Financial Statement Analysis of Ibm

Financial educational activity abbreviation of IBM Financial Statement Analysis of IBM I. Compevery Facts IBM International Business Machines Corpo balancen The home office of IBM is turn up in Armonk, Town of North Castle, New York, United States. IBM was founded in 1911 as the Computing Tabulating Recording Company (CTR) by a merger of triple companies the Tabulating Machine Company, the International Time Recording Company, and the Computing Scale Company.CTR pick out the sp abrogate a penny International Business Machines in 1924, utilise a name previously designated to CTRs subsidiary in Canada and later South America. Standard industrial Classification Codes be 7379 which ar mainly on electronic electronic computer and congress stuff. Chief executive director Officer (CEO) of IBM at at a time is Virginia M. Rometty. Chairman of the Board of IBM now is Samuel J. Palmisano. The end date of recent fiscal course of study of IBM is Dec. 31st 2011. of import wor k IBM provides include business consulting, IT colligate assists, outsourcing service and training.Main products IBM provides include mainframe, package, body-build and storage. IBMs major op eontions consist of five business segments orbiculate engineering go, Global Business go, packet, Systems and Technology and Global Financing. In the a la mode(p) fiscal course of study, IBM has an add together of 433,362 wholly owned employees tout ensemble over the world. PricewaterhouseCoopers LLP (PwC) is the unconditional auditor retained to audit IBMs consolidated financial Statements and the effectivity of the bon tons internal escort over financial reporting.The stock ticker symbolism is IBM. IBM roughhewn stock is listed on the New York s panache Exchange, the Chicago Stock Exchange, and outside the United States. And the latest stock expenditure was $188. 32 on Nov. fourteenth 2012 on NYSE. II. Business and Strategy Analysis 1. Industry rendering and Competitive Anlysis Since IBM is a highly diversified confederacy, it concentrates on several industries at the same time. So lets say IBM mainly concentrates on the computer related expectantw ar and packet manufacturing industries. As we all now, these twain industries supplement severally early(a) and depend on each separate darn the approximately war homogeneous companies always work on somewhat(prenominal) industries at the same time. The computer related software and hardware manufacturing intentness is characterized by signifi fag endt research and cultivation activity and rapid expert change. The rapid pace of innovation in this sector creates a uniform demand for moder and fast-breaking products and applications. While the sector has g classn faster than nigh new(prenominal) industries over the past several decades, it faces challenges from rising speak tos, global food market place conduct, and the rapid pace of innovation.The main competitors for IBM now are Hewlett-Packard, Dell and Microsoft. here I go forth use the Porter five forces analysis to go out a rivalrous analysis among these quadruplet companies. Threat of invigorated ambition The market of this exertion is paid in some part equivalent high-level software and frames, non too meshing subject in some new(prenominal) move alike PCs. So we tail end say the market is alleviate returns satisfactory and is attracting the novel entrants, which has the possibility to decrease profitability for all firms in this industry.While in this industry, because of the existence of several self-aggrandizing companies, the barriers to entry are relatively high which are non-profitable for the new entry firms. The several gargantuan companies shake off held rattling high brand honor, customer loyalty, greet-efficient dispersal modes and scale effect to decrease the be and sum up the dough. There is non too oft panic from the new firms to compete with IBM, ther e are high possibility for other main competitors like HP, Dell and Microsoft to picture the markets where IBM is making high profit, well they adjudge the R&D capabilities.But to turn over the biggest profits, although IBMs main competitors are Hewlett-Packard, Dell and Microsoft, each of these companies has a different locate area. Dell makes to the highest degree of its money on PC and server hardware, epoch Hewlett-Packard is more(prenominal) diversified as the induceer in PCs and Imaging effect as well as offering IT services and Microsoft concentrates on the computer software knowledge. So we keister conclude that there is threat of new competition, but the level is relatively low.Threat of substitute products or services The threat of substitute products or services is relatively high compared with the threat of new competition. Also these threats come from the main competitors. For products, such as PC, near customers volition compare the harm, screen size, life time and other attributes instead of save the brand the same way as services such as IT consulting etc. Bargaining position of customers The bargaining power of customers is likewise set forth as the market of outputs the ability of customers to put the firm under pressure, which also affects the customers sensitivity to price changes.In this factor, because customers of these ii industries throw many channels to some(prenominal)er the products and services, high information availability, different choices, differentiated advantages of products and customers is also kind of price sensitive. So we lav conclude that the bargaining power of customers is strong. Bargaining power of suppliers The bargaining power of suppliers is also described as the market of inputs. Suppliers of untoughened materials, components, labor, and services (such as expertise) to the firm can be a delegatetime of power over the firm, when there are few substitutes.Because there are plenty of s uppliers in most parts, presence of substitute keeps being produced, tier of differentiation of inputs is not high sufficiency and supplier competition is rattling strong. Then we can conclude that bargaining power of suppliers is also in a lower level. Intensity of private-enterprise(a) rivalry Intensity of competitive rivalry is the major determinant of the competitiveness of the industry. Sustainable competitive advantages done innovation, all these four big competitive companies have strong R&D team and invest very much money on it.And we can always see the advertisements of their products anywhere. Each caller has a differentiated competitive strategy to concentrate on their own areas and holds sustainable competitive advantages by dint of innovation. So we can conclude that the intensity of competitive rivalry is rattling high. Given the Porter five forces analysis above, here we have a everyday conclusion that computer related hardware and software industries are rel atively highly competitive and sustainable root word on the reliable situation and future development trends.There do have some profitable niche market and some areas can be developed further. The big four companies have their own advantages and fury and also compete severely with each other. There is no easy way for each of them to lead in all. 2. Industrys Future Prospects Assessment When we come to emit about the future prospects of computer related hardware and software industries, Im sure that it will not be that promising like nanotechnology or ge pelfic therapy which is still in research period, since he computer related hardware and software industries have been developed many classs, most of products, technologies and services have been mature enough. But it is still profitable and sustainable because the world has been established based on these two industries. Without their support, the world cannot take in forward even a bittie. And the intense competition and fast exchange locomote will drive these two industries to be developed faster and faster.There may be some lawsuits and governmental regulations there confronting companies, such as the plagiarization, copyright infringement, anti-monopoly, cutthroat competition, revenue issue, topical anesthetic anaesthetic protection and so on. These will be the main legal issues that companies of two these industries are certainly conflict now and will still never end in the future. plagiarisation and copyright infringement will be the two main issues that these companies should remunerate more emphasis on cuz these two are the vital parts for them to keep their competitive advantages and make profits.Incorporating the relative small companies may be judged by the court saying it is buying the potential competitor callable to the concern of monopoly of government. Cutthroat competition may not happen, while once it happened, it will certainly be a disaster. Tax issue and the local prot ection are always come together. Local government may protect the local companies by dealing high tax to the overseas competitors. Furthermore, collect to the fast replacement speed, the price of products and services in these two industries will never be high as long as there is no monopoly.So the cost run across is one of the key parts to determine these companies future. And innovation will never be too much. 3. summarisation and Evaluation of IBMs Future Goals and Strategies The adjacent decade holds enormous forebode for IBM. They are uniquely positioned to deliver the benefits of a vast new inwrought resource a gusher of entropy from both man-made and natural systems that can now be tapped to help businesses and institutions succeed in an change magnitudely composite and dynamic global economy.IBM has steady receivedigned its business to lead in a new era of computing and to enable its clients to benefit from the new capabilities that era is creating. As a conseque nce, its investors benefit from a business model that is both sustainable over the long term and fueled by some of the worlds most attractive high-growth markets and technologies. It will be on track toward its 2015 Road Map goal of at least $20 in ope dimensionn lettuce per allocate and $20 one thousand thousand in tax growth by 2015. This goal for IBM is quite suitable.There are four high-growth spaces as following, growth markets, business analytics, cloud and smarter pla cabbage. These four spaces IBM is working hard on will certainly drive to high profits imputable to its high emphasis and profession. The world is undergoing disruption, but IBM now stands out among its industry peers and in business at large as distinctively able to keep moving to the future, and to keep generating differentiating grade for its clients, its employees and the citizens of the world. III. Accounting AnalysisThe ac familying f utilize Financial Statements and foot notes of the International Business Machines Corpo proportionalityn (IBM or the social club) have been alert in accordance with accounting principles globally accepted in the United States of America (GAAP). 1. Revenue The gross recognition principle provides steering on when a company must recognize revenue. To recognize promoter to put down it. If revenue is recognise too early, a company would look more profitable than it is. If revenue is recognized too late, a company would look less profitable than it is. The company recognizes revenue when it is realized or realizable and clear.The company considers revenue realized or realizable and earn when it has persuasive evidence of an arrangement, delivery has occurred, the clear gross gross revenue price is fixed or calculable and collectability is reasonably assured. Delivery does not occur until products have been shipped or services have been provided to the client, risk of loss has transferred to the client, and either client adoption has been obtained, client acceptance provisions have lapsed, or the company has object evidence that the criteria specified in the client acceptance provisions have been satisfied.The gross gross revenue price is not considered to be fixed or determinable until all contingencies related to the sale have been resolved. IBMs revenue was growing in an increasing speed and its pre-tax income gross profit grew from 18. 9 pct in 2009 to 19. 7 portion in 2010 to 20. 02 percent in 2011 which is the ninth sequent increasing course. If only based on this, IBM was doing conk out and bring out in last three years. 2. Major Expenses The get down recognition (or matching) principle, prescribes that a company record the set downs it incurred to generate the revenue reported.The expenditure recognition (or matching) principle aims to record write downs in the same accounting period as the revenues that are earned as a result of those set downs. This matching of outgos with the revenue benefits is a major part of the adjusting process. Under the accrual basis of accounting, disbursals are recognized when incurred, unremarkably when honests are received or services are consumed. This may not be when the goods or services are actually paid for. The point at which an get down is recognized is dependent on the nature of the execution or other event that gives rise to the expense.The major expense of IBM includes stock-based mesh, prepared expense, advertising and promotional expense, research expense, development expense, engineering expense, workforce rebalancing charges, retirement-related be, amortisation of acquired intangibles additions, touch on expense and other expense. Below tables show the main expenses IBM recognized from 2009 to 2011. obtain panel 3-2-1 wide-cut Expense and other(a) Income ($ in millions) For the year stop declination 31 2011 2010 2009 wide-cut consolidated expense and other (income) $29,135 $26,291 $25,647 come operating (non-GAAP) expense and other (income) $28,875 $26,202 $25,603 numerate consolidated expense-to-revenue proportion 27. 30% 26. 30% 26. 80% Operating (non-GAAP) expense-to-revenue dimension 27. 00% 26. 20% 26. 