Housing Finance

[pic] [pic] [pic] BY: SHALEEN BAWEJA (15946) PUROO SONI (15907) DIWAKAR ANAND (15912) MUDIT KALRA (15918) AMAN ARORA (15944) ACKNOWLEDGEMENT We as a group would like to express our sincere thanks to MR. KUMAR BIJOY our FINANCIAL SERVICES faculty for helping us study the subject in depth thus giving us a wholesome experience. We also express our gratitude towards COLLEGE OF BUSINESS STUDIES for giving us the opportunity to work on the project. INDEX S. No. PARTICULARS PAGE 1. PROFILE OF NATIONAL HOUSING BANK 4 2. WHY HOUSING FINANCE IS IMPORTANT? 7 3. HOUSING & GDP 8 4. TYPES OF HOME LOANS 9 5. HOUSING FINANCE COMPANIES IN INDIA 11 6. SUMMARY OF FINANCIALS OF SELECTED HOUSING FINANCE COMPANIES 21 7. REVERSE MORTGAGE LOAN 22 8. HOUSING FINANCE- SCOPE IN INDIA 24 9. ASSESSMENTS & PROSPECTS 30 10. FUTURE EXPECTATIONS 32 11. LIMITATIONS OF HOUSING FINANCE 33 12. ANNEXURES 35 PROFILE OF THE NATIONAL HOUSING BANK The National Housing Bank (NHB) was established on 9th July 1988 under an Act of the Parliament viz. he National Housing Bank Act, 1987 to function as a principal agency to promote Housing Finance Institutions and to provide financial and other support to such institutions. The Act, inter alia, empowers NHB to: ? Issue directions to housing finance institutions to ensure their growth on sound lines ? Make loans and advances and render any other form of financial assistance to scheduled banks and housing finance institutions or to any authority established by or under any Central, State or Provincial Act and engaged in slum improvement and Formulate schemes for the purpose of mobilisation of resources and exten sion of credit for housing OBJECTIVES NHB has been established to achieve, inter alia, the following objectives: ? To promote a sound, healthy, viable and cost effective housing finance system to cater to all segments of the population and to integrate the housing finance system with the overall financial system. ? To promote a network of dedicated housing finance institutions to adequately serve various regions and different income groups. To augment resources for the sector and channelise them for housing. ? To make housing credit more affordable. ? To regulate the activities of housing finance companies based on regulatory and supervisory authority derived under the Act. ? To encourage augmentation of supply of buildable land and also building materials for housing and to upgrade the housing stock in the country. ? To encourage public agencies to emerge as facilitators and suppliers of serviced land, for housing. BUSINESS ACTIVITIES NHB, as the Apex level financial institution for the housing sector in the country, performs the following roles: ? Regulation and Supervision NHB exercises regulatory and supervisory authority over the HFCs in the matter of acceptance of deposits by them pursuant to the powers vested in it under the Act. As per the amendments to certain provisions of the Act, which came into effect from June 12, 2000, NHB is vested with powers to grant Certificate of Registration to companies for commencing/carrying on the business of a housing finance institution. Besides, NHB regulates the deposit acceptance activities in accordance with the Housing Finance Companies (NHB) Directions, 2001, amended from time to time, in the matter of ceiling on borrowings (including public deposits, rate of interest, period, liquid assets, etc). NHB has also issued Directions on prudential norms in regard to capital adequacy, asset classification, concentration of credit, income recognition, provisioning for bad and doubtful debts etc. NHB supervises the working of HFCs through on-site inspection and off-site surveillance. ? Financing NHB raises resources for the housing sector towards increasing new housing stock and provides refinance to a large set of retail lending institutions. These include scheduled commercial banks, scheduled state cooperative banks, scheduled urban cooperative banks, specialised housing finance institutions, apex co-operative housing finance societies and agriculture and rural development banks. Refinance is provided by NHB under various schemes, which are formulated taking into account, several aspects of the National Housing Policy, the constraints facing the sector etc. NHB has also a window for direct lending to Public Agencies such as, State Level Housing Boards and Area Development Authorities for large scale integrated housing projects and slum redevelopment projects. NHB is also operating a special window for extending financial assistance to the people affected by natural calamities viz. earthquake, cyclone etc. ? Resources of NHB NHB raises resources from diversified sources, both domestic and external by issuing Bonds/ debentures, borrowing from RBI and financial institutions/organisations etc. Under the Act, NHB is authorised to issue and sell Bonds with or without the guarantee of the Central Government for the purpose of carrying on its functions. ? Rural Housing NHB launched the â€Å"Swarna Jayanti Rural Housing Finance Scheme† to mark the golden jubilee of India's Independence. The Scheme seeks to provide improved access to housing loans to borrowers for construction/acquisition/ up-gradation of a house in rural areas of the country. Statistics Comparative Data on Housing Finance Disbursement Housing Finance Companies (Amt in Rs. crore) July-Sep 2003  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   July-Sep 2004 UNIT |AMT   | | 101182 |5207. 42 | |UNIT |AMT   | |104225 |6286. 15 | Why housing finance is important? Perhaps few things are more developmental than housing. Given its linkages to many sectors in the economy – including land markets, construction, and labour markets – housing finance is key to econo mic growth. It has been estimated that there are roughly 600 other industries that have links to the housing markets. A stimulus to the demand for housing will have a direct or indirect stimulatory impact on all of these industries. The availability of mortgage financing also stimulates the construction of new housing units. House construction and related industries are labour-intensive and thus provide significant employment opportunities; thus, a greater demand for housing provides a very large economic stimulus to the broader economy. There are also numerous other societal and Developmental benefits to providing decent living space to the poorer segments of society, which are our principal target markets. Productivity and employment are very often enhanced by providing a living space close to where people work. IMPORTANCE OF HOUSING SECTOR IN INDIA ? Income Generation It is estimated that the construction sector’s income multiplier is around 5, while construction related manufacturing has an income multiplier of 7. 6. ? Employment Generation Today, there are 2. 5 cr. construction workers in the country. In terms of direct, indirect and induced employment generation, the construction sector’s employment multiplier is 7. 76. ? Revenue Accruals to Government An investment of Rs. 100 generates Rs. 11. 4 as revenue to the Government in the form of sales, excise taxes and octroi. ? A basic human necessity supporting economic activities. ? Have forward and backward linkages with over 250 ancillary industries. ? Every Rupee spent on construction, an estimated 75-80 paise is added to GDP. ? Housing Industry Growth in last 5 years – Physical Terms 3. 0 % p. a. Financial Terms 30% p. a. ? Contribution of Housing in GDP is about 6%. ? Percentage of Mortgage Debt to GDP is 8. 