between corporate financial structure and the firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s profitability. As far as this study is concerned, Chudson had successfully proved the relationship between the profitability of a company with various capital structure variables including debt and equity capital. 3.2 M M Propositions In 1958 Merton Miller and Franco Modigliani in their famous Miller-Modigliani (MM) propositions put forward the net operating income approach of and demonstrated that the capital structure is irrelevant in a perfect market. Accordingly, the first Proposition holds that the value of a firm is independent of its capital structure. While the second proposition stats that when first proposition held, the cost of equity capital was a linear increasing function of the debt/equity ratio. As miller wrote subsequently these propositions implied that the weighted average of these costs of capital to a firm would remain the same no matter what combination of financing sources the firm actually chose. (Miller, 1988) In 1962, Barges tested and evaluated the MM propositions predominantly on the validity of the hypothesis that the cost of capital to the firms is unaffected by capital structure. According to Barges (p. 143): à ¢Ã¢â€š ¬Ã…“With respect to the empirical methods employed by MM it was found that, under very frequently encountered conditions, their methods will result in tests which are biased in favour of their propositions and biased against the traditional views.à ¢Ã¢â€š ¬? Barges had empirically proved the existence of some weaknesses in the research design and methodology of Modigliani and Millerà ¢Ã¢â€š ¬Ã¢â€ž ¢s study and concluded that (p. 147) à ¢Ã¢â€š ¬Ã…“Thus, on the basis of the evidence presented herein, the hypothesis of independence between average costs and capital structure appears untenable.à ¢Ã¢â€š ¬? Subsequently many studies were conducted with focus on the determination of capital structure and many theories were presented. 3.3 Profitability and Leverage theories Since MM propositions presented, many studies were conducted by releasing MM assumptions focusing on the extent to which each of the assumptions contributes to the determination of the firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s capital structure. All these theories explains the relationship between leverage and the value of the firm and hence profitability of the firm. There are various theories in order to further explain this relationship. Nevertheless, these theories are actually based on asymmetric information (Myers, 1984), tax deductibility (Modigliani and Miller, 1963; Miller 1977), Bankruptcy costs (Stiglitz, 1972; Titman, 1984) and agency costs (Jensen and Meckling, 1976; Myers, 1977). Two main theories are the pecking order theory and the trade off theory. Pecking Order Theory The Pecking Order Theory is based on information asymmetry between management and investors. So, the stock price of a firm may not reflect correct value of the firm. Myers and Majluf (1984) and Myers (1984) suggest that management issue the security which is overvalued and therefore, undervalued firms tend to avoid issuing equity. They argue that in imperfect capital markets, leverage increases with the extent of information asymmetry. They provided theoretical support to Donaldsonà ¢Ã¢â€š ¬Ã¢â€ž ¢s (1961) findings that firms prefer to use internally generated funds as a financing source and resort to externals funds only if the need for funds was unavoidable. According to (Myers 1995), the dividend policy is à ¢Ã¢â€š ¬Ã…“stickyà ¢Ã¢â€š ¬? and the firms prefer internal to external financing. Firms prefer using internal sources of financing first, then debt and finally external equity obtained by stock issues. Therefore, asymmetric information models seldom point towards a well-defined target debt ratio or optimal capital structure. All things being equal, the more profitable the firms are, the more internal financing they will have, and therefore we should expect a negative relationship between leverage and profitability. The various studies such as Ross (1977), and Myers and Majluf (1984), Harris and Raviv, 1991; Rajan and Zingales, 1995; Booth et al., 2001have supported this relationship that is one of the most systematic findings in the empirical literature. Agency Costs Theory The Agency Costs Theory (Organizational Theory of Capital Structure) emphasize that capital structure was influenced by conflicts between shareholders and managers, and between debt holders and equity holders. Major study into this area was done by Jensen and Meckling (1976) that showed managersà ¢Ã¢â€š ¬Ã¢â€ž ¢ natural tendency to extract too many perquisites and stresses on self-interested behaviour. Obviously, agency costs would increase as the managersà ¢Ã¢â€š ¬Ã¢â€ž ¢ personal ownership stake in the firm decreases. This supplied an argument for debt financing and against à ¢Ã¢â€š ¬Ã‹Å"publicà ¢Ã¢â€š ¬Ã¢â€ž ¢ equity which was contributed by non management investors who cannot monitor management effectively. Fama and Miller (1972), using agency cost theory, proved that leverage was positively associated with firm value. Firms with longer credit histories would have lower cost of debt. The Trade of theory The trade-off theory is based on the considerations of benefits and the costs of debt. This theory argues that firms optimise their capital structure by trading the tax deductibility of interests, bankruptcy costs, and agency costs. This theory is consistent with traditional approach of capital structure. This theory leads to an opposite conclusion. Accordingly if the firms are profitable, they should prefer debt to benefit from the tax shield. Further as the past profitability is a good proxy for future profitability, profitable firms can borrow more because the likelihood of paying back the loans is greater. However after a certain level of leverage, the profitability and the value of the firm will reduce due to interaction of bankruptcy costs and agency costs. 