70% We can see from this table that the expense is increasing with time goes on. While compared with the increasing speed of revenue and that of expense-to-revenue, we can figure out a fiddling bit progress on expense control of IBM. put back 3-2-2 Selling, world-wide and Administrative ($ in millions) For the year cease declination 31 2011 2010 2009Selling, general and administrative expense Selling, general and administrativeother $20,287 $18,585 $17,872 Advertising and promotional expense $1,373 $1,337 $1,255 Workforce rebalancing charges $440 $641 $474 bangment-related costs $603 $494 $503 amortisation of acquired intangibles assets $289 $253 $285 Stock-based allowance $514 $488 $417 Bad debt expense $88 $40 $147 impart consolidated selling, general and admin istrative expense $23,594 $21,837 $20,952 Non-operating adjustments amortisation of acquired intangible assets ($289) ($253) ($285) achievement-related charges ($20) ($41) ($8) Non-operating retirement-related (costs)/income ($13) $84 $127 Operating (non-GAAP) selling, general and administrative expense $23,272 $21,628 $20,787 Table 3-2-3 Research, Development and Engineering ($ in millions) For the year terminate December 31 2011 2010 2009 note consolidated research, development and engineering $6,258 $6,026 $5,820 Operating (non-GAAP) research, development and engineering $6,345 $6,152 $5,943 Table 3-2-4 Interest Expense ($ in millions)For the year ended December 31 2011 2010 2009 Interest expense $411 $368 $402 From all the tables above, we can become that the most important or the highest portion of the expense is the selling, general and administrative expense which includes most of the expense. 3. Investments IBMs 2009 hard specie investiture was $1. 2 gazillion fo r six attainments five of them in key areas of software. And after investing $ 5. 8 billion in R &D and $3. 7 billion in cabbage capital expenditures, IBM was able to return more than $10 billion to you $7. billion through share repurchase and $2. 9 billion through dividends. fit years dividend increase was 10 percent, marking the 14th year in a row in which it has raised its dividend. IBMs 2010 bullion flow has enabled it to invest in the business and to generate authentic returns to investors. Our 2010 gold investiture was $6 billion for 17 acquisitions 13 of them in key areas of software. After investing $6 billion in R&D and $4 billion in light up capital expenditures, IBM was able to return more than $18 billion to you $15. billion through share repurchases and $3. 2 billion through dividends. Last years dividend increase was 18 percent, marking the 15th year in a row in which it has raised its dividend. Over the past decade, IBM has returned $107 billion to you in the form of dividends and share repurchases, while investing $70 billion in capital expenditures and acquisitions, and almost $60 billion in R&D. IBMs 2011 notes flow has enabled IBM to invest in the business and to generate substantial returns to investors, while spending $6. billion on R&D. In 2011 IBM invested $1. 8 billion for five acquisitions in key areas of software and $4. 1 billion in electronic dischargework capital expenditures. IBM was able to return $18. 5 billion to you $15 billion through share repurchases and $3. 5 billion through dividends. Last years dividend increase was 15 percent, marking the 16th year in a row in which IBM has raised its dividend, and the 96th consecutive year in which it has paid one. From the table and the description above, the R&D investment was always above 5% of summate revenue.IBM put much emphasis on its R&D to keep the sustainable development and competitive advantages. 4. Inventories Raw materials, work in process and finished go ods are give tongue to at the lower of average cost or market. specie flows related to the sale of inventories are reflected in scratch coin from operating activities in the Consolidated Statement of silver Flows. Table 3-4-1 Inventories ($ in millions) At December 31 2011 2010 2009 Finished goods $589 $432 $533 Work in process and rude(a) materials $2,007 $2,018 $1,960 fall $2,595 $2,450 $2,494 5.Property, graft and Equipment Property, plant and equipment are carried at cost and depreciated over their estimated usable lives apply the straight-line method. The estimated useful lives of certain depreciable assets are as follows buildings, 30 to 50 years building equipment, 10 to 20 years the three e narrates improvements, 20 years plant, laboratory and office equipment, 2 to 20 years and computer equipment, 1. 5 to 5 years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease term, rarely exceeding 25 years.Below is th e table of Property, Plant and Equipment from 2009 to 2011 including the depreciation. Table 3-5-1 Property, Plant and Equipment ($ in millions) At December 31 2011 2010 2009 Land and cut improvements $786 $777 $737 Buildings and building improvements $9,531 $9,414 $9,314 Plant, laboratory and office equipment $26,843 $26,676 $9,314 Plant and other property clear $37,160 $36,867 $35,940 slight Accumulated depreciation $24,703 $24,435 $23,485 Plant and other property winnings $12,457 $12,432 $12,455 Rental machines $2,964 $3,422 $3,656less(prenominal) Accumulated depreciation $1,538 $1,758 $1,946 Rental machinesnet $1,426 $1,665 $1,710 entirenet $13,883 $14,096 $14,165 The data from the table show a relatively steadily decreasing status of IBMs property, plant and equipment in all. This heart a good control and a relatively 6. saving grace and Intangibles Below tables show the intangibles from 2009 to 2011 Table 3-6-1 Intangibles in 2009 ($ in millions) At December 31, 2009 gro ssCarryingAmount Accumulated Amortization concluding Carrying Amount Intangible asset class Capitalized software $1,765 ($846) $919 guest relationships $1,367 ($677) $690 Completed technology $1,222 ($452) $770 Patents/trademarks $174 ($59) $115 new(prenominal)* $94 ($75) $19 get along $4,622 ($2,109) $2,513 Table 3-6-2 Intangibles in 2010 ($ in millions) At December 31, 2010 consummate(a)CarryingAmount Accumulated Amortization straighten out Carrying Amount Intangible asset class Capitalized software $1,558 ($726) $831 invitee relationships $1,709 ($647) $1,062 Completed technology $2,111 ($688) $1,422In-process R&D $21 $0 $21 Patents/trademarks $211 ($71) $140 different* $39 ($28) $11 centre $5,649 ($2,161) $3,488 Table 3-6-3 Intangibles in 2011 ($ in millions) At December 31, 2011 GrossCarryingAmount AccumulatedAmortization networkCarryingAmount Intangible asset class Capitalized software $1,478 ($678) $799 Client relationships $1,751 ($715) $1,035 Completed tech nology $2,156 ($745) $1,411 In-process R&D $22 ($1) $21 Patents/trademarks $207 ($88) $119 some other* $29 ($22) $7 $5,642 ($2,250) $3,392The net carrying amount of intangible assets fall $96 million during the year ended December 31, 2011, primarily due to amortization, partially offset by intangible asset additions. No check of intangible assets was recorded in any of the periods presented. wide amortization was $1,226 million, $1,174 million and $1,221 million for the years ended December 31, 2011, 2010 and 2009 respectively. The aggregate intangible amortization expense for acquired intangibles (excluding capitalized software) was $634 million, $517 million and $489 million for the years ended December 31, 2011, 2010 and 2009 respectively.In addition, in 2011 the company retired $1,133 million of fully amortized intangible assets, impacting both the gross carrying amount and store amortization for this amount. The amortization expense for each of the five succeed years rel ating to intangible assets onlinely recorded in the Consolidated Statement of Financial Position is estimated to be the following at December 31, 2011 Table 3-6-4 Estimated consolidated statement of financial position ($ in millions) Capitalized software program Acquired Intangibles summate 012 $480 $634 $1,113 2013 $250 $590 $840 2014 $70 $446 $516 2015 $340 $340 2016 $303 $303 The changes in the goodwill balances by reportable segment, for the years ended December 31, 2009, 2010 and 2011, are as follows Table 3-6-5 Goodwill Balances in 2009 ($ in millions) incision Balance anuary 1, 2009 Goodwill Additions Purchase Price Adjustments Divestitures unknown gold interpreting and new(prenominal) Adjustments Balance December 31, 2009Global Business Services $3,870 $172 $4,042 Global Technology Services $2,616 $10 $1 $150 $2,777 Software $10,966 $994 ($50) ($13) $708 $12,605 Systems and Technology $772 ($7) $1 $12,605 aggregate $18,226 $1,004 ($ 56) ($13) $1,031 $20,190 Table 3-6-6 Goodwill Balances in 2010 ($ in millions) Segment Balance anuary 1, 2010 Goodwill Additions Purchase Price Adjustments Divestitures Foreign bills Translation and Other Adjustments Balance December 31, 2010Global Business Services $4,042 $252 $0 $35 $4,329 Global Technology Services $2,777 $32 ($1) ($104) $2,704 Software $12,605 $4,095 ($52) $315 $16,963 Systems and Technology $766 $375 ($1) ($1) $1,139 derive $20,190 $4,754 ($54) $245 $25,136 Table 3-6-7 Goodwill Balances in 2009 ($ in millions) Segment Balance anuary 1, 2011 Goodwill Additions Purchase Price Adjustments Divestitures Foreign Currency Translation and Other Adjustments Balance December 31, 2011Global Business Services $4,329 $14 $0 ($10) ($20) $4,313 Global Technology Services $2,704 ($1) ($2) ($55) $2,646 Software $16,963 $1,277 $10 ($2) ($127) $18,121 Systems and Technology $1,139 ($6) $0 $1,133 aggregate $25,136 $1,291 $2 ($13) ($2 03) $26,213 Purchase price adjustments recorded in the 2011, 2010 and 2009 were related to acquisitions that were completed on or prior to December 31, 2010, 2009 or 2008 respectively, and were still subject to the flierment period that ends at the earlier of 12 months from the acquisition date or when information becomes available.There were no goodwill deterioproportionn losses recorded in 2011, 2010 or 2009 and the company has no accumulated impairment losses. IV. Financial Analysis 1. Financial Ratio Display and adaptation 2. 1 Liquidity and power Ratios a. Current dimension 2011 Current proportion=Current assetsCurrent liabilities=50,92842,123=1. 211 2010 Current dimension=Current assetsCurrent liabilities=48,11640,562=1. 191 The actual dimension is a financial proportion that measures whether or not a firm has enough resources to pay its debts over the conterminous 12 months. It compares a firms new assets to its sure liabilities.Here, we can conclude that IBM is sumly able to pay for its debt. b. warm proportion (Acid-test ratio) 2011 Quick ratio=Cash+Short-term investments+ Current receivablesCurrent liabilities=11,922+4,895+18,38242,123=0. 841 2010 Quick ratio=Cash+Short-term investments+ Current receivablesCurrent liabilities=10,661++4,895+17,39140,562=0. 811 Quick assets are property, short-run investments, and current receivables. These are the most liquid types of current assets. The acid-test ratio, also called pronto ratio, reflects on a companys short-term liquid.The quick ratio is more conservative than the current ratio, a more well-known liquidity measure, because it excludes archive from current assets. line is excluded because some companies have difficulty bout their enumeration into cash. Here, the quick ratio is pretty good for IBM. c. Accounts receivable disturbance 2011 Accounts receivable turnover rate= fee salesAverage accounts receivable, net=106,91617,886. 5=5. 97 multiplication 2010 Accounts receivable turnover= authorise salesAverage accounts receivable, net=99,87016,724=5. 97 measureAn accounting measure used to quantify a firms effectiveness in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measure how expeditiously a firm uses its assets. d. Inventory turnover 2011 Inventory turnover=Cost of goods soldAverage inventory=56,7782,522. 5=22. 51 times 2010 Inventory turnover=Cost of goods soldAverage inventory=53,8572,472=21. 89 times The Inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year. e. Days sales collect 011 Days sales uncollected=Accounts receivable, net gelt sales*365=18,382106,916*365=62. 75 days 2010 Days sales uncollected=Accounts receivable, net scratch sales*365=17,39199,870*365=63. 56 days Accounts receivable turnover provides insight into how frequently a company collects its accounts. Days sales uncollected is one measure of this activity. f. Days sal es in inventory 2011 Days sales in inventory= end point inventoryCost of goods sold*365=2,59556,778*365=16. 68 days 2010 Days sales in inventory= goal inventoryCost of goods sold*365=2,45053,857*365=16. 0 days Days sales in inventory is a useful measure in evaluating inventory liquidity. A measure of how quickly a company turns its inventory into sales. Days sales in inventory is linked to inventory in a way that days sales uncollected is linked to receivables. g. sum up assets turnover 2011 Total assets turnover= boodle salesAverage total assets=106,916114,942. 5=0. 93 times 2010 Total assets turnover= give notice salesAverage total assets=99,870111,237=0. 90 times The total asset turnover ratio measures the ability of a company to use its assets to expeditiously generate sales.This ratio considers all assets, current and fixed. Those assets include fixed assets, like plant and equipment, as well as inventory, accounts receivable, as well as any other current assets. 2. 2 Solvency Ratios a. Debt ratio 2011 Debt ratio=Total liabilitiesTotal assets=96,197 116,433 =82. 6% 2010 Debt ratio=Total liabilitiesTotal assets=90,279113,452=79. 6% A ratio that indicates what residual of debt a company has relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load. b. Equity ratio 011 Equity ratio=Total uprightnessTotal assets=20,236116,433=17. 4% 2010 Equity ratio=Total beauteousnessTotal assets=23,172113,452=20. 4% A financial ratio indicating the relative proportion of candor used to finance a companys assets. The two components are often taken from the firms balance sheet or statement of financial position (so-called playscript value), but the ratio may also be figure using market values for both, if the companys equities are publicly traded. c. Interest coverage ratio 2011 Interest coverage ratio=Income before wager expense and income taxesInterest expense=22,90 4411=55. times 2010 Interest coverage ratio=Income before interest expense and income taxesInterest expense=20,923368=56. 9 times A metric used to measure a companys ability to adjoin its debt obligations. It is calculated by taking a companys earnings before interest and taxes (EBIT) and dividing it by the total interest account payable on bonds and other contractual debt. It is usually quoted as a ratio and indicates how many times a company can cover its interest charges on a pretax basis. Failing to meet these obligations could force a company into bankruptcy. 