0% (E) in 2005-06, still way below China’s (12%), Malaysia (22%), Hong-Kong (40%) and US (65%). ? An engine of equitable economic growth – Investments, Savings.. Housing and GDP Housing construction contributes approximately 1-2% to India's GDP as compared to the entire construction sector’s contribution of around 6%, which includes roads, ports, housing, dams and canals etc. The construction industry is the only industry which makes use of all oth er industries; you need ceramics, pipes, steel, cement, glass, tiles, iron, wood, cloth. Start construction and you provide employment for hundreds of labourers, you will use transport for transferring materials, so the transportation industry will get a boost, labourer's income will increase, spending will increase. Over and above, you solve the housing problem. If this is done, the contribution might go up to 10% for the construction sector and around 3-4% for the housing sector. Another way of looking at the huge potential of housing construction sector for the development of economy is through it’s impact on GDP. A 10% increase in final expenditure in the construction sector increases the GDP by 3%. TYPES OF HOME LOANS Home Purchase Loans: This is the basic home loan for the purchase of a new home. Home Construction Loans: This loan is available for the construction of a new home on a said property. The documents that are required in such a case are slightly different from the ones you submit for a normal Housing Loan. If you have purchased this plot within a period of one year before you started construction of your house, most HFCs will include the land cost as a component, to value the total cost of the property. In cases where the period from the date of purchase of land to the date of application has exceeded a year, the land cost will not be included in the total cost of property while calculating eligibility. Home Improvement Loans: These loans are given for implementing repair works and renovations in a home that has already been purchased, for external works like structural repairs, waterproofing or internal work like tiling and flooring, plumbing, electrical work, painting, etc. One can avail of such a loan facility of a home improvement loan, after obtaining the requisite approvals from the relevant building authority. Home Extension Loans: An extension loan is one which helps you to meet the expenses of any alteration to the existing building like extension/ modification of an existing home; for example addition of an extra room etc. One can avail of such a loan facility of a home extension loan, after obtaining the requisite approvals from the relevant municipal corporation. Home Conversion Loans: This is available for those who have financed the present home with a home loan and wish to purchase and move to another home for which some extra funds are required. Through a home conversion loan, the existing loan is transferred to the new home including the extra amount required, eliminating the need for pre-payment of the previous loan. Land Purchase Loans: This loan is available for purchase of land for both home construction or investment purposes Stamp Duty Loans: This loan is sanctioned to pay the stamp duty amount that needs to be paid on the purchase of property. Bridge Loans: Bridge Loans are designed for people who wish to sell the existing home and purchase another. The bridge loan helps finance the new home, until a buyer s found for the old home. Balance-Transfer Loans: Balance Transfer is the transfer of the balance of an existing home loan that you availed at a higher rate of interest (ROI) to either the same HFC or another HFC at the current ROI a lower rate of interest. Re-finance Loans: Refinance loans are taken in case when a loan for your house from a HFI at a particular ROI you have taken drops over the years and you stand to lose. In such cases you may opt to swap your loan. This could be done from either the same HFI or another HFI at the current rates of interest, which is lower. NRI Home Loans: This is tailored for the requirements of Non-Resident Indians who wish to build or buy a home or property in India. The HFCs offer attractive housing finance plans for NRI investors with suitable repayment options. HOUSING FINANCE COMPANIES IN INDIA I. BOB HOUSING FINANCE   [pic] BOB Housing Finance Limited was set up in December, 1990 by Bank of Baroda in association with National Housing Bank. The company became a wholly owned subsidiary of Bank of Baroda since March 31, 2006. Purpose For purchase of land /site from Govt. statutory bodies such as housing boards, Development Authorities/CIDCO etc. Amount (Least of the following subjects to minimum of Rs. 50,000/-) 85% of the cost/purchase price of the land. Rs. 100 lacs. 42 months gross salary or 3 1/2 times of average annual income as per income tax returns last 3 years of which ever is less. . Rate of Interest :The current interest rates are as under : |FIXED RATE OPTION | |TENURE |   | | |NEW RATE | 1-5 |   |9. 00% | |6-10 |   |9. 25% | |11-20 |   |9. 75% | |VARIABLE OPTION | |TENURE |   |NEW RATE | |1-20 |   |9. 75% | †¢ Interest will be calculated on annual rest basis. †¢ Installment to commence from the next month, from the month in which loan is fully disbursed or expiry of 1 1/2 year from the date of first disbursals whichever is earlier. Pending EMI, Pre-EMI interest is to be paid on monthly basis on loan disbursed. Security †¢ Equitable mortgage of the plot of land to be purchased. †¢ Personal guarantee of one individual. II. CAN FIN HOMES [pic] Can Fin Homes Limited was set up in 1987, the â€Å"International Year for Shelter for the Homeless,† by Canara Bank in association with reputed financial institutions including HDFC and UTI. The first bank sponsored Housing Finance Company in India; Can Fin Homes has emerged as one of the leading players in the country's home loan segment. Canara Bank offers home loans for construction/purchase of house/flat and also for renovation of existing flat/house. The bank offers a maximum loan of Rs. 1,00,00,000/- depending on the borrower's repayment capacity. The loan repayment period is 5 – 10 years for site loans and 5 – 20 years for other loans. Canara Bank home loans are offered for purchase or construction of any residential house or flat. The bank also provides finance for companies or corporations or Societies for purposes of construction or purchase of residential houses or flats. Canara Bank provides loans to individuals for site purchase where the allotment of site shall be for the residential purpose by State Development Agencies, Municipal Bodies, and Associations. How much amount you get a loan Upto Rs. 1,00,00,000/- depending on your repayment capacity. Repayment capacity will be considered after assessing your income, age, qualifications, work experience, number of dependents, spouse's income, stability of income and employment, assets, liabilities, etc. You can apply for a loan upto 80% in the case of site loan and 85% of otal project cost for the remaining section depending on your repayment capacity. Your loan repayment will be †¢ 5 – 10 years for site loans, 5 – 20 years for other loans. †¢ They are payable in easy, Equated Monthly Installments III. LIC HOUSING FINANCE   [pic] LIC Housing Finance Limited is one of the leading players in the home loan segment. Incorporated on June, 19, 1989 and promoted by the Life Insurance Corporation of India, LIC Housing Finance Limited boasts of an extensive distribution network and a massive brand presence by virtue of being one of the earlier entrants in the market for housing loans. Griha Prakash Loan Amount: †¢ Min. Rs. 25,000 †¢ Max. Rs. 1,00,00,000. Loan to Property Cost : 85% of total Cost of the property including Stamp Duty and Registration Charges. Loan Term : Upto 20 Years or Retirement Age or 70 years of Age, whichever is earliest. Repayment Mode : Equated Monthly Installments(EMI) – Monthly Rest Basis Security : 1. Equitable Mortgage of House/Flat 2. One Guarantor. Risk Cover: Any existing or new policy under any acceptable plan of insurance (issued by LIC of India) on the lives of the applicants, having risk cover to the extent of loan amount. Front End Charges: 1. 00% of Loan Sanctioned. Loan for Purchase of Vacant Plots/Sites Loan Amount: Min Rs. 50,000 Max Rs. 20,00,000. Loan to Property Cost: 85% of the Cost of Plot/Site. Loan Term: Upto 15 Years or Retirement Age, or 70 years of Age, whichever is earliest. Repayment Mode: By Equated Monthly Installments (EMI) – Monthly Rest Basis. Security: 1. Equitable Mortgage of Plot/Site 2. One Guarantor. Risk Cover: Life Insurance Cover is not required but advisable in the interest of the applicants. Front End Charges: 1. 