3.4 Various Studies on Capital Structure As the issue of capital structure gained prominence and interest, a number of studies had been done over the years to explore the relationship between capital structure and a firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s various characteristics e.g. growth opportunities, non-debt tax shields, firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s volatility, asset systematic risk, asset unique risk, internal funds availability, asset structure, profitability, industry classification, and firm size. This study is concerned particularly on the relationship between capital structure and profitability. Most of the studies had concluded that capital structure measured by debt/equity ratio had an inverse relationship with profitability measured by Return on Investment (ROI). Professor Myers of MIT had written in 1995 that à ¢Ã¢â€š ¬Ã…“the strong negative correlation between profitability and financial leverageà ¢Ã¢â€š ¬? is one of the à ¢Ã¢â€š ¬Ã‹Å"most striking facts about corporate financingà ¢Ã¢â€š ¬? (p.303). It is worthy to mention here that the aforesaid studies were the most comprehensive ever carried out in the US. One significant research was conducted by Bradley, Jarrell and Rim (1984) using Ordinary Least Squares method to analyze the capital structure of 851 industrial firms over a period of 20 years (1962-81). They concluded that an optimal capital structure actually existed as proposed by finance theorists. Bradley, Jarrell and Kimà ¢Ã¢â€š ¬Ã¢â€ž ¢s findings were supported by El-Khouri in 1989 who studied a sample of 1,040 Companies in US from 27 different industries covering a period of 19 years (1968-86). El-Khourià ¢Ã¢â€š ¬Ã¢â€ž ¢s major findings were that there exists an optimal capital structure, and profitability was significantly but negatively related to capital structure. 3.5 Rajan and Zingalesà ¢Ã¢â€š ¬Ã¢â€ž ¢ Study Rajan and Zingales (1995), in their study of determinant of capital structure find that profitability is negatively or inversely related to gearing consistent with Toy et al. (1974), Kester (1986) and Titman and Wessles (1988). Given, however, that the analysis is effectively performed as an estimation of a reduced form, such a result masks the underlying demand and supply interaction which is likely to be taking place. More profitable firm will obviously need less borrowings, although on the supply-side such profitable firms would have better access to debt, and hence the demand for debt may be negatively related to profits. Most of such studies were conducted in US using local companies and hence represents financing and profitability relationship in US economy and might not be applicable in other countries around the globe. Some of the studies conducted in UK as well though changing business and economic environment and time period may have their impact on such capital structure and profitability relationship. Further as discussed earlier much attention was not given to one major aspect of the capital structure, which is the impact on the profitability and hence the value of the firm. So understanding the effect of capital structure on the profitability and hence the value of the firm in the current economic and business environment is the main motivation for this study. CHAPTER 3 RESERCH FRAMEWORK I intend to use two major sets of variables (Ratios) i.e. Debt and Profitability to ascertain the relationship between the capital structure and profitability. The first set includes Gearing ratios Debt/Equity Ratio and Debt Ratio. The other set includes profitability ratios Return on Equity, and Return on Assets. The variables will be analyzed using the descriptive/time-series Correlation and regression technique. 2.1 Data Sample The data used for the empirical analysis will be derived from Hemscott database contains balance sheet, profit and loss and certain Key Ratio information for FTSE 100 companies in UK. For the purposes of this dissertation, I expect to utilise this data to obtain the required variables for all non-financial companies. 2.2 The Model and Research Methodology The following model outlines the framework for research. It consist two major components i.e. the profitability of a firm as the dependent variables and the capital structure of a firm as the independent variables. The arrow pointing to the right indicated the expected direction of causality. However profitability and capital structure relationship is a two way relationship. DEBT RATIO ROE DEBT/EQUITYRATIO ROA The model gave the foundation for analysis which was to explain the relationship among the two main groups of variables. In as much as possible, variables will be selected on the basis of the literature being reviewed. Thus, while this study is expected to give exciting results, there will be direct ties to earlier studies although may reflect the changing requirements of the time. One prominent issue here is the direction of the causality in the model. This research is based on the notion that the capital structure being practised by a firm would affect its profitability. This particular cause-and-effect relationship had been proved in various studies as found in the literature being reviewed. Though it should be kept in mind that there were a number of researchers who had argued that it was profitability which would influence the capital structure (Chudson 1945, Lamothe 1982, Bowen, Daley and Huber 1982). However, it is not within the scope of this study to determine the direction of causality in this particular relationship but rather to focus on the significance of such a relationship. 2.3 Variables In the first instance, great care was taken to define the dependent and independent variables to be used in the descriptive, co variance and regression analysis. As there are several alternative measures of profitability and gearing, only relevant measures are chosen for this cross-sectional analysis. Dependent Variable Profitability is dependent variable in this analysis and two measures of profitability employed in this analysis are Return on Equity (ROE) and Return on Assets (ROA). ROE is the return on equity and is measured as earnings before tax (EBT) divided by ownersà ¢Ã¢â€š ¬Ã¢â€ž ¢ capital or equity. ROE = EBT/EQUITY ROA is return on assets and is measured as earnings before interest and tax divided by total assets (Titman and Wessels, 1998; Fama and French, 2002 and Flannery and Rangan, 2006). The ratio of earnings before interest and tax (EBIT), to the book value of total assets (TA) ROA = EBITDA/TA Independent Variables Gearing Ratio represents capital structure. Therefore, in order to examine the sensitivity or otherwise of their cross-sectional results to the profitability following two ratios are used in this analysis and defined as: Debt to Total Assets: This is a simple ratio of total debt to total assets DEBT RATIO= TD/ TA Debt to Equity Capital: This is the ratio of total debt to capital, with the capital calculated as total debt plus equity, including preference shares. DEBT/EQUITY RATIO = TD / (TD + ECR + PS) PS the book value of preference shares. Research Plan and Implementation Schedule Research work starts from week beginning from October 4, 2010 and is expected to complete in 10 weeks time. The work is scheduled as follows. Research Plan Week Star Date : 04-10-2010 Week 1 2 3 4 5 6 7 8 9 10 Background reading and literature review X X Research design and plan X Choice of methodology X Gathering data X X X Data analysis and refine X X X Writing up draft X X X Editing final document X X Produce final document X Document passed to supervisor to read X Resources I intend to use following resources Hemscott database for data collection. MS Excel for analysing data. University of Wales online library, internet, and some books on finance.