2. Profitability Ratios a. Return on total assets 2011 Return on total assets= concluding incomeAverage total assets=15,855114,942. 5=13. 8% 2010 Return on total assets=Net incomeAverage total assets=14,833 111,237=13. 3% A ratio that measures a companys earnings before interest and taxes (EBIT) against its total net assets. The ratio is considered an indicator of how effectively a company is using its assets to generate earnings before contractual obligations must be paid. b. Return on equity 2011 Return on equity=Net income-Preferred dividendsAverage equity=15,855-3,47321704=57. % 2010 Return on equity=Net income-Preferred dividendsAverage equity=14,833- 3,177 22963. 5=50. 8% The amount of net income returned as a voice of shareholders equity. Return on equity measures a corporations profitability by revealing how much profit a company generates with the money shareholders have invested. c. Net income as a percentage of net sales (Profit coast ratio) 2011 Net income as a percentage of net sales=Net incomeNet sales=15,855106,916=14. 8% 2010 Net income as a percentage of net sales=Net incomeNet sales=14,833 99,870=14. % A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings. Profit margin is very useful when comparing companies in similar industries. A high prof it margin indicates a more profitable company that has better control over its costs compared to its competitors. d. Gross profit rate (Gross margin ratio) 2011 Gross profit rate=Net sales-Cost of goods soldNet sales=106,916-56,778106,916=46. 9% 2010 Gross profit rate=Net sales-Cost of goods soldNet sales=99,870-5385799,870=46. % A companys total sales revenue minus its cost of goods sold, divided by the total sales revenue, uttered as a percentage. The gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by a company. The higher the percentage, the more the company retains on each dollar of sales to service its other costs and obligations. 2. 4 foodstuff ratios a. Price-Earnings ratio 2011 Price-Earnings ratio=Market price per common shareEarnings per share=183. 8813. 25=13. 91 010 Price-Earnings ratio=Market price per common shareEarnings per share=146. 7611. 69=1 2. 61 P/E ratio is an equity valuation measure defined as market price per share divided by annual earnings per share. b. Dividend number 2011 Dividend offspring=Annual cash dividends per shareMarket price per share=2. 90183. 88=1. 6% 2010 Dividend hand=Annual cash dividends per shareMarket price per share=2. 50146. 76=1. 7% A financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend result is the return on investment for a stock. . comparison and Interpretation of Ratio set With Main Competitors Microsoft each the comparisons are based on the data of 2011. 3. 5 Liquidity and Efficiency Ratios a. Current ratio 2011 IBM Current ratio=Current assetsCurrent liabilities=50,92842,123=1. 211 2011 Microsoft Current ratio=Current assetsCurrent liabilities=74,91828,774=2. 601 The lower current ratio kernel that Microsoft has more resources to pay its debts over the abutting 12 months. b. Quick ratio (Acid-test ratio) 2011 IBM Quick ratio=Cash+Short-term investments+ Current receivablesCurrent liabilities=11,922+4,895+18,38242,123=0. 841 011 Microsoft Quick ratio=Cash+Short-term investments+ Current receivablesCurrent liabilities= 9,610+43,162+14,98728,774=2. 351 Microsoft has a higher quick ratio which meaning that Microsofts shot-term liquidity is better than that of IBM. c. Accounts receivable turnover 2011 IBM Accounts receivable turnover=Net salesAverage accounts receivable, net=106,91617,886. 5=5. 97 times 2011 Microsoft Accounts receivable turnover=Net salesAverage accounts receivable, net=69,94314000. 5=5. 00 times The similar accounts receivable turnover means that both the companies have a relatively good ability to use its assets efficiently. . Inventory turnover 2011 IBM Inventory turnover=Cost of goods soldAverage inventory=56,7782,522. 5=22. 51 times 2011 Microsoft Inventory turnover=Cost of goods soldAverage inventory=53,8571,372=39. 25 times Micro soft has a higher inventory turnover which means a better inventory control. e. Days sales uncollected 2011 IBM Days sales uncollected=Accounts receivable, netNet sales*365=18,382106,916*365=62. 75 days 2011 Microsoft Days sales uncollected=Accounts receivable, netNet sales*365=14000. 569,943*365=73. 1 days IBM has a faster pace to collect its accounts. f.Days sales in inventory 2011 IBM Days sales in inventory=Ending inventoryCost of goods sold*365=2,59556,778*365=16. 68 days 2011 Microsoft Days sales in inventory=Ending inventoryCost of goods sold*365=1,37253857*365=9. 30 days Microsoft has a quicker speed to turn its inventory into sales. g. Total assets turnover 2011 IBM Total assets turnover=Net salesAverage total assets=106,916114,942. 5=0. 93 times 2011 Microsoft Total assets turnover=Net salesAverage total assets=69,94397408. 5=0. 72 times IBM has better abilities to use its assets to efficiently generate sales. . 6 Solvency Ratios a. Debt ratio 2011 IBM Debt ratio=Total lia bilitiesTotal assets=96,197 116,433 =82. 6% 2011 Microsoft Debt ratio=Total liabilitiesTotal assets=51,621 108,704 =47. 5% IBM has a higher proportion of debe relative to its assets, which means a higher risk. b. Equity ratio 2011 IBM Equity ratio=Total equityTotal assets=20,236116,433=17. 4% 2011 Microsoft Equity ratio=Total equityTotal assets=57,083108,704=52. 5% c. Interest coverage ratio 2011 IBM Interest coverage ratio=Income before interest expense and income taxesInterest expense=22,904411=55. times 2011 Microsoft Interest coverage ratio=Income before interest expense and income taxesInterest expense=28,071295=95. 2 times Microsoft has better ability to meet its debt obligations. 3. 7 Profitability Ratios a. Return on total assets 2011 IBM Return on total assets=Net incomeAverage total assets=15,855114,942. 5=13. 8% 2011 Microsoft Return on total assets=Net incomeAverage total assets=23,15066213. 5=35. 0% Microsoft is more efficient in generating earnings by using its assets. b. Return on equity 2011 IBM Return on equity=Net income-Preferred dividendsAverage equity=15,855-3,47321704=57. % 2011 Microsoft Return on equity=Net income-Preferred dividendsAverage equity=23,150-5,39451629=34. 4% IBM has a better process in generating profitability by using shareholders investment. c. Net income as a percentage of net sales (Profit margin ratio) 2011 IBM Net income as a percentage of net sales=Net incomeNet sales=15,855106,916=14. 8% 2011 Microsoft Net income as a percentage of net sales=Net incomeNet sales=23,15069,943=33. 1% Microsoft is better in keeping earnings in how much out of every dollar of sales. d. Gross profit rate (Gross margin ratio) 011 IBM Gross profit rate=Net sales-Cost of goods soldNet sales=106,916-56,778106,916=46. 9% 2011 Microsoft Gross profit rate=Net sales-Cost of goods soldNet sales=69,943-56,77869,943=18. 8% Higher percentage of IBM means it retains more on each dollar of sales to service its other costs and obligations. 3. 8 Market Ratios a. Price-Earnings ratio 2011 IBM Price-Earnings ratio=Market price per common shareEarnings per share=183. 8813. 25=13. 91 2011 Microsoft Price-Earnings ratio=Market price per common shareEarnings per share=26. 872. 73=9. 841 P/E ratio gives a clear comparison, Microsoft is better. b.Dividend buckle under 2011 IBM Dividend yield=Annual cash dividends per shareMarket price per share=2. 90183. 88=1. 6% 2011 Microsoft Dividend yield=Annual cash dividends per shareMarket price per share=0. 64 26. 87=2. 4% Microsoft give higher percentage of dividend. 3. Comparison and Interpretation of Ratio Values with Key Business Ratios All the comparisons are based on the data of 2011. Only compared with those available online. 4. 9 Liquidity and Efficiency Ratios Table 3-3. 1-1Liquidity and Efficiency Ratios with Key Business Ratios Item IBM 2011 IBM 2011 Key Business Ratios Current ratio 1. 211 1. 191 1. 91 Quick ratio 0. 841 0. 811 0. 681 Return on equity 57. 0% 50. 8% 13. 96% Net income as a percentage of net sales 14. 8% 14. 9% 10. 2% Price-Earnings ratio 13. 91 12. 61 13. 21 Dividend yield 1. 6% 1. 7% 2. 05% The lower current ratio means IBM has a more resource to pay its debts over the next 12 month compared to the industry average. IBM has a higher quick ratio which means that IBMs shot-term liquidity is better than industry average. A higher return on equity ratio means IBM has a better performance than industry average in generating profitability by using shareholders investment.A higher Net income as a percentage of net sales means IBM is better in keeping earnings in how much out of every dollar of sales than industry average. IBMs P/E ratio increased and exceeded the industry average and is a little bit better. Its stock performed well last year. A lower dividend yield ratio means less dividend compared to industry average gave to shareholders. In conclusion, IBM had a quite well performance in last two years. All the ratios shows that IBM had got an obvi ous growth and improvement. 4. frequent-size relative Statements Analysis appurtenance 1 is IBM commonality-Size comparative degree Balance Sheets A 0. 4% point increase in cash and equivalents, which is likely balanced with a 0. 87% point extraction in Marketable securities, both steady status in inventories and property, plant and equipment, a marked increase 8. 5% in retained earnings and with most of the good increase and good decrease in percentage means a better performance year in 2011 than that in 2010. addendum 2 is IBM Common-Size Comparative Income Statement A 0. 33% fall in cost of services, a 0. 39% decline in cost of sales, a 0. 11% decline in cost of financing, a 0. 82% decline in total cost contributes a 0. 82% increase in gross profits, and a 0. 2% decline in net income (loss) shows a better performance of IBM in 2011 than that in 2010. Appendix 3 is IBM Common-Size Comparative Cash Flow Statement A 4. 01% increase in net income, a 1. 29% decline in inventorie s, a 5% decline in other assets/other liabilities, a 0. 09% increase in investment in software, a 0. 61% in non-operating finance receivables net, a 21. 17% increase in acquisition of businesses, net of cash acquired, and a 21. 37 increase in net cash flows from investing activities gives a enough evidence to show the better performance of IBM in 2011 than that in 2010.So in conclusion, IBM performed better in 2011 than in 2010. 5. elan Analysis Appendix 4 is IBM Income Statement Trend percentage The base period is 2009 and the trend percent is computed in each subsequent year by dividing that years amount by its 2009 amount. Total revenue in trend percent is nose candy% in 2009, 104. 29% in 2010, and 111. 65% in 2011 Total cost is 100% in 2009, 103. 62% in 2010, and 109. 25% in 2011 Total expense & other income is 100% in 2009, 102. 51% in 2010, and 113. 60% in 2011. These data shows a good control of cost but a relatively bad expense control.IBM used the relatively same cost g enerates more revenue but fewer revenue with the same expense. Total revenue falls short of that for total expense & other income in 2011 but exceeded in 2010, IBM fails to show an ability to control these expenses as it expands in 2011. Appendix 5 is IBM Balance Sheet Trend Percent The base period is 2009 and the trend percent is computed in each subsequent year by dividing that years amount by its 2009 amount. Total revenue in trend percent is 100% in 2009, 104. 29% in 2010, and 111. 65% in 2011 Total assets are 100% in 2009, 104. 60% in 2010, and 106. % in 2011 Retained earnings are 100% in 2009, 114. 38% in 2010, and 129. 61% in 2011. With these percent, we can figure out that IBM was more efficient in using its assets in 2011. Management has generated revenues sufficient to compensate for this asset growth. And in retained earnings shows a better in expense control and higher competency in generate revenues. So in conclusion, IBM did a quite good job in 2011. V. Prospective An alysis and Summary Here, based on what I have calculated and the interpretation. We can definitely come to a conclusion that IBM is still growing and it did very good in most parts.As the trend analysis listed above, the faster growing total revenue and the sulky growing total cost shows a quite good control of the cost. IBM used the relatively same cost generates more revenue. And IBM was becoming more efficient in using its assets to generate revenue. The fairly good current ratio gives an average performance in giving the debts in next 12 months. And with the quite good quick ratio, return on equity, net income as a percentage of net sales, P/E ratio in 2011 which are higher than the average key business ratios and the ratios of IBM in 2010, we can anticipate a good performance in 2012 and farthermost future.Common-size comparative statements analysis also gives a quite good result, such as the increase in cash and equivalents, gross profits, net income, acquisition of business es, net of cash acquired, net cash flows and retained earnings, the decline in cost of goods and inventories. Although IBM didnt perform as well as Microsoft, and there is still some defects in its performance in last two years. As a whole, I would like to invest my hard -earned dollars into the stock of IBM. Appendix 1 Common-size Percent Report construe 12/31/2011 12/31/2010 12/31/2011 12/31/2010 Cash cash equivalents 11,922,000 10,661,000 10. 4% 9. 40% Marketable securities 0 990,000 0. 00% 0. 87% Notes accounts receivable trade, net 11,179,000 10,834,000 9. 60% 9. 55% Short-term financing receivables 16,901,000 16,257,000 14. 52% 14. 33% Other accounts receivable 1,481,000 1,134,000 1. 27% 1. 00% Finished goods 589,000 432,000 0. 51% 0. 38% Work in process raw materials 2,007,000 2,018,000 1. 72% 1. 78% Inventories 2,595,000 2,450,000 2. 23% 2. 16% Deferred taxes 1,601,000 1,564,000 1. 38% 1. 38% prepay expenses other current assets 5,249,000 4,226,000 4. 51% 3. 2% Tot al current assets 50,928,000 48,116,000 43. 74% 42. 41% Land land improvements 786,000 777,000 0. 68% 0. 68% Buildings building improvements 9,531,000 9,414,000 8. 19% 8. 30% Plant, laboratory office equipment 26,843,000 26,676,000 23. 05% 23. 51% Plant other property, gross 37,160,000 36,867,000 31. 