0% of Loan Sanctioned. V. SBI HOME FINANCE [pic] State Bank of India (SBI), the largest bank in India, is one of the market leaders in the home loan segment. But SBI's reputation has surely taken a hit following the collapse of the erstwhile SBI Home Finance Limited in which SBI was the largest shareholder along with other institutional promoters like HDFC and LIC. Due to continued losses and complete erosion of its net worth, the company's certificate of registration had been cancelled by the National Housing Bank. SBI offers home loans for a variety of purposes: purchase/ construction of new House/ Flat, purchase of an existing House/ Flat, purchase of a plot of land for construction of House and extension/ repair/ renovation/ alteration of an existing House/ Flat. SBI home loans come with some unique features that make them stand out in the competition: no cap on maximum loan amount for purchase/ construction of house/ flat, option to club income of one's spouse and children to compute eligible loan amount, free personal accident insurance cover and complimentary international ATM-Debit card. Besides the standard package of home loans, SBI has some customized home loan products in its kitty that address the needs of niche customer segments. ‘SBI-Flexi' Home Loans are designed to enable borrowers to hedge their Home Loan against unfavorable movement in interest rates and gives the customers a one time irrevocable option to choose one of the three customized combinations of fixed and floating interest rates. ‘SBI-Freedom' Home Loans are customized for high net worth individuals and offer benefits such as 100 per cent finance of the project and no mortgage f the property, provided the individual could show liquid securities such as LIC policies or NSCs. SBI Housing loan schemes are designed to make it simple for you to make a choice at least as far as financing goes! ‘SBI-Home Loans' Loan Amount  Applicant/ any one of the applicants are aged over 21 years and upto 45 years – 60 times Net Monthly Income (NMI) or 5 times Net Annual Income (NAI), subj ect to aggregate repayment obligations not exceeding 57. 50% of NMI/ NAI   Applicant(s) aged over 45 years of age- 48 times NMI or 4 times NAI, subject to aggregate repayment obligations not exceeding 50%of NMI/ NAI   VII. HDFC   [pic] Both in terms of business volume and market standing, HDFC stands head and shoulder above the competition in the home loan segment. With an expertise gathered over 25 years of existence in the business, HDFC has managed to create an impressive loan portfolio that caters to varied housing finance needs. HDFC offers home loans for individuals to purchase (fresh / resale) or construct houses. HDFC finances up to 85% maximum of the cost of the property which is inclusive of agreement value, stamp duty and registration charges. HDFC lends a maximum amount of Rs 1 crore and the maximum period of repayment is 15 years or retirement age, whichever is earlier. HDFC's Home Improvement Loan facilitates internal and external repairs and other structural improvements like painting, waterproofing, plumbing and electric works, tiling and flooring, grills and aluminium windows. HDFC finances up to 85% of the cost of renovation (100% for existing customers). HDFC Land Purchase Loan can be used to purchase land. HDFC finances up to 70% of the cost of the land and repayment of the loan can be done over a maximum period of 10 years. Features: Maximum loan  85% of the cost of the property (including the cost of the land) and based on the   repayment capacity of the customer. Maximum Term  20 years subject to your retirement age. Adjustable Rate Home Loan  Loan under Adjustable Rate is linked to HDFC's Retail Prime Lending Rate (RPLR). The rate on your loan will be revised every three months from the date of first disbursement, if there is a change in RPLR, the interest rate on your loan may change. However, the EMI on the home loan disbursed will not change*. If the interest rate increases, the interest component in an EMI will increase and the principal component will reduce resulting in an extension of term of the loan, and vice versa when the interest rate decreases. Fees  1% of the loan amount applied plus applicable service taxes and cess. No Charges for    Part or Full Prepayment of loan under Adjustable Rate (except in case of prepayment through a refinance from other bank or institutions prepayment charges will be applicable)    Fixed Rate – Part prepayment upto 25% of opening loan outstanding in a financial year    Replacement of cheques Income Tax Certificates Accelerated Repayment Option VIII. ICICI [pic] ICICI Bank offers home loans for purchase or construction of house and the loan amount can be up to 85% of the cost of the property. The loan must terminate before or when the borrower turns 65 years of age or before retirement, whichever is earlier. ICICI home loans come with benefits like easy interest rates, simplified documentation, doorstep service and free personal accident insurance. ICICI MaxMoney Home Loans offer the unique advantage of higher loan eligibility with a lower initial installment. One can get up to 30% higher amount against one's current income and the installment amount gets stepped up over the years. ICICI SmartFix Home Loans combine the safety of fixed rates plus the advantages of floating rates. For the first 3 years the borrower gets a fixed interest rate and the fourth year onwards, the loan gets switched to the prevailing floating interest rate. Home Improvement Loans †¢ You can get a loan for renovation /refurbishment of your home. †¢ Get the same interest rate as applicable on Home Loans †¢ Avail of loan upto Rs. 50 Lakhs Avail of loan upto 70% of cost of improvement †¢ Enjoy repayment period of upto 15 years. IX. SUNDARAM FINANCE GROUP   [pic] The south-based Sundaram Home Finance Limited was launched on July 2, 1999, by Sundaram Finance Limited with equity participation from International Finance Corporation (IFC), Washington and FMO, Netherlands. After consolidating its business in the south, Sundaram Home Finance has made for ays in the Northern states as well. Sundaram home loans are offered for purchase or construction of any residential house or flat. The house/flat can be purchased from a builder or from a Statutory Authority. The maximum loan amount can be Rs. 1 crore or 85% of the agreement value, whichever is less. The tenure of the home loan can be 20 years or retirement age, whichever is earlier. Sundaram provides Home Improvement Loans to individuals for carrying out internal and external repairs to an existing home. The maximum loan amount can be Rs. 1 crore or 70% of the agreement value, whichever is less. The term of the home loan can be 10 years or retirement age, whichever is earlier. Sundaram Land Loans facilitate purchasing of land for construction of residential units. The maximum loan amount can be Rs. 1 crore or 50% of the agreement value, whichever is less. The tenure of the land loan can be 15 years or retirement age, whichever is earlier. Sundaram also provides loans against existing residential properties. The maximum loan amount can be Rs. 25 lakhs or 50% of the value whichever is less. The maximum term of repayment for salaried professionals is 10 years or retirement age whichever is earlier. Maximum loan:  Rs. 1 crore or 85% of the agreement value, whichever is less, subject to repayment capacity as assessed by SHFL. Maximum term of loan: Salaried Category:  20 years or retirement age, whichever is earlier for all salaried categories of customers. For Self-employed:  15 years or 65 years, whichever is earlier. X. Housing and Urban Development Corporation Ltd. (HUDCO)   [pic] Established on April 25, 1970, the Housing and Urban Development Corporation Ltd. (HUDCO) is a fully owned organization of the Government of India. HUDCO was instituted with the objective of providing long-term finance for construction of houses, undertaking urban development programmes and infrastructure facilities. HUDCO stands out in the burgeoning housing finance industry for its focus on the social aspect of housing and utility infrastructure provision. In spite of its commercial orientation, HUDCO has adopted a policy of preferential allocation of resources to the socially disadvantaged. It continues to emphasize on sectors which are more socially relevant rather than only on commercially viable and profitable sectors. HUDCO has played a stellar role in the implementation of National Housing Policy. It has been entrusted with the implementation of the priority programmes of the Ministry like Low Cost Sanitation, Night Shelter for Footpath Dwellers, Shelter Upgradation under Nehru Rozgar Yojana, Rural housing under Minimum Needs Programme. Although commercial banks and housing finance companies are doing brisk business in the swelling housing finance sector, the housing needs of the poor and low income groups have remained unaddressed. In such a scenario, HUDCO's role has become even more significant. HUDCO's social orientation of is evident from the fact that about 92 percent of the 150. 93 lakh houses financed by HUDCO are for the benefit of Economically Weaker sections and Low Income categories. In the face of growing competition, HUDCO has adopted innovation in its lending operations. HUDCO Niwas, which was launched in 1999, is an extremely popular housing loan scheme. Under HUDCO Niwas, individual housing loans are given directly to the borrowers instead of the established practice of disbursing loans through the state governments and their housing agencies. Moreover, HUDCO has moved the government seeking permission to enter the banking and insurance sectors. Property:  Housing Urban Development Corporation (HUDCO) offers Niwas scheme. The scheme is a housing finance instrument for individual families which offers loan assistance to individuals constructing or buying a house or a flat. Similar loan assistance is also extended to extend or improve an existing house or flat. Amount:   The maximum loan amount will not exceed 85 per cent of the total cost of the housing unit, including incidental costs like stamp duty and registration. The maximum loan amount granted by HUDCO is Rs 15 lakh. Payment Term:   It is normally up to 15 years, but the period will not extend beyond the age of 65 years of applicant. However, HUDCO Niwas will endeavor to determine the repayment period to suit the convenience of the applicant. In case the applicant wishes to extend the period of repayment beyond 15 years, it can be extended up to 20 years. Howev er, in such cases, additional interest of 1 per cent per annum will be charged over and above the regular rates. Summary of Financials of Select Housing Finance Companies in 2005 |PARTICULARS |LIC Housing Finance Ltd. |Can Fin Homes Ltd. Sundaram Housing Finance Ltd |HDFC Ltd. | |Summarised Balance Sheet | |Assets | |Loans |360,115. 00 |15,292. 70 |13,105. 00 |8,165. 27 | |Investments |31,300. 40 |1,201. 80 |333. 10 |218. 03 | |Fixed Assets (Net Block) |2,948. 0 |301. 00 |35. 80 |82. 77 | |Net Current Assets/Others |10,941. 10 |766. 10 |188. 60 |341. 31 | |Total Assets |405,305. 00 |17,561. 60 |13,662. 50 |8,807. 38 | |Liabilities | |Share Capital |2,491. 0 |501. 20 |204. 90 |265. 00 | |Reserves |36,339. 80 |1,394. 70 |1,320. 70 |469. 54 | |Total Shareholders funds |38,831. 00 |1,895. 90 |1,525. 60 |734. 54 | |Loan funds |366,474. 00 |15,665. 70 |12,136. 90 |8,072. 4 | |Total Liabilities |405,305. 00 |17,561. 60 |13,662. 50 |8,807. 38 | |Summarised Profit and Loss Statement | |Tot al Income |34,100. 80 |10,687. 20 |1,273. 30 |855. 43 | |Total Expenditure |21,532. 95 |8,611. 10 |991. 20 |648. 0 | |Gross Profit |12,567. 85 |2,076. 10 |282. 10 |206. 73 | |Profit After Tax |10,365. 53 |1,437. 20 |211. 20 |167. 08 | |Other Financials | |Dividend (%) |170 |50 |20 |21 | |EPS (Rs. |41. 74 |16. 21 |5. 06 |6. 31 | |Book Value Per Share (Rs. ) |179. 00 |140. 59 |37. 83 |27. 72 | |Capital Adequacy Ratio (%) |13. 40 |15. 00 |16. 46 |15. 71 | |Debt Equity Ratio |9. 44 |8. 26 |7. 6 |10. 98 | | CALCULATION OF LOAN On receiving a loan application, financial institutions carry out the credit appraisal of the applicant/s. Credit appraisal is the step that decides the loan amount an applicant is eligible for. The objective of credit appraisal is to determine the ability and willingness of an applicant/s to repay a loan. A set of financial and non-financial techniques is used to meet this objective. Different financial institutions have different methods and norms of credit appr aisal and for calculating the loan eligibility. Usually the ability to repay is determined by analyzing information like present income, consistency of income, experience, profession, additional sources of income, assets, liabilities, amount of installments of other loans (if any), past loan repayment history, investments, educational qualification, age, number of dependents etc. The financial ratios considered during the process of credit appraisal to determine the amount of loan an applicant is eligible for include; A. Installment to Income Ratio (IIR) Expressed as percentage, this ratio is calculated as IIR = (Home loan installment amount / Monthly income) * 100 Installment to Income ratio (IIR) denotes the portion of monthly income that can be spent towards home loan repayment. It is believed that about 35% to 40% of monthly income can be comfortably allocated towards home loan repayment. Based on this broad assumption, an IIR of 35% to 40% is considered to arrive at eligible loan amount. For example, at 40% IIR, an applicant having monthly income of Rs. 40,000 can repay Rs. 16,000 as home loan installment. As mentioned, an IIR of 40% is a broad assumption and can be higher or lower based on other parameters like consistency of income, experience, profession, additional sources of income, assets, liabilities, past loan repayment history, investments, educational qualification, age, number of dependents, age of dependents etc. In case of an earning co-applicant, co-applicant's monthly income can be clubbed with applicant's monthly income to increase the loan eligibility. With your monthly income known, you can calculate your approximate home loan eligibility as explained in the example below; Monthly income:Rs40000 IRR:40% Desired Loan Tenure :20 Interest Rate :10% STEP1: AFFORDABLE LOAN INSTALLMENT=(40000*40%) = Rs. 16,000 STEP2: Determine installment amount per lack of loan for desired loan tenure. In this example, installment for a loan of Rs. 1,00,000 for 20 years at an interest rate of 10% is Rs. 965 STEP3: Eligible Loan Amount = (Affordable loan installment / installment per lack) * 1,00,000 In this example Eligible loan amount=(Rs 16000/Rs. 965)*100000=Rs. 16,58,030 B. Fixed Obligation to Income Ratio (FOIR) Expressed as percentage, this ratio is calculated as FOIR = (Home loan installment amount + other loans installments) / Monthly income)} * 100 Fixed Obligation to Income Ratio (FOIR) is calculated to determine the portion of monthly income that can be spent towards home loan installment after considering other fixed obligations like car loan, consumer durable loan, deduction towards salary advance recovery etc. Statutory deductions such as provident fund, professional tax, investment s, insurance premium are excluded from the fixed obligation component. For example, for an applicant having a monthly income of Rs. 40,000 and a car loan installment of Rs. 4,000, at 40% FOIR, can repay Rs. 2,000 towards home loan installment {(Rs. 40,000*40%) – Rs. 4,000 }. Some of the financial institutions do not consider loans outstanding with maturity less than one year as fixed obligation and installment paid towards these short terms loans is excluded from the FOIR calculation. This means, your loan eligibility can be higher despite of short term fixed obligations. It is worth checking the institution's policy on fixed obligations before finalizing the lender. With your monthly income and other fixed obligations known, you can calculate your approximate home loan eligibility as explained in the example below; Monthly Income :Rs 40000 Car Loan Installment :Rs 4000 FOIR% :40% Desired Loan Tenure :20 years Interest Rate :10% STEP 1: Affordable Loan Installments = (Rs. 40,000 * 40%) – Rs. 4,000 (OF ALL OUTSTANDING LOANS)=12000 STEP2: Determine installment amount per lack of loan for desired loan tenure. In this example, installment for a loan of Rs. 1,00,000 for 20 years at an interest rate of 10% is Rs. 965 STEP3: Eligible Loan Amount = (Affordable loan installment / installment per lack) * 1,00,000 In this example Eligible loan amount=(Rs 12000/Rs 965)* Rs 100,000 = Rs12,43,000 C. Loan to value ratio (LTV) Expressed as percentage, this ration is calculated as LTV = (loan amount / property value) * 100 Loan to value (LTV) denotes the portion of value of the property that is financed by a financial institution. Each financial institution has a cap on maximum loan amount that can be extended towards financing a property. Most of the financial institutions offer loan upto 85% of the property value. The LTV offered by a financial institution may differ in certain cases. For example, LTV may be different for an approved project from an unapproved project. Instances where loan amount computed based on income (IIR/FOIR) is different from the loan amount computed based on property value (LTV), the lower of the two is considered as the eligible loan amount. SOME IMPORTANT POINTS TO BE MENTIONED: 1. Income of salaried class people includes :income of the applicant +income of the co-aplplicants(max2)+rental income(generally 50%) 2. Income of a self employed: It is determined by the INCOME TAX RETURN of the applicant +depreciation(generally100%) 3. The IRR and FOIR can be 100% only in certain exceptional cases. 