92% 32. 50% Less accumulated depreciation 24,703,000 24,435,000 21. 22% 21. 54% Plant other property, net 12,457,000 12,432,000 10. 70% 10. 96% Rental machines, gross 2,964,000 3,422,000 2. 55% 3. 02% Less Accumulated depreciation 1,538,000 1,758,000 1. 2% 1. 55% Rental machines, net 1,426,000 1,665,000 1. 22% 1. 47% Plant, lease machines oth property, gross 40,124,000 40,289,000 34. 46% 35. 51% Less Accumulated depreciation 26,241,000 26,193,000 22. 54% 23. 09% Plant, rental machines other property, net 13,883,000 14,096,000 11. 92% 12. 42% Long-term financing receivables 10,776,000 10,548,000 9. 26% 9. 30% Prepaid pension assets 2,843,000 3,068,000 2. 44% 2. 70% Deferred taxes 3,503,000 3,220,000 3. 01% 2. 84% Goodwill 26,213,000 25,136,000 22. 51% 22. 16% Intangible assets, net 3,392,000 3,488,000 2. 1% 3. 07% Deferred taxes - - Deferred transition set-up costs other deferred arrangements 1,784,000 1,853,000 1. 53% 1. 63% Derivatives, non-current 753,000 588,000 0. 65% 0. 52% Alliance investments equity method 131,000 122,000 0. 11% 0. 11% Alliance investments non-equity method 127,000 531,000 0. 11% 0. 47% Prepaid software 233,000 268,000 0. 20% 0. 24% Long-term deposits 307,000 350,000 0. 26% 0. 31% Marketable securities - - Other receivables 208,000 560,000 0. 18% 0. 49% Employee benefit related 493,000 409,000 0. 42% 0. 6% Prepaid income taxes 261,000 434,000 0. 22% 0. 38% Other assets 598,000 663,000 0. 51% 0. 58% Total investments sundry assets 4,895,000 5,778,000 4. 20% 5. 09% Total assets 116,433,000 113,452,000 100. 00% 100. 00% Taxes 3,313,000 4,216,000 2. 85% 3. 72% commercial paper 2,300,000 1,144,000 1. 98% 1. 01% Short-term loans 1,859,000 1,617,000 1. 60% 1. 43% Long-term debt current maturities 4,306,000 4,017,000 3. 70% 3. 54% Short-term debt 8,463,000 6,778,000 7. 27% 5. 97% Accounts payable 8,517,000 7,804,000 7. 31% 6. 88% Compensation benefits 5,099,000 5,028,000 4. 8% 4. 43% Deferred income 12,197,000 11,580,000 10. 48% 10. 21% Other accrued expenses liabilities 4,535,000 5,156,000 3. 89% 4. 54% Total current liabilities 42,123,000 40,562,000 36. 18% 35. 75% U. S dollar notes debentures 24,192,000 21,766,000 20. 78% 19. 19% Other debt in Euros 1,037,000 1,897,000 0. 89% 1. 67% Other debt in Japanese yen 1,123,000 1,162,000 0. 96% 1. 02% Other debt in Swiss francs 173,000 540,000 0. 15% 0. 48% Other currencies debt 177,000 240,000 0. 15% 0. 21% Long-term debt 26,702,000 25,606,000 22. 93% 22. 7% Less net unamortized premium (discount) -533,000 -531,000 -0. 46% -0. 47% Add SFAS No. 133 fair value adjustment 994,000 788,000 0. 85% 0. 69% Long-term debt before current maturities 27,161,000 25,863,000 23. 33% 22. 80% Less Current maturities 4,306,000 4,017,000 3. 70% 3. 54% Long-term debt 22,857,000 21,846,000 19. 63% 19. 26% Retire nonpension postretire benef obligs 18,374,000 15,978,000 15. 78% 14. 08% Deferred income 3,847,000 3,666,000 3. 30% 3. 23% Income tax reserves 3,989,000 3,486,000 3. 43% 3. 07% Executive compensation accruals 1,388,000 1,302,000 1. 19% 1. 5% Disability benefits 835,000 739,000 0. 72% 0. 65% Derivatives liabilities 166,000 135,000 0. 14% 0. 12% Restructuring actions 347,000 399,000 0. 30% 0. 35% Workforce reductions 366,000 406,000 0. 31% 0. 36% Deferred taxes 549,000 378,000 0. 47% 0. 33% Enviromental accruals 249,000 249,000 0. 21% 0. 22% Non-current warranty accruals 163,000 130,000 0. 14% 0. 11% asset retirement obligations 166,000 161,000 0. 14% 0. 14% Other liabilities 777,000 841,000 0. 67% 0. 74% Total other liabilities 8,996,000 8,226,000 7. 73% 7. 25% Total liabilities 96,197,000 90,279,000 82. 2% 79. 57% Common stock 48,129,000 45,418,000 41. 34% 40. 03% Retained earnings 104,857,000 92,532,000 90. 06% 81. 56% Treasury stock, at cost 110,963,000 96,161,000 95. 30% 84. 76% Net deceitful gains (losses) on cash flow hedge derivatives 71,000 -96,000 0. 06% -0. 08% Foreign currency translation adjustments 1,767,000 2,478,000 1. 52% 2. 18% Net change retirement-related benefit plans -23,737,000 -21,289,000 -20. 39% -18. 76% Net unrealized gains (losses) on mktble secur 13,000 164,000 0. 01% 0. 14% Accum gains (losses) not affecting ret earns -21,885,000 -18,743,000 -18. 0% -16. 52% Total stockholders equity 20,138,000 23,046,000 17. 30% 20. 31% Non-controlling interests 97,000 126,000 0. 08% 0. 11% Total equity 20,236,000 23,172,000 17. 38% 20. 42% Appendix 2 Common-size Percent Report Date 12/31/2011 12/31/2010 12/31/2011 12/31/2010 Services revenue 60,721,000 56,868,000 56. 79% 56. 94% Sales 44,063,000 40,736,000 41. 21% 40. 79% Financing revenue 2,132,000 2,267,000 1. 99% 2. 27% Total revenue 106,916,000 99,870,0 00 100. 00% 100. 00% Cost of services 40,740,000 38,383,000 38. 10% 38. 43% Cost of sales 14,973,000 14,374,000 14. 0% 14. 39% Cost of financing 1,065,000 1,100,000 1. 00% 1. 10% Total cost 56,778,000 53,857,000 53. 11% 53. 93% Gross profit 50,138,000 46,014,000 46. 89% 46. 07% Selling, general & administrative base expense 20,287,000 18,585,000 18. 97% 18. 61% Advertising & promotional expense 1,373,000 1,337,000 1. 28% 1. 34% Workforce reductions ongoing expense 440,000 641,000 0. 41% 0. 64% Retirement-related expense 603,000 494,000 0. 56% 0. 49% Amortization expense-acquired intangibles 289,000 253,000 0. 27% 0. 25% Stock-based compensation 514,000 488,000 0. 8% 0. 49% Bad debt expense 88,000 40,000 0. 08% 0. 04% Total selling, general & administrative exps 23,594,000 21,837,000 22. 07% 21. 87% Research, development & engineering expenses 6,258,000 6,026,000 5. 85% 6. 03% Intellectual property & custom development income 1,108,000 1,154,000 1. 04% 1. 16% Foreign currency trans action gains (losses) (513,000) (303,000) -0. 48% -0. 30% Gains (losses) on derivative instruments 113,000 239,000 0. 11% 0. 24% Interest income 136,000 92,000 0. 13% 0. 09% Net gains from securities & investments assets 227,000 (31,000) 0. 1% -0. 03% Other income & (expense) 58,000 790,000 0. 05% 0. 79% Total other income (expense) 20,000 787,000 0. 02% 0. 79% Interest expense 411,000 368,000 0. 38% 0. 37% Total expense & other income 29,135,000 26,291,000 27. 25% 26. 33% Income (loss) bef income taxes U. S. opers 9,716,000 9,140,000 9. 09% 9. 15% Income (loss) bef inc taxes Non-U. S. opers 11,287,000 10,583,000 10. 56% 10. 60% Income (loss) from continuing trading operations before income taxes 21,003,000 19,723,000 19. 64% 19. 75% U. S federal official income taxes (benefit) current 268,000 190,000 0. 5% 0. 19% U. S. federal income taxes (benef) deferred 909,000 1,015,000 0. 85% 1. 02% Total U. S. federal income taxes (benefit) 1,177,000 1,205,000 1. 10% 1. 21% U. S. state & local inc tax (benef) current 429,000 279,000 0. 40% 0. 28% U. S. state & local inc tax (benef) deferred 81,000 210,000 0. 08% 0. 21% Total U. S. state & local income taxes (benef) 510,000 489,000 0. 48% 0. 49% Non-U. S. income taxes (benefit) current 3,239,000 3,127,000 3. 03% 3. 13% Non-U. S. income taxes (benefit) deferred 222,000 69,000 0. 21% 0. 07% Total non-U. S. ncome taxes (benefit) 3,461,000 3,196,000 3. 24% 3. 20% Provision for income taxes 5,148,000 4,890,000 4. 81% 4. 90% Net income (loss) 15,855,000 14,833,000 14. 83% 14. 85% Weighted average shares spectacular-basic 1,196,951. 006 1,268,789. 388 1. 12% 1. 27% Weighted average shares outstanding-diluted 1,213,767. 985 1,287,355. 388 1. 14% 1. 29% Year end shares outstanding 1,163,182. 564 1,227,993. 544 1. 09% 1. 23% Net earnings (loss) per share-basic 13. 25 11. 69 0. 00% 0. 00% Net earnings (loss) per share-diluted 13. 06 11. 52 0. 00% 0. 00% Dividends per share of common stock 2. 2. 5 0. 00% 0. 00% Total numb er of employees 433,362 426,751 0. 41% 0. 43% Number of common stockholders 504,093 523,553 0. 47% 0. 52% Appendix 3 Common-size Percent Report Date 12/31/2011 12/31/2010 12/31/2011 12/31/2010 Net income (loss) 15,855,000 14,833,000 79. 89% 75. 88% Depreciation 3,589,000 3,657,000 18. 08% 18. 71% Amortization of intangibles 1,226,000 1,174,000 6. 18% 6. 01% Stock-based compensation 697,000 629,000 3. 51% 3. 22% Deferred taxes 1,212,000 1,294,000 6. 11% 6. 62% Net loss (gain) on asset sales & other (342,000) (801,000) -1. 2% -4. 10% Receivables (including financing receivables) (1,279,000) (489,000) -6. 44% -2. 50% Retirement related (1,371,000) (1,963,000) -6. 91% -10. 04% Inventories (163,000) 92,000 -0. 82% 0. 47% Other assets/other liabilities (28,000) 949,000 -0. 14% 4. 85% Accounts payable 451,000 174,000 2. 27% 0. 89% Net cash flows from operating activities 19,846,000 19,549,000 100. 00% 100. 00% Payments for plant, rental machines & other property (4,108,000) (4,185,000) -20. 70% -21. 41% Proc from disp of plant, rental machines & oth prop 608,000 770,000 3. 06% 3. 4% Investment in software (559,000) (569,000) -2. 82% -2. 91% Purchases of marketable securities & other investments (1,594,000) (6,129,000) -8. 03% -31. 35% Proceeds from disposition of marketable securities & other investments 3,345,000 7,877,000 16. 85% 40. 29% Non-operating finance receivables net (291,000) (405,000) -1. 47% -2. 07% Acquisition of businesses, net of cash acquired (1,811,000) (5,922,000) -9. 13% -30. 29% Divestiture of businesses, net of cash transferred 14,000 55,000 0. 07% 0. 28% Net cash flows from investing activities (4,396,000) (8,507,000) -22. 5% -43. 52% Proceeds from new debt 9,996,000 8,055,000 50. 37% 41. 20% Payments to settle debt (8,947,000) (6,522,000) -45. 08% -33. 36% Sht-tm borrows (repays)-less than 90 days-net 1,321,000 817,000 6. 66% 4. 18% Common stock repurchases (15,046,000) (15,375,000) -75. 81% -78. 65% Common stock transactions, other 2,453 ,000 3,774,000 12. 36% 19. 31% Cash dividends paid (3,473,000) (3,177,000) -17. 50% -16. 25% Net cash flows from financing activities (13,696,000) (12,429,000) -69. 01% -63. 58% Eff of exch rate chngs on cash & cash equivs (493,000) (135,000) -2. 8% -0. 69% Net change in cash & cash equivalents 1,262,000 (1,522,000) 6. 36% -7. 79% Cash & cash equivalents, beginning of year 10,661,000 12,183,000 53. 72% 62. 32% Cash & cash equivalents, end of year 11,922,000 10,661,000 60. 07% 54. 53% Cash paid during the year for income taxes 4,168,000 3,238,000 21. 00% 16. 56% Cash paid during the year for interest 956,000 951,000 4. 82% 4. 86% Appendix 4 Trend Percent Report Date 12/31/2011 12/31/2010 12/31/2009 Services revenue 110. 15% 103. 16% 100. 00% Sales 115. 05% 106. 36% 100. 00% Financing revenue 91. 46% 97. 5% 100. 00% Total revenue 111. 65% 104. 29% 100. 00% Cost of services 109. 68% 103. 33% 100. 00% Cost of sales 110. 05% 105. 64% 100. 00% Cost of financing 87. 30% 90. 16% 100. 00% T otal cost 109. 25% 103. 62% 100. 00% Gross profit 114. 51% 105. 09% 100. 00% Selling, general & administrative base expense 112. 36% 102. 93% 100. 00% Advertising & promotional expense 109. 66% 106. 79% 100. 00% Workforce reductions ongoing expense 92. 83% 135. 23% 100. 00% Retirement-related expense 187. 27% 153. 42% 100. 00% Amortization expense-acquired intangibles 101. 40% 88. 7% 100. 00% Stock-based compensation 123. 26% 117. 03% 100. 00% Bad debt expense 59. 86% 27. 21% 100. 00% Total selling, general & administrative exps 112. 61% 104. 22% 100. 00% Research, development & engineering expenses 107. 53% 103. 54% 100. 00% Intellectual property & custom development income 94. 14% 98. 05% 100. 00% Foreign currency transaction gains (losses) -51300. 00% -30300. 00% 100. 00% Gains (losses) on derivative instruments 941. 67% 1991. 67% 100. 00% Interest income 144. 68% 97. 87% 100. 00% Net gains from securities & investments assets -202. 8% 27. 68% 100. 00% Net real gains (losses) f rom real est activs - - 100. 00% Other income & (expense) 16. 48% 224. 43% 100. 00% Total other income (expense) 5. 70% 224. 22% 100. 00% Interest expense 102. 24% 91. 54% 100. 00% Total expense & other income 113. 60% 102. 51% 100. 00% Income (loss) bef income taxes U. S. opers 102. 02% 95. 97% 100. 00% Income (loss) bef inc taxes Non-U. S. opers 131. 03% 122. 86% 100. 00% Income (loss) from continuing operations before income taxes 115. 80% 108. 74% 100. 00% U. S federal income taxes (benefit) current 56. 6% 40. 17% 100. 00% U. S. federal income taxes (benef) deferred 67. 79% 75. 69% 100. 00% Total U. S. federal income taxes (benefit) 64. 88% 66. 43% 100. 00% U. S. state & local inc tax (benef) current 357. 50% 232. 50% 100. 00% U. S. state & local inc tax (benef) deferred 43. 78% 113. 51% 100. 00% Total U. S. state & local income taxes (benef) 167. 21% 160. 33% 100. 00% Non-U. S. income taxes (benefit) current 138. 01% 133. 23% 100. 00% Non-U. S. income taxes (benefit) de ferred 89. 88% 27. 94% 100. 00% Total non-U. S. income taxes (benefit) 133. 2% 123. 21% 100. 00% Provision for income taxes 109. 23% 103. 76% 100. 00% Income (loss) from continuing operations - - 100. 00% Net income (loss) 118. 10% 110. 49% 100. 00% Weighted average shares outstanding-basic 90. 19% 95. 60% 100. 00% Weighted average shares outstanding-diluted 90. 49% 95. 97% 100. 00% Year end shares outstanding 89. 11% 94. 07% 100. 00% Earnings (loss) per share from continuing operations-basic - - 100. 00% Net earnings (loss) per share-basic 130. 93% 115. 51% 100. 00% Earnings (loss) per share from continuing operations-diluted - - 100. 0% Net earnings (loss) per share-diluted 130. 47% 115. 08% 100. 00% Dividends per share of common stock 134. 88% 116. 28% 100. 00% Total number of employees 98. 99% 97. 48% 100. 00% Number of common stockholders 92. 70% 96. 28% 100. 00% Appendix 5 Trend percent Report Date 12/31/2011 12/31/2010 12/31/2009 Cash & cash equivalents 97. 86% 87. 51% 100. 00% Marketable securities 0. 00% 55. 28% 100. 00% Notes & accounts receivable trade, net 104. 13% 100. 91% 100. 00% Short-term financing receivables 113. 32% 109. 00% 100. 00% Other accounts receivable 129. 7% 99. 21% 100. 00% Finished goods 110. 51% 81. 05% 100. 00% Work in process & raw materials 102. 40% 102. 96% 100. 00% Inventories 104. 05% 98. 24% 100. 00% Deferred taxes 92. 54% 90. 40% 100. 00% Prepaid expenses & other current assets 133. 02% 107. 10% 100. 00% Total current assets 104. 07% 98. 33% 100. 00% Land & land improvements 106. 65% 105. 43% 100. 00% Buildings & building improvements 102. 33% 101. 07% 100. 00% Plant, laboratory & office equipment 103. 69% 103. 04% 100. 00% Plant & other property, gross 103. 39% 102. 58% 100. 0% Less accumulated depreciation 105. 19% 104. 05% 100. 00% Plant & other property, net 100. 02% 99. 82% 100. 00% Rental machines, gross 81. 07% 93. 60% 100. 00% Less Accumulated depreciation 79. 03% 90. 34% 100. 00% Rental machines, net 83. 39% 9 7. 37% 100. 00% Plant, rental machines & oth property, gross 101. 33% 101. 75% 100. 00% Less Accumulated depreciation 103. 19% 103. 00% 100. 00% Plant, rental machines & other property, net 98. 01% 99. 51% 100. 00% Long-term financing receivables 101. 24% 99. 10% 100. 00% Prepaid pension assets 94. 4% 102. 23% 100. 00% Deferred taxes 83. 50% 76. 76% 100. 00% Goodwill 129. 83% 124. 50% 100. 00% Intangible assets, net 134. 98% 138. 80% 100. 00% Deferred transition & set-up costs & other deferred arrangements 100. 68% 104. 57% 100. 00% Derivatives, non-current 133. 27% 104. 07% 100. 00% Alliance investments equity method 113. 91% 106. 09% 100. 00% Alliance investments non-equity method 26. 62% 111. 32% 100. 00% Prepaid software 74. 68% 85. 90% 100. 00% Long-term deposits 99. 03% 112. 90% 100. 00% Other receivables 33. 71% 90. 76% 100. 00%Employee benefit related 115. 46% 95. 78% 100. 00% Prepaid income taxes - - - Other assets 76. 37% 84. 67% 100. 00% Total investments & sundry asset s 91. 00% 107. 42% 100. 00% Total assets 106. 80% 104. 06% 100. 00% Taxes 86. 59% 110. 19% 100. 00% Commercial paper 978. 72% 486. 81% 100. 00% Short-term loans 108. 65% 94. 51% 100. 00% Long-term debt current maturities 193. 79% 180. 78% 100. 00% Short-term debt 203. 05% 162. 62% 100. 00% Accounts payable 114. 54% 104. 95% 100. 00% Compensation & benefits 113. 19% 111. 61% 100. 00% Deferred income 112. 7% 106. 78% 100. 00% Other accrued expenses & liabilities 86. 83% 98. 72% 100. 00% Total current liabilities 117. 00% 112. 67% 100. 00% U. S dollar notes & debentures 132. 58% 119. 29% 100. 00% Other debt in Euros 30. 26% 55. 35% 100. 00% Other debt in Japanese yen 71. 76% 74. 25% 100. 00% Other debt in Swiss francs 35. 74% 111. 57% 100. 00% Other currencies debt 62. 11% 84. 21% 100. 00% Long-term debt 111. 22% 106. 66% 100. 00% Less net unamortized premium (discount) 101. 14% 100. 76% 100. 00% Add SFAS No. 133 fair value adjustment 147. 70% 117. 9% 100. 00% Long-term debt before cu rrent maturities 112. 45% 107. 08% 100. 00% Less Current maturities 193. 79% 180. 78% 100. 00% Long-term debt 104. 22% 99. 61% 100. 00% Retire & nonpension postretire benef obligs 115. 18% 100. 16% 100. 00% Deferred income 108. 00% 102. 92% 100. 00% Income tax reserves 109. 98% 96. 11% 100. 00% Executive compensation accruals 119. 66% 112. 24% 100. 00% Disability benefits 105. 03% 92. 96% 100. 00% Derivatives liabilities 25. 58% 20. 80% 100. 00% Restructuring actions 78. 68% 90. 48% 100. 00% Workforce reductions 89. 9% 99. 27% 100. 00% Deferred taxes 116. 81% 80. 43% 100. 00% Enviromental accruals 101. 63% 101. 63% 100. 00% Non-current warranty accruals 129. 37% 103. 17% 100. 00% Asset retirement obligations 143. 10% 138. 79% 100. 00% Other liabilities 99. 49% 107. 68% 100. 00% Total other liabilities 102. 01% 93. 28% 100. 00% Total liabilities 111. 51% 104. 65% 100. 00% Common stock 115. 11% 108. 63% 100. 00% Retained earnings 129. 61% 114. 38% 100. 00% Treasury stock, at cost 136. 58% 118. 36% 100. 00% Net unreal gains (losses) on cash flow hedge derivatives -14. 6% 19. 96% 100. 00% Foreign currency translation adjustments 96. 24% 134. 97% 100. 00% Net change retirement-related

Revisiting Cost of Capital in Commercial Banks

CHAPTER 1 INTRODUCTION 2 Background pileus Structure termination mud bingle of the corpo tell st wandergies to corpo position tutors beca engage it meets sloppeds prise. This enquiry is conducted indoors the mercenary message deposits. In mevery assay journals and articles the equal of great(p) is the judge stride of buy the farm of keen in investors investing. dull h sensationst bell of metropolis is considered as required come in of return in the dictate. Component of exist of cap ar long-term debt, favourred decline, and general song. apiece must admit minimum return.We go from previous explore articles that the verifys should non focalize on historical woo tho on new greet, beca custom in browse to invest and rise, new salute of jacket crown is utilise to make decisions. Level of engross yard, appreciate grade atomic number 18 deuce of the computes that affects hail of slap-up in the commercialised banks. pursuit jud ge apply on debt and legality. It is the most grave factor for investors. make up of debt affects by the take of hobby place and similarly the comprise of comeliness. As expound in m whatsoever articles, if involvement group dress attachs the greet of debt affixs, which increases the address of corking.So, the elevation of working enceinte delayed till by-line post become regardable. This shows how the amour tempo can be a source effective bank none of the represent of jacket crown. Similarly, if the revenue provement rate increases, the comprise of debt decreases, which decrease the equal of detonating device as it affects the subsequently guessation damage. The make up of great(p) straight off and in all(a) mergeed with dandy social organization. bang-up construction bias the cheer of the banks, unfluctuating, company potentially by reflects the funding strategy. And bully organize should consider evaluate strategies.We found from contrasting articles that the most alpha ceiling social body social organisation decisions be when the judge levy pass judgment goes juicyer. The basic function of hood structure is to minimize the toll of crownwork and take a chance. Interest is levyation deductable. The deductibility of post payments provides allure for determine. Higher the measure rate, the greater b lowly of deductibility of pursual potentially on the afterwardswards- revenue equal of debt. These ar the be facts that be labeld in previous enquiryes. check to this inquiry we atomic number 18 trying to look what post these factors melt down in commercial banks outstanding structure.It is necessary for top concern of any cable institutions to ascertain the banks or firms applicable constitute of outstanding. From the banks perspective, the greet of distributively source of outstanding of the United States reflects the take of return because it is affected by cert ain factors analogous task judge, absorb rates, dividends etc. as the clock time period changes, the level of return in addition changes. In its simplest form, the upper-case letter structure decision is the selection by firm centering of debt-to- fair-mindedness ratio for the firm. bell of neat is perhaps the most fundamental and widely used patterns in fiscal economies.Managers of banks or federation and besides regulators employ the burden just price of dandy for enthronement decisions. The WACC and the measure rates atomic number 18 endogenous to the firms debt policy. The please rates affect the follow of debt as increasing debt increasing vex payments. We alike derive the sources of capital structure that which source is better for the commercial banks and how the raise rates, tax rates brings random variable in the live of debt and the dividends and harvest-tide rates affects the hail of integrity that in all affect the weighted amount speak to of capital.Our methodological compend allows us to value the government tax rates and interest rates that affect make up of debt. We specify numerically the affects of the divergences in the factor like interest rates, tax rates and dividends, thus providing useful conceptual fashion present for the tax and interest policy debates that influence equal of capital of debt and impartiality. Finally we come to essay that hail of debt increase or decrease by diversity in the interest rates and tax rates and that help in the affection of WACC that show that whenever the WACC decreases, it solvents in an increase in the dough that is useful for any organization or commercial banks. . Problem statement (Revisiting the apostrophize of capital in the commercial bank) The problem statement of this investigate proposal overwhelms refresh the cost of capital in commercial banking sector of Pakistan and as well to evaluate the direct and indirect association of the factors that affects weighted honest cost of capital and how this regeneration (increase or decrease) can affect the profit and also the capital structure -debt and faithfulness- of the commercial banks. 2. Research objectives While doing question think, we psychoanalyse that the cost of capital considers the factors affecting decision making.The side by side(p) object of the research comes into play ? We entrust align out the factors which creates the variation (increase or decrease) on cost of capital and their effect on the capital structure decision making. ? To analyze the after do of these factors on capital structure. ? To examine up to how a lot extent they are controllable or not from banks perspective. 3. Significance The importance of this research paper is that, the comparison amidst the unlike determinants of the costs of capital creates contrary touch on on the diametric commercial banks by affecting capital structure of that commercial bank.We chouse that as the weighted median(a) cost of capital decreases, it increases the profit n the commercial-grade cusss. run a lay on the line associated with cost of capital and capital structure taking require to b looked at separate than in the crusade of the commercial banking institutes. This research sheds new light on how the cost of capital computed in the field of study of commercial banks. Also the birth among the cost of capital and capital structure is investigated. This research has an some opposite importance as banking system has a vital role to play in the economic development of a nation. A healthy economy requires a sound banking system.This research states that how banks applies different techniques that enhance their performance and also affect the decision making of the Mangers regarding their capital. In this research, the main finding of the paper suggests that the commercial bank should focus on reducing the cost of capital that maximizes the profit. Accordin g to our findings, it is concluded that each banks has its policies of monetary support. each bank takes decision of selecting capital structure for minimizing their cost, danger factor differently that occupies good pecuniary position in market.Factors that apply refer on cost of capital as well as on capital structure are tax rates, interest rates, dividends payout, stake of default and other(a) like market magnetic variation, corporate governance. This research plays a vital role by showing the earthshaking contribution of mercenary coin banks eon compare debt to equity ratio. It also shows the on a lower floorstanding of the performance of Banks by evaluating weighted second-rate cost of capital. The main findings of the paper suggest that private commercial banks should focus on reducing the cost of capital which can magnify the returns to their stockbearers.Finally this research paper would also help the students in academics in understanding the analogy betw ixt the factors and the cost of capital and also their after affects that create relate on the weighted average cost of capital. 4. Limitation Time shyness of this semester is the issue for this study as we exact express time in this semester as compared to the actual time required for the research. By being in banks we will acquire interviews approximately 15 -30 minutes with questionnaire because of the time effrontery by the Mangers of pay Division.The information inclined up by the managers is also check because it difficult for them to provide all necessary information as they are bound by the policies of the commercial bank. 1. 6 Report Structure Chapter 1 represents the introduction of research topic its background, problem statement, objectives of research that set, significance of this research and limitations. This chapter gives brief information about the topic pervious information, the scope of research and its benefits, the target of the research. And also prov ides the basic information that already conducted by different authors research workers.Chapter 2 deals with the literary works recap and conceptual framework. In this portion you will find the different views of different researchers related to this research topic cost of capital in commercial banks including capital structure importance its link with cost of capital, and factors that affect cost of capital. This portion also gives the direction and relevant information which is very helpful in proceedings the research. Conceptual framework helps in determining the sexual relationships of factors with WACC.Chapter 3 provides the detail of methodology that is adapted to proceedings the research. This portion gives explanation of research type, method, exemplar sizing, instruments that is used in finding and collecting the selective information. Chapter 4 gives the analysis of data that is collected with the questionnaire, interviews and cypher the WACC of commercial banks t hat chosen with assumptions, and research findings that proves the hypotheses that is set. Chapter 5 includes the conclusion of research findings and literature review findings.Also gives the recommendations. Finally Appendix attach to our research that contain Questionnaire. CHAPTER 2 LITERATURE REVIEW AND CONCEPTUAL FRAMEWORK 1 Literature brushup 2 Capital structure (Khadka 2005) has analyses in his research that the firms becoming their running(a) needs by raising their funds and this can be through with(p) through the capital structure that involves the two major sources of debt and equity. There should be an appropriate balance amidst debt and equity as it has set up on the take chances and return of the stock pallbearers of the company.If at that place are apt residuals of debt and equity in the capital structure of the firm, it maximizes the shareholders wealth while minimizing the cost of capital and that could be considered as the optimum capital structure. (Jo hn J. Pringle, Jun. , 1974) Since banks are private economic units, it is reasonable to suppose that shareholder interests will influence, if not control, managerial decisions. Capital is an important managerial decision variable and that it plays an important role in the pecuniary charge of the soul bank. Groth 1997) tell that the selection of capital structure affects the cost of capital. Carefully selection of capital structure is more than important. Banks and companies consider more conservative capital structure with sensitivity to cyclical effects of economy. It involves in dividing not in sharing. If payments of dividend are not deductible and if interest is tax deductible on debt then capital structure is important. Barton and Gordon (1987) Financing and capital structure choices are among the several diagnose decisions make by firm managers.Yet the study of these questions has been generally neglected by strategy researchers. Several scholars drive noted that the iss ues involved are concerned with fundamental choices which should support and be consistent with the long- term strategy of the firm. Balakrishnan and corn dab (1993) state that by selecting worthy financing, a firms ability to manage its relationship with lenders thus becomes a key source of competitive service. Capital is a critical resource for all firms, the supply of which is uncertain. This indecision enables the suppliers of pay to exert ontrol over the firm. Stearns (1986) and Mizruchi (1993) estimate the cost of equity capital use a dividend discount puzzle (DDM) methodology and earnings estimates. They find that the cost of equity capital for large U. S publicly traded companies ranged between 10% and 12% during 1979-1995, depending on the assumptions used with the DDM approach. Interestingly, Myers and Borucki (1994) mystify the same range of estimates for the cost of equity capital of a limited exemplar of U. S. utility companies using a DDM-type method.Bruner (1 998) and Weaver(2001) surveying large corporation and confirm about WACC methodologies. Both authors find that on that point is a significant difference exists in estimating the equity capital component of the firm. Some uses CAPM while other uses different methods. 