4. Another important point to note is that as the tenure of the loan decreases the loan he loan he is eligible for also decreases. Will the Installment to Income Ratio (IIR) AND Fixed Obligation to Income Ratio (FOIR) always remain the same? No, it will not always remain the same. As the income increases both IRR and FOIR also increases but it generally remains in the limits of 40% to 70%. Reverse Mortgage Loan Many senior citizens, retired from work worry about the dwindling amount in their bank accounts? Wondering how to maintain a steady cash flow to meet their daily needs? An option often thought of to deal with this problem, is to rent the existing house which seems a liability and move to a smaller house or to sell the house altogether and invest the proceeds to earn a higher monthly income. Why not turn that liability into an asset? The answer – Reverse Mortgage. Reverse mortgage is a financial product that enables senior citizens (60 +) who own a house to mortgage their property with a lender and convert part of the home equity into tax-free income without having to sell the house. Instead of you making monthly payments to a lender, as with a regular loan, the lender makes payments to you. Multiple options are available for repayment of the loan in lumpsum at the end of the loan term. Maximum period of loan is of twenty years. The loan is not required to be serviced as long as the borrower is alive and in occupation of the property. On the borrower’s death, the loan is repaid through sale of property. About 350 crore worth of Reverse Mortgage has been sanctioned. The National Housing Bank has received innumerable calls of inquiry from senior citizens wanting to know more. It is to tackle this influx of calls and give each senior citizen attention as per his/her needs, that information and counseling centres will be functional throughout the nation, at various HelpAge offices in 10 cities of India: Delhi, Chandigarh, Lucknow, Hyderabad, Chennai, Jaipur, Bangalore, Kolkata, Ahmedabad, and Bhopal with especially trained staff. Qualifications for reverse mortgage eligibility ? Should be a Senior Citizen of India above 60 Years of age. ? Married Couples will be eligible as joint borrowers provided one of them being above 60 years of age and other not below 55 years of age. Benefits of a reverse mortgage: ? It aims at partially meeting the financial needs of senior citizens without selling the property and enables recurring funds inflows to the senior citizens during their life time. ? After the death of the senior citizen, the surviving spouse can continue to occupy the property till his/her demise ? It can also be an investment tool for youngsters who plan for a retirement solution. They can start investing in a housing property and take benefit of the same during their retirement life. They have a secured investment which has benefit of capital appreciation. In India, the Reverse Mortgage concept faces a few challenges: ? Indian culture dictates that property is bequeathed to heirs and housing property is a sign of social legacy. Indians have to work out of this mindset to adopt this novel concept. ? Also, on the legal front, handling the title transfer, possession of house, other regulation etc can be tricky. ? Last but not the least income tax treatment for money received from the HFC is also an open issue, since the loan disbursements cannot be considered as the income for senior citizens. Reportedly National Housing Board is working on the resolution of these issues and Reverse Mortgage will be introduced in a full fledged manner in India very soon. . HOUSING FINANCE-SCOPE IN INDIA [pic] Macroeconomic Background On the back of economic reforms undertaken in 1991, India has grown at an average rate of over 5% through the nineties peaking at about 8% in FY04. It is currently the fourth largest (in PPP terms) economy in the world with GDP output at USD 554 billion. India’s services led-growth strategy is well documented and is a departure from the rest of Asia’s manufacturing-led model for growth. Both domestic and global demand for India’s services remains robust with globally competitive firms emerging from the country’s historically protected private sector. With still much scope for reform, India’s healthy progress in liberalization, private sector-led development, and newly established political support (irrespective of the ruling party) for economic and structural reforms suggest that India could well be setting up the necessary conditions to support the type of long-term growth path over the next 2-3 decades. Inflation through the nineties has hovered between 7% and 13%. Demographics The population of India is over 1 billion and accounts for one sixth of the entire world’s population. The population is second only to China with one quarter of the world’s youth living in India. 54% of the Indian population is below the age of 25. In 2001 the productive population (age 25-44) was 278 million which, by 2013, will grow to 369 million; a growth of 33%. This explosive growth will result in higher demand for housing loans in the foreseeable future. According to the 2001 Census of India the total number of households in India is 191 million, up from 147 million in 1991. Much in line with world trends of falling household size, in India, the average household size has fallen from 5. 71 in 1991 to 5. 34 in 2001. This trend is expected to continue as individuals migrate to urban centres in search of work, coupled with movement away from the joint family system to single family households that is further accelerating lower household sizes. The following graphs interpret the emergence and bubble of housing finance in the country. [pic][pic] series1=housing finance series2=consumer durables series3=credit cards eries4=other personal loans Housing Finance The value of total residential mortgage debt moved up from USD 1. 84 billion in 1994 to USD 12. 26 billion in 2004; a CAGR of 21%. The housing finance market has recorded robust growth in the last 5 years, clocking an annual growth rate of about 40% between FY99 and FY04. Residential mortgage debt as a percentage of GDP was a mere 0. 58% in 1994 which has moved up to 2. 21% in FY04, still miniscule when c ompared to about 45% in the EU, 70% in the US and upwards of 30% in East Asian economies. Interest rates on housing loans have fallen from a peak of 17% in 1996 to 7. 5% last fiscal making owning a home more affordable. This combined with increasing loan tenures, increasing loan-to-value ratio and a rise in the installment-to-income ratio are precipitating high growth rates in the housing finance market. The organized lenders in the housing finance industry, comprising 30% of housing units constructed, are currently concentrated in the urban markets, with a greater presence in the major metros and Tier 1 cities. They are however, moving to the Tier 2 cities and smaller towns but are yet to venture into the rural markets. Also, salaried borrowers constitute the bulk of the clientele for the financier in comparison to the self-employed borrowers, who constitute a miniscule proportion. As a segment, the self-employed category is much bigger than the salaried segment, but the organized lenders have, historically, been concentrating on the salaried borrowers due to the lower risks associated with them. Traditionally housing finance was dominated by a handful of private sector institutions. These Housing Finance Companies (HFCs) commanded 70% market share in FY99, which has subsequently fallen to 50% In FY04 as a direct result of policy changes that permitted the entry of banks into this industry. Banks now control 40% of this market and continue to show explosive growth on account of government policy that categorizes this lending under priority sector lending and the low NPA levels experienced in this industry Shortage of Housing Official and updated statistics on the shortage of housing units in the entire country is not readily available. According to the National Buildings Organisation (NBO), the components of housing shortage include (a) the excess of households over houses, including homeless households, (b) congestion i. e. the number of married couples requiring a separate room, (c) replacement or upgradation of unserviceable houses and (d) obsolescence/replacement of old houses. The last official estimate on the shortage of housing units was from the NBO which estimated a total shortfall of 19. 4 million units comprising 6. 6 million units in urban areas and 12. 8 million units in rural areas. Further, over 90 percent of this shortage is for the poor and low-income category (Ministry of Urban Affairs, 1998). This, shortage however, is based on the 1991 Census figures and thus is outdated. The unofficial estimate of the housing shortage is currently pegged at over 40 million dwelling units. Despite the absence of reliable statistical information, the growing population and increasing urbanisation has resulted in rising pressure on the available housing stock. As per the Planning Commission estimates, the total requirement of urban housing during the tenth five year plan, covering the period 2002-2007, is 22. 4 million dwelling units in urban areas. This comprises two components – an urban housing backlog of 8. 89 million dwelling units estimated at the beginning of 2002 and an addition of 13. 55 million new dwelling units. As per the Census 2001, housing completions (defined as the absolute increase in housing stock during a particular period) is around 5 houses unit s per 1,000 population per annum in India. The average annual housing completion in urban areas per 1,000 population was steady at around 7 housing units during the past three decades. This however, is lower than the minimum threshold as recommended by the United Nations of 8 to 10 housing units per 1000 population for developing countries (NHB Trend and Progress Report, 2004). Table 1. 2: Addition of Census Houses per 1,000 Population |1971-81 |1981-91 |1991-01 | |Urban | |Added Census Houses (million) |11. 55 |16. 55 |19. 3 | |Added Households (million) |10. 00 |11. 64 |12. 95 | |Annual Housing Completions/1,000 population |7. 23 |7. 61 |6. 83 | |Rural | |Added Census Houses (million) |19. 25 |29. 02 |34. 56 | |Added Households (million) |15. 0 |19. 16 |25. 61 | |Annual Housing Completions/1,000 population |3. 66 |4. 62 |4. 65 | |Total | |Added Census Houses (million) |26. 53 |45. 58 |54. 08 | |Added Households (million) |25. 50 |30. 80 |38. 6 | |Annual Housing Completions/1,000 population |3. 87 |5. 39 |5. 26 | Source: Census 2001, NHB Trend and Progress Report, 2004 Rapid Urbanisation Housing needs are strongly influenced by growth in population and demogra phic changes. While in the recent period the total population growth has been slowing down, the urban population continues to grow rapidly. The urban population has increased from 20 percent in 1971 to almost to 34 percent currently (SSKI, 2006). Urbanisation is particularly concentrated in urban agglomerations or mega cities, defined as cities having a population in excess of one million people. These mega cities account for almost 40 percent of the total urban population. As per the 2001 Census, there were 35 mega cities and the polarisation of growth towards them poses a greater challenge in providing housing in these areas as the housing stock is unable to keep pace with demand (Nallathiga, 2005). This is exacerbated by the continuing trend of in-migration to urban areas. As a result, there has been a disproportionate rise of slums. For instance in Mumbai, almost 60 percent of the total population live in slums. Restrictive Laws One of the major issues constricting the addition of homes is the series of archaic laws governing the Indian housing and real estate sector. Of the over 100 laws governing various aspects of real estate, many date back to the 19th century. Significant ones are the Indian Contracts Act, 1872, the Transfer of Property Act, 1882 and the Registration Act, 1908. Despite the plethora of laws, the legal framework requires a complete overhaul to make it more relevant to today’s requirements. These laws often lead to prolonged litigation and create artificial scarcity of land, thereby raising prices. In India, land is a state subject1. Thus, while the centre may make amendments and issue guidelines, the responsibility for implementing it remains optional for a state government. With 28 states and 7 union territories (areas directly managed by the central government), support for reforms has varied considerably from state to state. ANALYSIS Despite the problems alluded above much development has been made by the country in the field to promote housing finance during the past few decades. With the entrenchment of HDFC in1977, a system of specialized housing finance companies(hfc’s) discussed above, now in hundreds was bought into being. This include 25 large and stable organizations which have been approved as eligible for refinancing from NHB which was formed in 1989. The institution as mentioned earlier is the watchdog for housing finance. It egulates all the HFC’S dealing in housing finance and then sets its rules, regulations and policies binding the same. The recent developments in the field mark the effort made. The recent cut in interest rates for housing finace below 20lac clearly bring up the role played by the agencies today in countering the problem of availability of housing finance. These coups will not only help consumers (middle and lower middle class) find a shelter for themselves b ut it will also motivate infrastructure companies to invest in building low cost homes for the desired category. This in turn will lead to increase in the the capital goods, development of infrastructure therefore overall development of society, increase in job opportunities for the labour class (which will earn more=spend more savings = continuous earning and spending=increase in gdp =increase in living standard). ASSESSMENTS AND PROSPECTS The housing finance market in India has undergone unprecedented change in recent times. This evolution has been interesting, especially for developing countries looking to establish or strengthen their primary housing finance markets. From a time where HDFC established itself as the first retail housing finance company, to the next level where HDFC helped broad-base and develop the market by co-promoting three housing finance companies, GRUH Finance, Can Fin Homes and SBI Home Finance. In effect, HDFC co-promoted its own competition. The third level saw existing players having to actually re-assess the way they did business as the tide of competition rose to an almost unsustainable level with the aggressive entry of banks into the housing finance market. And finally, the present stage where there are a few dominant players with large scale operations. India today is a good example for developing countries wanting to kick off their primary housing market. The advantage of using the Indian housing finance experience is that housing finance players have been successful despite unfavourable conditions such as not having foreclosure norms for several years, difficulty in accessing long-term funding sources, lack of clear titles, no reliable statistics on housing or consumer data and an acute shortage of housing units. Rather than waiting for the government and regulators to create a favourable environment to foster a housing finance system, the market developed despite these constraints. Pre-requisites for Well Functioning Housing Finance Systems Listed below are prerequisites for a well functioning housing finance system which are universal requirements for any country: ? Sound macro-economic policies: Low mortgage interest rates triggered by sound macro economic policies are more important in developing mortgage markets than tax incentives and subsidies. ? Keep transaction costs low and mortgage registration systems efficient. Concentrate on getting the â€Å"primary market† right, e. g. transparent property rights, mortgage and credit registration, efficient mortgage collateral and repossession procedures, before creating a â€Å"secondary market† to finance those loans. ? Create transparent markets for lenders through approved valuation methods, house price indices and data on mo rtgage industry. ? Protect and inform the borrowers, for instance, by helping them compare mortgages products. ? Access to long-term funding sources and other instruments such as covered bonds, mortgage backed securities. Broad Basing the Market Need for an Independent Floating Rate Benchmark There is a need to explore the creation of an independent benchmark for adjustable rate mortgages which can be adopted by all players, thereby leading