4 approach of capital greet of capital is the minimum required rate of return by investors in firms securities. It occupies an important role in the theory of financial management and in the investment decision making as it provides criteria for allocation of the capital that what a firm pays for its capital like debt, preferred stock and equity. salute of Capital is related with the level of danger associate with existing and new assets and investments. (Khadka 2005) Modigliani and moth miller (1958) proved that firms cost of capital is in qualified of capital structure as it has no effect on the capital structure. The traditional belief of Modigliani and moth miller (1963) is that the cost of capital can affect c apital structure as in this belief they say that the personal taxes may include that brings variation in the cost of capital and consequently affects the capital structure of the company. Khadka 2005) states that thither is an empirical relationship between the cost of capital with capital structure, the size of the firm, growth of the firm, dividend payout ratio and liquidity of underdeveloped economy like Nepal but the major focus was the relationship of the leverage with the cost of capital where he conclude that negative beta shows that there is a negative relationship of cost of capital with the leverage as cost of capital decreases with the use of the leverage and this is done by the tax deductibility of the interest charges in the Nepalese firms.Cost of capital is the anticipate rate of return of capital in investors investment. On debt, the amount of interest is stipendiary is called cost of debt. Whereas cost of equity is equivalent to the gamble free rate of interest plus insecurity premium for business risk. (Groth 1997). 5 Factors that affects cost of capital Groth (1997) get on utter that risk is one of the factors that affect the cost of capital which determines the expected risk of change flow in the asset side of the bank. railway line risk is that when bank and companies cash flow are not able to meet its operating expenses.Risk is linked to economic changes. And it would be at risk to business risk when change in economy occurs and when financing is done by totally with equity. Cost of equity influenced by business risk. righteousness holders risk has not accepted by the creditors and preferred stock holder if present. If increase in business risk occurs then it decreases the financial risk and the optimal D/E ratio, and increases the cash flow doubtfulness of asset side. fiscal risk is that when bank and companies cash flow are not able to meet its financial obligations. If firm funds through debt, then it has financial risk.tax income rates and interest rates are also factors. Interest payment expected deductibility give opportunity for value. If the tax deductibility is cognize by the company then stockholders get the expected benefit of the tax deduction. Jorgenson and Landau (1993) or Bond and Devereux (2003) analyses that the governments choice of the corporate tax rate is an important factor with respect to the investment decision made by shareholders and it is well known that the existence of corporate taxes distort this investment decision away from the social optimum . John J. Pringle, Jun. (1974) tell that the traditional function of risk-bearing, capital is important in adjusting the maturity structure of liabilities. Risk is a function of uncertainty regarding future events, e. g. , earnings, losses on loans and securities, fluctuations in deposits, conditions in the financial markets, etc. Cost of equity increases if the financial risk become laid-back. The cost of equity and debt increases with the increase in debt. The deduction of tax and its benefit is an expected benefit, to allow deduction of interest the pre-tax EBIT income must be large.On after tax cost of debt, there is the greater the impact of interest deductibility, if the tax rate s higher. John R. Graham, (2003) analyze that the appropriate cost of capital in the presence of personal taxes does not depend directly on either the dividend payout rate or the tax on dividends. faithfulness shares have a market value lower than the difference between the reproduction cost of a firms assets and the market value of its debt obligations. Because of this capitalization, it need not be true that an economy without risk or uncertainty would have no equity financing.Groth (1997) said that dissymmetry of effects is that the expected return to stockholder will goes up, if in place of near equity some debt is used. The good or bad leveraging effects are asymmetry if interest is tax deductable. The inability to rea lize the interest deduction prove in an asymmetry effect on expected return to stockholder. heavy average cost of capital become low with the cost of capital high, if the debt capital increase in proportion. Cost of equity increases with the cost of debt.If the cost of components high the weighted average cost of capital increases and reason is that shareholder prefer to use of debt when expected value of tax benefit is magnetic as compared to the added financial risk associated with the debt. The Demanded rate of increase in cost of debt and equity, effects on value of the expected increase in tax benefit of using more debt. Interest rate affects the cost of debt. It involves the risk components that have the probability of default on the debt. Meziane (2006) in his article said that a company pays interest which is treated as an expense for tax purpose and therefore it is tax deductable.Company will be bankrupt, if default on payment of interest to bank present by company. Equi ty financing cannot create a tax advantage because dividends are paid after interest and tax. Interest is paid on debt before tax deduction, whereas, dividend is paid after tax benefit. So, the cost of equity is high then cost of debt. Debt financing becomes attractive when tax is deductable from interest. Banks use cost of capital for decisions, a weighted average interest on debt. Bank should select D/E ratio for which the cost of capital fluctuate with the degree of debt finance is minimized.The D/E ratio is considered as one of the way of financing. (Alan J. Auerbach, aug. 1979). William F. place and Sean Collin (2006) said that in the mid of 1990, a trend towards higher B/S debt in which low cost interest rate, lending level lessend by commercial banks and increase payback period for borrowers, a stable banking system. Cost of capital become low that could lower by the management in down market through viewing real corporate governance themes, taking action on giving managem ent training with respect to capital market issues of today and advanced planning to identify the potential investors. Cost of capital and corporeal Governance Ramly and Rashid said corporate governance is also the factor that affects the cost of capital. CG directly affects the cost of equity, And indirectly with beta. This means poor performance of manager created through calorie-free rights, thus increase cost of capital. Strong (weak) shareholders right associated with increase (decrease) cost of equity capital. CG generate liquidity problem in which investor high the shift price and decrease the buy price which can high the operation cost and also affects the COEC.Thus, the CG creates strong mechanism on COEC and provides compulsive shareholder value for firm. It has also reducing effects on cost of capital. Banks and other financial institutes have negative influence on CG. Hennart, (1994) Both classes of suppliers (debt holders and equity holders) have governance abiliti es. The level of governance ability varies between the two and the optimal selection of the type of financing depends on the nature of resources of the firm. Seth, (1990) financing choices have the potential to affect performance by changing the level of governance costs. Importance and difficulties of WACC Denis Boudreaux (1995) in his article uses the buildup model for the cost of equity capital by estimating cost of equity capital for capital budgeting analyses. He said that whenever there is a need to determine the value of the firm, the cost of capital must be estimated. He said that the cost of debt of virtually held firm is much higher that the publicly traded organization because of the loans or debt borrowed by the closely held firms including the commercial banks.He further said that the public traded firms have the low risk whereas a huge risk factor is involved in the closely held businesses. Experts have recognized that the exploitation of debt and equity can enhance t he corporate value in 1940s. Later in the years, five concept developed on this area(1) early gearing leverage model (2) the model of Modigliani and Miller (MM) (3) Capital Asset Pricing illustration(CAPM) (4) Arbitrage Price possibleness (APT) and (5) Gordon Model Shubbar and Alzafiri, (2008). Un slight a firm can gain in purpose little of its cost of capital, it will not add value to its investors wealth.Companys cost of capital is expressed by the weighted average of the cost of individual sources of capital employed. Bruner et. al. , (1998). For a firm using common stock (equity) and bond (debt) financing, with re and rd as the cost of equity capital and the cost of debt capital, the WACC is expressed the following equation WACC = r = wd rd (1 ? t) + we re Where, wd (weight (proportion) of debt) = (value of debt/value of debt and value of equity), we (weight (proportion) of equity) = (value of equity/value of debt and value of equity), wd + we = 1, and t = tax rate on corpora te income.The component costs, re and rd, as well as the weights are based on market values re is frequently measured as the risk free rate plus a risk premium, based on the capital asset pricing model, and rd reflects the market rates on the firms outstanding debt and on the rd of similar firms. The step treatment includes (1? t) in the WACC weighing to reflect the deductibility of interest payments in the calculation of the corporate tax on the firms income statement the interest cost of debt, by this procedure, is reduced.Also, to avoid double counting the tax advantage of debt, the interest payments are not calculated in the panoramaive cash flows. This is the textbook treatment in calculating a firms cost of capital. (Miller2006) Evaluating a firms weighted average cost of capital has its importance to the managers who estimate investments projects for capital budgeting purposes or to the investor whose desire is to assess the overall riskiness and expected return from a co mpanys activities for valuation purposes. (Miller 2006).Fama and French (1997, 1999) analyse that few difficulties arise because there is some uncertainty in evaluating a firms (or banks) cost of capital. This uncertainty is a sort of risk faced by the firm when project a projects cash flow. Bruner, Eades, Harris, and Higgins, (1998) also analyze that there is wide variation in estimating WAAC by different methods. This is due to the managers differences in firms costs of equity capital that helps in investment decision making. 8 Conceptual Framework DV= DEPENDENT varying IV= INDEPENDENT VARIABLE MV=MODERATE VARIABLE 9 Conceptual HypothesisHo WACC increases with increase in interest rates and decreases with decrease in interest rates. H1 WACC increases with decrease in tax rates and decreases with increase in interest rates. H3 Cost of debt increases with increases in interest rate and decreases with decrease in interest rates. H4 Cost of debt increases with decrease in tax rates a nd decreases with increase in interest rates. CHAPTER 3 RESEARCH METHODOLOGY 10 reference of Research Research can be defined as the search for knowledge, or as any systematic investigation, with an open mind and facts, normally using a scientific method.Our research is empirical research, which tests the feasibility of a solution using empirical evidence. This research comprises of twain the qualitative and decimal research method for the data analysis. Firstly we search for the secondary data in order to know and understand the analysis of the previous researcher that how they work and create different perspective for the dull fair(a) Cost of Capital than we include the researches of the previous researcher in the literature review of this research in order to create relation and direction between the previous researches with our research. 1 Sampling Technique Sampling Technique used in our research is Random Sampling in which we chosen from a population for investigation. In this method we chose from managers in the Commercial Banks and estimates obtained from the random sample in order to solve our queries related to WACC. 12 Sample size The Sample Size is comprises of 5 Commercial Banks of Karachi. More than the apt(p) sample size is not possible because of the time of this semester and also the little hindrance in finding the appointments with the Mangers of Finance Departments. 3 Instruments Questionnaire includes 12 question given to the Managers of the Commercial Banks in order to analyses the perception of the manager that how each individual differs in their perception for the factors that affects the weighted average cost of capital. Most of them include five point likert scales. other(a) than questionnaire, the balance sheet of 2009 of each bank is used to estimate the WACC for the year and evaluate how the factors like tax rates, interest rates affect WACC. 14 Data CollectionThis research has been carried out to evaluate the correlation between the factors of cost of capital like tax rates, interest rates and the WACC that how these factors affect the WACC in the commercial banks. The selected five banks include consort Bank Limited (ABL), Habib Bank Limite(HBL), Muslim Commercial Bank(MCB), Alfalah Bank and Soneri Bank Limited. Descriptive Data Analysis is taken place in order to estimate WACC. This study employs after-tax cost of debt and equity in order to estimate WACC for selected banks. The procedure of calculating after-tax cost of debt and cost of equity has been stated here.The cost of debt measures the cost of borrowing funds of the firm. In calculating the after-tax cost of debt of each bank for the year 2009 by the following formula After-tax cost of debt = pre-tax cost of debt (1 tax rate) The cost of equity evaluated through the given formula Cost of equity = Gordon growth model =(Do (1 + g))/ (market price per share) + g) Finally the Weighted just Cost of Capital calculated by WACC = (Weighted ave rage cost of debt) + (weighted average cost of equity) CHAPTER 4 DATA synopsis 15 QUESTIONNAIRE ANALYSIS Banks normally prefer financing through debt plus equity. 1% of the commercial banks use both (debt and equity) as their sources of finance while remaining 29% of the banks prefer debt for their investment. Only exploitation of equity is not preferred by any banks because through debt finances, the banks gain and improves profit. pic Equity sources liable bank to pay dividend, 71% of the banks says that the dividend payment increases the cost of capital while the other 14% said that it decrease the cost of capital and the remaining said that dividend payment has no such impact on the cost of capital. pic 5% of the commercial banks said that by using tax shield, cost of capital decreases as it decreases cost of debt and also impact interest rates. While 14% said that it has no such impact like some of Moslem bank like Meezan Bank. pic 71% of the sample size change coursed that the Cost of capital has positive impact on the capital structure by using both sources of finance while 15% disagree and other 14% are highly disagree. That means most of the commercial banks are in the favor of Ho that the using both sources improves the profit of the commercial bank. pic 7% agrees and 28% strongly agrees that the risk factor of the default increases as there is an increases liabilities when bank finance through debt while only 10% of the sample size disagree to this fact but still they have profit by increasing their liabilities. pic Approximately 86% of the commercial banks agree from the fact that the fluctuation in the interest rate affects Cost of Capital and also the Capital Structure of their banks while other says that there is no as such impact of the interest rates but from secondary data we analyze that interest rate is the factor that affects the cost of capital and the capital structure. pic 71% of the managers agrees that as low dividend payout affec ts the report of their bank, similarly high dividend payout and dividend growth also affect the capital structure decision whereas 29% of the managers said that high dividend has no such impact on the cost of capital and on investment decision. pic deoxycytidine monophosphate% of the sample size agrees that cost of capital highly impact the investment decision in the commercial bank that also affects capital structure decision making and increases the profit if the weighted average cost of capital is low. pic 5% of the sample size agrees that the cost of capital has a huge impact on the level of risk because the maximation of the profit in the commercial bank is truly based on cost of capital and its other factors. pic 57% of the sample size agree that the taxes bring variation in the cost of capital in commercial bank while the other denied that taxes has no such affects on cost of capital but many researches has proved that taxes highly affects the cost of capital. pic 100% of the managers agree that weighted average cost of capital reduces as there is reduction in the net financial debt.It can be explained by the fact that if the cost of debt remains same but there is variation in the weightage of the debt. The lower weightage reduces the WACC of the commercial bank. pic While the method used for the cost of equity varies in different banks. 15% uses the CAPM, 42% uses the Gordon suppuration Model whereas the remaining percentage uses both the CPM and Gordon Growth Model method when they finances through the equity. pic 16 DESCRIPTIVE ANALYSIS 17 Allied Bank Limited WACC = (Weighted average cost of dbt) + (weighted average cost of equity)WACC = (interest (1-tax)) + (Do (1 + g))/ (market price per share) + g) address OF candour YEAR 2005 2006 2007 2008 2009 DIVIDEND/SHARE 2. 5 2. 5 3 3. 5 4 GROWTH 0% 0% 20% 16. 66% (14. 28%) Average growth=4. 476% Cost of equity = Gordon growth model =(Do (1 + g))/ (market price per share) + g) Cost of equity =4(1+0 . 4476)/59. 11+0. 04476 = 11. 54% g Growth valuate 4. 476% Do outlive Dividend 4 MP food market Price 59. 11 salute OF DEBT Interest Rate = 9. 619% tax revenue rate = 32. 4% Weighted average cost of debt after tax = 0. 09619(1-0. 324)Weighted average cost of debt after tax =6. 503 % WEIGHTED AVER historic period monetary value OF CAPITAL AMOUNT %AGE office toll WACC Thousand (a) (b) (a*b) (000) DEBT 39,457,216 0. 0055 0. 650 0. 00036 lawfulness 7,110,007,580 0. 9945 0. 1154 0. 11476 TOTAL 7,149,464,796 0. 11512 or 11. 51% ANALYSIS In order to prove our research hypotheses, we find different relation between the interest rates, cost of debt and WACC we look at different variation in the interest rates as it is the independent variable that affects the WACC hich is the dependent variable. In 2009, the interest rate of ABL was 9. 619%, we scratch two different rates in which one is greater than 2009 rate i. e. 15% and other is less than 2009 interest rate i. e. 7. 00%. As the interest rates increases, it also increases the cost of debt that chairs in the increase in the weighted average cost of capital. Hence, hypotheses Ho and H3 of our research has proved by this analysis because as the interest rate decreases to 7. 00%, the cost of debt also declines which result in decreases in the WACC and vice versa. sake mobilize WACC 7. 00% 4. 73% 11. 50% 9. 62% 6. 50% 11. 51% 15. 00% 10. 14% 11. 52% pic For the relation between the taxes rates, cost of debt and WACC. We find different variations among them. assess rates are the independent variable so they create different affects on WACC as it is dependent variable. In 2009, ABL has the tax rate of 32. 40%. Similarly we assume one tax rate greater than 32. 4% and another is less than 32. 4% in order to prove our hypothesis. From the following analysis, we come to know that as the tax rates increases, it decreases the cost of debt that results in the decrease in the weighted ave rage cost of capital.Hence, hypotheses H1 and H4 of our research have proved by this analysis. TAX RATES turn in WACC 30% 6. 73% 11. 84% 32. 40% 6. 50% 11. 51% 35% 6. 25% 11. 50% pic 8 Habib Bank Limited (HBL) WACC = (Weighted average cost of debt) + (weighted average cost of equity) WACC = (interest (1-tax)) + (Do (1 + g))/ (market price per share) + g) COST OF EQUITY YEAR 2005 2006 2007 2008 2009 DIVIDEND/SHARE 1. 5 1. 48 1. 48 3. 01 0. 30 GROWTH 0 -1. 333% 0 103. 378% -90. 033% Average growth=2. 4024%Cost of equity = Gordon growth model =(Do (1 + g))/ (market price per share) + g) Cost of equity = 0. 03 (1+0. 024)/40. 9+0. 024 = 2. 475% g Growth Rate 2. 4024% Do Last Dividend 0. 03 MP Market Price 40. 90 COST OF DEBT Interest Rate = (LIBOR+1. 75) = 18. 65% Tax rate = 37. 2% Cost of debt after tax = 18. 65 (1 0. 3732) Cost of debt after tax = 11. 69% WEIGHTED AVERAGE COST OF CAPITAL AMOUNT %AGE COMPONENT COST WACC Thousand (a) (b) (a*b) (000) DEBT 33,5 36,837 0. 786 0. 169 0. 0912 EQUITY 9,108,000 0. 214 0. 0246 0. 0053 TOTAL 42644837 0. 0965 or 9. 65% ANALYSIS We find different relation between the interest rates, cost of debt and WACC in order to prove our research hypothesis. We assume different variation in the interest rates as it is the independent variable that affects the WACC which is the dependent variable.In 2009, the interest rate of HBL was 18. 65%, we assume two different rates in which one is greater than 2009 rate i. e. 20% and other is less than 2009 interest rate i. e. 12. 00%. As the interest rates increases, it also increases the cost of debt that results in the increase in the weighted average cost of capital, this can substantially proved by given table and you can also find this relation through the given graph. Hence, hypotheses Ho and H3 of our research has proved by this analysis because as the interest rate decreases to 12%, the cost of debt also declines to from 11. 69% to 7. 2% and which result i n decreases in the WACC from 9. 65% to 6. 44% and vice versa. INTEREST bring in WACC 12% 7. 52% 6. 44% 18. 65% 11. 69% 9. 65% 20% 12. 536% 10. 38% pic Tax rates are the independent variable so they create different affects on WACC as it is dependent variable. In 2009, HBL has the tax rate of 32. 40% that having invite 6. 503% and a WACC of 11. 51%. Similarly we assume one tax rate greater than 32. 4% and another is less than 32. 4% in order to prove our hypothesis. From the following analysis, we come to know that as the tax rates increases, it decreases the cost of debt that results in the decrease in the weighted average cost of capital. Hence, hypotheses H1 and H4 of our research have proved by this analysis. Tax rates COD WACC 30% 6. 73% 11. 84% 32. 4% 6. 503% 11. 51% 35% 6. 25% 11. 50% pic 19 Muslim Commercial Bank (MCB)WACC = (Weighted average cost of debt) + (weighted average cost of equity) WACC = (interest (1-tax)) + (Do (1 + g))/ (market price per share) + g) C OST OF EQUITY YEAR 2005 2006 2007 2008 2009 DIVIDEND/SHARE 4. 5 5. 1 5. 6 6 6. 8 GROWTH 0 13. 33% 9. 8% 7. 14% 13. 33% Average growth=8. 72%Cost of equity = Gordon growth model = (Do (1 + g))/ (market price per share) + g) Cost of equity=6. 8(1+0. 0872)/189. 79+0. 0872 =12. 62% g Growth Rate 8. 72% Do Last Dividend 6. 8 MP Market Price 189. 79 COST OF DEBT Interest Rate = 12. 75% Tax rate = 33. 07% Cost of debt after tax = 12. 275 (1 0. 3307) Cost of debt after tax = 8. 216% WEIGHTED AVERAGE COST OF CAPITAL AMOUNT %AGE COMPONENT COST WACC Thousand (000) (a) (b) (a*b) DEBT 44,662,088 0. 0221 0. 0822 0. 0018 EQUITY 1,972,537,950 0. 778 0. 1262 0. 1234 TOTAL 2,017,200,038 0. 1252 or 12. 52% ANALYSIS From many different previous researches, we find different relation between the interest rates, cost of debt and WACC. We assume different variation in the interest rates as it is the independent variable that affects the WACC which is the dependent variable. In 2009 , the interest rate of MCB was 12. 28%, we assume two different rates in which one is greater than 2009 rate i. . 11. 6% and other is less than 2009 interest rate i. e. 14. 90% in order to find the after affects of these changes. rest other things constant, as the interest rates increases, it also increases the cost of debt that results in the increase in the weighted average cost of capital, this can easily proved by given table and you can also find this relation through the given graph. Hence, hypotheses Ho and H3 of our research has proved by this analysis because as the interest rate decreases to 11. 6%, the cost of debt also declines to from 8. 22% to 7. 6% and which result in decreases in the WACC from 12. 52% to 12. 51% and vice versa. INTERSET RATES COD WACC 11. 60% 7. 76% 12. 51% 12. 28% 8. 22% 12. 52% 14. 90% 9. 97% 12. 6% pic For the relation between the tax rates, cost of debt and WACC. We find different variations among them. Tax rates are the independent variable so they create different affects on WACC as it is dependent variable. In 2009, MCB has the tax rate of 33. 07%. Similarly we assume one tax rate greater than 33. 07% and another is less than 33. 07% in order to prove our hypothesis. From the following analysis, we come to know that as the tax rates increases, it decreases the cost of debt that results in the decrease in the weighted average cost of capital.Hence, hypotheses H1 and H4 of our research have proved by this analysis. TAX RATES COD WACC 30% 8. 59% 12. 53% 33. 07% 8. 22% 12. 52% 40% 7. 36% 12. 50% pic 20 Al-falah Bank Limited WACC = (Weighted average cost of debt) + (weighted average cost of equity) WACC = (interest (1-tax)) + (Do (1 + g))/ (market price per share) + g) COST OF EQUITY YEAR 2005 2006 2007 2008 2009 DIVIDEND/SHARE 0. 5 1. 25 1 2. 25 2. 25 GROWTH 0 one hundred fifty% -20% 125% 0 Average growth=51%Cost of equity = Gordon growth model =(Do (1 + g))/ (market price per share) + g) Cost of equity = 2. 25 (1+0. 51)/26. 13+0. 51 = 64% g Growth Rate 51% Do Last Dividend 2. 25 MP Market Price 26. 13 COST OF DEBT Weighted average Interest Rate = 6. 406%.Tax rate = 34. 84% Cost of debt after tax = 0. 06406 (1 0. 3484) Cost of debt after tax = 4. 