to more credibility, especially in the case of upward movements in the benchmark. Better Access to Credit History India has no easily shared method of verifying a client’s credit history or loan record. This has resulted in the housing finance industry witnessing a rising number of fraud incidents in the sector. There have been instances of clients taking out multiple mortgages on the same property from different lenders or providing fake documents for the site that do not exist. To enable access to better credit history for customers and preventing malpractices, some important steps have been initiated in the recent period. In 2005, citing increasing cases of fraud in the system, the National Housing Bank has set up a ‘Fraud Management Cell’ to collect information from housing finance companies on frauds committed. The National Housing Bank as collected this data and issued circulars detailing causative factors and suggestive remedial action. . Removal of Conflicts of Interest The National Housing Bank’s role as a promoter should be considered as successfully completed. Serving as both a regulator and equity investor in housing finance companies creates an unnecessary conflict of interest (World Bank, 2004). At the time of inception, the National Housing Bank’s mandate was to promote the housing finance sector. Today this role is not required. Thus, there is no longer any rationale for the National Housing Bank to provide equity investments, thereby creating a conflict of interest as regulator and investor. Besides, in 2005, the National Housing Bank’s investments in housing finance companies was miniscule, accounting for less than one percent of its total assets. FUTURE EXPECTATIONS High interest rates coupled with soaring property prices have only impacted the affordability of buyers, demand, however continues to persist and will become stronger and more intense in near future. Housing Sector in India to Be On a Growth Spree By 2015 Housing demand is poised to see a growth of around 80 Million for the lower-income and the lower-middle income groups. Housing Sector in India is also likely to generate around 4 Million new jobs within a decade with a whooping investment of US$ 670 Billion. It’s also expected that housing and real estate sector will undergo a revolutionary transformation to grow at around 14% annually. Presently, the contribution of Indian Housing to the country’s GDP is modest at less than one percent. In 2010 the demand would further grow to a massive volume of around 400 Million Units. This will necessitate a minimum outlay of US$ 890 Billion. There is a shortage of more than nearly 20 Million housing units in India and this is a positive sign of the untapped opportunities for this sector. LIMITATIONS OF HOUSING FINANCE The housing sector in India for several decades faced a number of set-backs, such as an unorganized market, development disparities, a compartmentalized development approach and a deterrent rent control system. There was not even a concerted attempt to understand the housing problem let alone promote it. Reforms introduced in the sector during the 1990s, however, have overturned the situation to a great extent. The designing of a shelter policy, the organization of the housing finance market, the introduction of fiscal incentives, increased public investment, legal reforms and others initiatives have brought about a number of changes in the housing sector. Interestingly, these changes have been concerned with both reducing the housing shortage and increasing the number of quality housing stock besides increased access to various other housing amenities like safe drinking water, good sanitation and household electricity. In spite of the high growth rates exhibited by the Indian housing finance industry, this sector too has its share of problems. The survey revealed the following growth constraints: 1) Limited exposure of the industry Housing finance assistance of formal institutions has been limited to the middle income and high-income groups. Companies have also not been able to penetrate the rural areas. 2) Absence of proper title deeds High down payment requirement and non-availability of title deeds in the absence of land records are some of the reasons responsible for the inability of the companies in reaching out to the vast population living in the rural areas. 3) No access to long-term funds Non-availability of long-term funds with housing finance companies and banks results in an asset liability mismatch. 4) Lack of foreclosure norms Lack of foreclosure norms for housing finance companies, which, if in place, will encourage HFCs to disburse more loans ) Regional Constraints ? Disparity and high rates of Stamp duty across the country on registration leads to the suppression of the value of property/evasion of registration. ? Imposition of stamp duty on equitable mortgages (i. e. on property used as a collateral for taking a home loan), the rate of which varies across states acts as a deterrent factor in availing ho using finance as the prime security for these loans is equitable mortgage of the property financed. This form of stamp duty is a cost to the customers and should be done away with or reduced to affordable levels. ) Constraints faced by Housing Finance Companies as against banks ? Banks have access to lower cost of funds compared to HFCs because of the following reasons: †¢ Banks have access to low cost retail funds †¢ Minimum capital adequacy ratio for banks is 10% whereas for HFCs it is 12% ? The Securitisation & Reconstruction of Financial Assets & Enforcement of Security Interest Act 2002 is applicable to banks but not to housing finance companies ANNEXURE I 2009 will be the year of affordable housing 29 Dec 2008, 0342 hrs IST, Mayur Shetty, ET Bureau |[pic] | S Sridhar | |NHB chairman & MD | National Housing Bank (NHB) — a subsidiary of the Reserve Bank of India (RBI) — was created two decades ago to regulate and promote housing finance institutions in In dia. Given the current economic environment, home finance has gained centrestage, with housing construction being the largest employment generator with linkages to 250 ancillary industries. As the apex housing finance institution, NHB has taken several initiatives to promote affordable housing. In an interview with Mayur Shetty, NHB chairman and managing director S Sridhar speaks on why he expects 2009 to be the year of affordable housing. House prices have crashed in the West. There is an expectation among buyers that prices will decline in India as well. How do you see the situation? The situation in India is quite different from that of the West. In India, the conduct of the monetary policy and regulation over banks and housing finance companies ensured that the housing bubble did not develop. Further, the actual equity component in housing is much higher than in the West. Thus, housing prices in India have fallen a bit and may fall further, but unlikely to get into a free-fall situation. What needs to be done to reduce housing shortage? I expect 2009 to be the ‘year of affordable houses’, when affordable houses will be available to the middle and lower income groups in sufficient volumes. This will happen mainly through a combination of fall in house prices and reduction in home loan interest rates. The latter has happened. I hope developers reduce prices to stimulate demand and public housing agencies will take up affordable housing in a big scale. Additional hygiene factors are reduction in transaction cost in home purchases through reduction in stamp duty and registration charges and the availability of risk mitigants such as mortgage guarantee, title insurance, credit guarantee for lower income houses. Where do you see interest rates on home loans? Is the NHB refinance rate likely to come down further? Interest rates are headed southward. Public sector banks (PSU banks) have set the pace. Others, including housing finance companies, are following suit. NHB’s refinance rates have also come down to single digit. Refinance for rural housing at concessional rate of 8% per annum for seven years has also been provided. Our PLR has been reduced to 10. 75% per annum. NHB has announced a package for the housing sector. At what interest rate will you lend to HFCs? The refinance facility of Rs 4,000 crore extended by RBI to NHB will be on-lent by NHB to housing finance companies with the following major conditions. It will be available at an interest rate of 8%, and will be available only for loans below Rs 20 lakh. The facility is available up to March 31, 2010. You have launched an index of home prices. How is the index doing? NHB’s RESIDEX, which is India’s first official property index, was launched in July 2007 for five cities — Bengaluru, Bhopal, Delhi, Kolkata and Mumbai — covering the period 2001-2005. It has since been updated to December 2007. The property index has been well received. It is being expanded to cover 15 cities and up to December 2008 wh