174% WEIGHTED AVERAGE COST OF CAPITAL AMOUNT %AGE COMPONENT COST WACC Thousand (000) (a) (b) (a*b) DEBT 18,687,600 0. 00138 0. 0417 0. 000057 EQUITY 13,491,562,500 0. 986 0. 64 0. 639104 TOTAL 13,510,250,100 0. 639 or 63. 9% ANALYSIS Many different researches have concluded that different variation in the interest rates as it is the independent variable that affects the WACC which is the dependent variable. In 2009, the interest rate of Alfalah Bank was 6. 404%, we assume two different rates in which one is greater than 2009 rate i. e. 8. 6% and other is less than 2009 interest rate i. . 4. 6% in order to find the after affects of these changes. Remaining other things constant, as the interest rates increases, it also increase s the cost of debt that results in the increase in the weighted average cost of capital, this can easily proved by given table and you can also find this relation through the given graph. Hence, hypotheses Ho and H3 of our research has proved by this analysis because as the interest rate decreases to 4. 6%, the cost of debt also declines to from 4. 174% to 2. 997% and which result in decreases in the WACC from 63. 914% to 63. 0% and vice versa. INTEREST RATES COD WACC 4. 6% 2. 997% 63. 90% 6. 406%. 4. 174% 63. 914% 8. 6% 5. 604% 63. 918% pic For the relation between the taxes rates, cost of debt and WACC.We find different variations among them. Tax rates are the independent variable so they create different affects on WACC as it is dependent variable. In 2009, Alfalah has the tax rate of 34. 84%. Similarly we assume one tax rate greater than 34. 84% and another is less than 34. 84% in order to prove our hypothesis. From the following analysis, we come to know that as the tax rat es increases, it decreases the cost of debt that results in the decrease in the weighted average cost of capital. Hence, hypotheses H1 and H4 of our research have proved by this analysis as they are negatively correlated. TAX RATES COD WACC 25% 4. 805% 63. 917% 34. 84%. 4. 174% 63. 9% 40% 3. 844% 63. 915% pic 21 Soneri Bank Limited ANALYSISSoneri Banks has following interest rates and tax rates, which affect WACC in the same manner as it affects other commercial Banks. In 2009, it has interest rate of 12. 63% that has the cost of debt 8. 54% and the WACC is of 0. 37%. Variation in the interest rates brings following changes and hence proves our research. INTEREST RATES COD WACC 11. 60% 7. 84% 0. 35% 12. 3% 8. 54% 0. 37% 14. 60% 9. 87% 0. 43% pic Tax rates posses the same affect. As tax rates increases, it has negative relation with the COD and WACC that proves the hypothesis H1 and H4 of our research as in 2009, the tax rate was 32. 34%, when it decrease, the COD incre ases which also increases WACC and again inversely proportional when Tax rate increase. TAX RATES COD WACC 25% 9. 47% 0. 41% 32. 34% 8. 54% 0. 37% 40% 7. 57% 0. 33% pic CHAPTER 5 destination AND RECOMMENDATION 1. ConclusionAccording to past related researches, there should be a satisfactory balance between debt and equity as it has effects on the risk and return of the shareholders of the bank. If there are reasonable proportions of debt and equity in the capital structure, it maximizes the shareholders wealth while minimizing the cost of capital and that could be considered as the optimal capital structure. Factors like Interest payment expected deductibility give prospect for value. If the tax deductibility is realized by the bank then stockholders get the expected benefit of the tax deduction.If firm finances through debt, then it has financial risk. And if through equity, then it has business risk. The cost of capital can affect capital structure that the taxes bring varia tion in the cost of capital and hence affect the capital structure of the banks. Cost of equity increases if the financial risk become high. The cost of equity and debt increases with the increase in debt. On after tax cost of debt, there is the greater the impact of interest deductibility, if the tax rate s higher. Weighted average cost of capital become low with the cost of capital high, if the debt capital increase in proportion.Cost of equity increases with the cost of debt. If the cost of components high the weighted average cost of capital increases and reason is that shareholder prefer to use of debt when expected value of tax benefit is attractive as compared to the added financial risk associated with the debt. The Demanded rate of increase in cost of debt and equity, effects on value of the expected increase in tax benefit of using more debt. Interest rate affects the cost of debt. It involves the risk components that have the probability of default on the debt.In this res earch, the main finding of the paper suggests that the commercial bank should focus on reducing the cost of capital that maximizes the profit. According to our findings, it is concluded that each banks has its policies of financing. Each bank takes decision of selecting capital structure for minimizing their cost, risk factor differently that occupies good financial position in market. Factors that have impact on cost of capital as well as on capital structure are tax rates, interest rates, dividends payout, risk of default and other like market fluctuation, corporate governance.These factors differently affect the cost of capital and capital structure of each commercial bank. Some banks agree that tax brings variation in the capital structure as the use of taxes decreases the cost of debt but some banks strongly disagree, like Islamic bank Meezan and Alfalah,. These Islamic banks have no such interest rate risk. Tax impacts on cost of capital increases cost of capital agrees by maj ority of commercial banks, and disagrees by some commercial banks. Dividend impacts on cost of capital increases cost of capital agrees by some banks, and disagrees by some banks.Interest rate brings effects on increase in cost of capital as the interest rate increases the cost of debt also increases but some banks strongly disagreed. Other factors like market fluctuation also influence interest rate to increase. And sometimes sudden increase in interest rates influence market. Due to this, all factors differently impact on cost of capital variation (increase and decrease) and capital structure decision making. We have estimated Weighted Average Cost of Capital (WACC) of commercial banks in order to find the effects of cost of capital and their factors on profit and capital structure decision making.We analyze from computing WACC with different assumptions that The interest rates increases (decreases), it also increases (decreases) the cost of debt that results in the increase (dec reases) in the weighted average cost of capital. Hence, hypotheses Ho and H3 is verify. The tax rates increases (decreases), it decreases (increases) the cost of debt that results in the decrease (increases) in the weighted average cost of capital. Hence, hypotheses H1 and H4 is verify. The cost of capital improves the profit and capital structure decision making in which other factors also takes part to maximize the profit in the commercial banks. . Recommendations Cost of capital plays a exchange role in valuation, portfolio selection, and capital budgeting. Therefore, measuring and validating the cost of capital has been the subject of much research. For reducing cost of capital of bank, we recommend that proportion of debt plus equity financing is better although debt increases risk of default as most of the commercial banks prefer debt financing. Because, debt financing provides tax benefit under suitable market conditions and reduces WACC. Through equity financing banks gi ve dividend which increases their reputation in market.In short, payment of dividend gives market position. And it is also important because in foothold of financial ratios, equity financing shows bank more strong as compared to debt or liabilities. Adopt an optimal capital structure to improve shareholder value. Capital structure is part of a banks mailboat of financial policies, which include dividend policy and amount of debt and equity claims issued which improves share holder wealth and reduces WACC. Conventional thinking in the area of finance has also assumed that a certain amount of debt in the capital structure is a good thing. Interest rates are high in Pakistan.The following make betters looked-for from the Government of Pakistan (GOP) Allow and encourage consideration of financial institutions to reduce disintegration in the financial sector. Strengthen legal and judicial reform laws to allow financial institutions to foreclose on guarantee to reduce risk in the ca se of unpaid loans without going through lengthy court of justice proceedings. CHAPTER 7 AREA OF FURTHER STUDIES After performing this research we have concluded that the researches on the Weighted Average Cost of Capital in Banks are less or there is no proper research that has taken place for the Commercial Banks.There should be more researches on the factor that are affecting WACC in the commercial banks as its proper regard maximizes profit. It is found with the help of weightage there is a huge impact on the cost of capital that may be a source of further studies for the commercial bank because proper weightage of debt and equity can improves or enhances the profit of commercial banks. The WACC affects the profit or Capital Structure decision making that has direct affect on the reputation of the commercial banks. CHAPTER 8 REFERENCES Nadeem A.Sheikh and Zongjun Wang, June 2010, supranational ledger of Innovation, Management and Technology, Vol. 1, none 2, Financing Behav ior of Textile Firms in Pakistan, pg 130-135 Khadka, H Bahadur,2006. Leverage and the Cost of Capital. The Journal of Nepalese Business Studies,Vol. III, No1 85-91 Modigliani, F. and Miller, M. H. 1963. Corporate Income Taxes and the Cost of Capital A Correction. American Economic Review 433-443. Shubber, K. and Alzafiri, E. (2008). Cost of capital of Islamic banking institutions an empirical study of a special case, International Journal of Islamic and Middle Eastern Finance and Management, Vol. No. 1, pp. 10-19 Bruner, R. F. , Eades, K. M. , Harris, R. S. , Higgins, R. C. (1998). Best practices in estimating the cost of capital survey and synthesis, Financial Practice and Education, Spring/Summer, pp. 13-28. Miller, R. A. (2006). The weighted average cost of capital is not quite right, The Quarterly Review of Economics and Finance, 49 (2009) 128138 Jorgenson, Dale W. and Ralph Landau (1993). Tax Reform and the Cost of Capital An International Comparison. Washington, D. C. Brookings Institution. Fama, E. F. , and K.French, 1997, Industry costs of equity, Journal of Financial Economics 43, 153-193. Fama, E. F. , and K. French, 1999, The corporate cost of capital and the return on corporate investment, Journal of Finance 54, 1939-1967. John J. Pringle, the Capital Decision in Commercial Banks, the Journal of Finance, Vol. 29, No. 3 (Jun. , 1974), pp. 779-795 Richard Lambert*, Christian Leuz, Robert E. Verrecchia invoice Information, Disclosure, and the Cost of Capital September 2005, Revised, August 2006 Barton, S. L. and P. J. Gordon (1987). Corporate strategy expedient perspective for the study of capital structure? Academy of Management Review, 12, pp. 67-75 Balakrishnan, S. and I. Fox (1993). Asset specificity, firm heterogeneity, and capital structure, Strategic Management Journal, 14(1), pp. 3-16. A. Seth (1990). The impact of LBOs on strategic direction, California Management Review, 32(1), pp. 30-43. Groth John C. , Capital structure P erspectives. Management Decision 357 (1997) 552561. John C. Groth, Professor, Texas A University, ground forces Capital Structure Implications, 1997. Ross, Stephen A. , Randolph W. Westerfield, and Jeffrey Jaffe. Corporate Finance. 9th ed.Boston, MA McGraw-Hill, 2010. Alan J. Auerbach, Wealth Maximization and the Cost of Capital, the Quarterly Journal of Economics, Vol. 93, No. 3 (Aug. , 1979), pp. 433 John R. Graham, Taxes and Corporate Finance A Review, the Review of Financial Studies, Vol. 16, No. 4 (Winter, 2003), pp. 1075-1129 Meziane Lasfer, Professor, Cass Business School, UK Optimizing the Capital Structure Finding the Right Balance between Debt and Equity. William F. Coffin and Sean Collin, 2006, Techniques to lower the cost of capital in todays volatile markets, CCG Investor Relations. Ali Murtaza, manager financial reporting and analysis, finance division, marge ALFALAH LIMITED. amir Ahmed, risk manager, Asst. vice president, Risk Management Unit, MEEZAN BANK. Aniel Victor, Asst. manager, Riak management, UBL FUNDS MANAGERS. Syed Ali Shabar, Branch Manager, MCB BANK LIMITED. Raza Abbas, Asst. vice president, Portfolio Management, HABIB BANK LIMITED. Aamir Maysorewala, customer service manager, ALLIED BANK LIMITED. Riazullah Khan, patron Vice President & Manager, SONERI BANK. APPENDIX A Questionnaire NAME_________________________DESIGNATION_________________ BANK__________________________ BRANCH_______________________ 1. Debt and equity are the sources of finance, through which source your bank finances their investment? a) Debt b) Equity c) Both 2. What is the impact of dividend payment on cost of capital as using equity is source of finance that will liable bank to pay dividend? a) affix cost of capital b) Decrease cost of capital c) No impact on cost of capital 3. Tax shield also has an important factor in cost of capital, how tax impact on cost of capital? a) Increase cost of capital b) Decrease cost of capital ) No impact on cost of capital 4. Cost of capital has positive impact by using both sources of finance. pic 5. When bank finance through debt, it increase liabilities that also increase the risk factor of default. pic 6. variance in the interest rate affects Cost of Capital and also the Capital Structure of your banks. pic 7. As low dividend payout will affect the reputation of your bank, is high dividend payout and dividend growth affect the capital structure decision? pic 8. Cost of capital occupies an important role in the financial management and in investment decision making in commercial banks. pic . Cost of capital affects the level of risk in commercial bank. pic 10. Taxes bring variation in the capital structure of commercial banks. pic 11. Reducti