Mcdonalds 10k

Morningstar ® DocumentResearchS Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2010 OR ? TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period fromto Commission File Number 1-5231 McDONALD’S CORPORATION (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) One McDonald’s Plaza Oak Brook, Illinois (Address of principal executive offices) 36-2361282 (I. R. S. Employer Identification No. ) 60523 (Zip code) Name of each exchange on which registered New York Stock Exchange Registrant’s telephone number, including area code: (630) 623-3000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Common stock, $. 01 par value Securities registered pursuant to Section 12(g) of the Act: None (Title of class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ? Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Act. Yes ? No x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No? Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( §232. 05 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ? Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorpora ted by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of â€Å"large accelerated filer,† â€Å"accelerated filer† and â€Å"smaller reporting company† in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer xAccelerated filer ? Non-accelerated filer ? (do not check if a smaller reporting company)Smaller reporting company ? Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ? No x The aggregate market value of common stock held by non-affiliates of the registrant as of June 30, 2010 was $70,073,280,631. The number of shares outstanding of the registrant’s common stock as of January 31, 2011 was 1,043,298,941. DOCUMENTS INCORPORATED BY REFERENCE Part III of this Form 10-K incorporates information by reference from the registrant’s 2011 definitive proxy statement which will be filed no later than 120 days after December 31, 2010. Source: MCDONALDS CORP, 10-K, February 25, 2011Powered by Morningstar  ® Document ResearchSM Table of Contents Part I. Part II. Part III. Part IV. McDONALD’S CORPORATION INDEX Page Reference Item 1Business1 Item 1A Item 1B Item 2Properties6 Risk Factors and Cautionary Statement Regarding Forward-Looking Statements3 Unresolved Staff Comments5 Item 3 Item 5 Item 6 Item 7 Item 7A Item 8 Item 9 Item 9A Item 9B Item 10 Item 11 Item 12 Item 13 Item 14 Item 15 Legal Proceedings6 Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities7 Selected Financial Data9 Management’s Discussion and Analysis of Financial Condition and Results of Operations10 Quantitative and Qualitative Disclosures About Market Risk27 Financial Statements and Supplementary Data27 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure48 Controls and Procedures48 Other Information48 Directors, Executive Officers and Corporate Governance48 Executive Compensation48 Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters48 Certain Relationships and Related Transactions, and Director Independence49 Principal Accountant Fees and Services49 Exhibits and Financial Statement Schedules49 52 53 Signatures Exhibits All trademarks used herein are the property of their respective owners and are used with permission. Source: MCDONALDS CORP, 10-K, February 25, 2011Powered by Morningstar  ® Document ResearchSM Table of Contents PART I ITEM 1. Business McDonald’s Corporation, the registrant, together with its subsidiaries, is referred to herein as the â€Å"Company. † a. General development of business During 2010, there have been no material changes to the Company’s corporate structure or in its method of conducting business. In 2010, the Company has continued the process it began in 2005 to realign certain subsidiaries to develop a corporate structure within its geographic segments that better reflects the operation of the McDonald’s worldwide business. . Financial information about segments Segment data for the years ended December 31, 2010, 2009, and 2008 are included in Part II, Item 8, page 40 of this Form 10-K. c. Narrative description of business †¢ General The Company franchises and operates McDonald’s restaurants in the global restaurant industry. These restaurants serve a varied, yet limited, value-priced menu (see Products) in more than 100 countries around the world. All restaurants are operated either by the Company or by franchisees, including conventional franchisees under franchise arrangements, and foreign affiliated markets and developmental licensees under license agreements. The Company’s operations are designed to assure consistency and high quality at every restaurant. When granting franchises or licenses, the Company is selective and generally is not in the practice of franchising to passive investors. Under the conventional franchise arrangement, franchisees provide a portion of the capital required by initially investing in the equipment, signs, seating and de? cor of their restaurant businesses, and by reinvesting in the business over time. The Company owns the land and building or secures long-term leases for both Company-operated and conventional franchised restaurant sites. In certain circumstances, the Company participates in reinvestment for conventional franchised restaurants. A discussion regarding site selection is included in Part I, Item 2, page 6 of this Form 10-K. Conventional franchisees contribute to the Company’s revenue stream through the payment of rent and royalties based upon a percent of sales, with specified minimum rent payments, along with initial fees received upon the opening of a new restaurant or the granting of a new franchise term. The conventional franchise arrangement typically lasts 20 years, and franchising practices are generally consistent throughout the world. Over 70% of franchised restaurants operate under conventional franchise arrangements. The Company has an equity investment in a limited number of foreign affiliated markets, referred to as affiliates. The largest of these affiliates is Japan, where there are more than 3,300 restaurants. The Company receives a royalty based on a percent of sales in these markets. Under a developmental license arrangement, licensees provide capital for the entire business, including the real estate interest. While the Company has no capital invested, it receives a royalty based on a percent of sales, as well as initial fees. The largest of these developmental license arrangements operates more than 1,750 restaurants across 18 countries in Latin America and the Caribbean. The Company and its franchisees purchase food, packaging, equipment and other goods from numerous independent suppliers. The Company has established and strictly enforces high quality standards and product specifications. The Company has quality assurance labs around the world to ensure that its high standards are consistently met. The quality assurance process not only involves ongoing product reviews, but also on-site inspections of suppliers’ facilities. A quality assurance board, composed of the Company’s technical, safety and supply chain specialists, provides strategic global leadership for all aspects of food quality and safety. In addition, the Company works closely with suppliers to encourage innovation, assure best practices and drive continuous improvement. Leveraging scale, supply chain infrastructure and risk management strategies, the Company also collaborates with suppliers toward a goal of achieving competitive, predictable food and paper costs over the long term. Independently owned and operated distribution centers, approved by the Company, distribute products and supplies to most McDonald’s restaurants. In addition, restaurant personnel are trained in the proper storage, handling and preparation of products and in the delivery of customer service. McDonald’s global brand is well known. Marketing, promotional and public relations activities are designed to promote McDonald’s brand image and differentiate the Company from competitors. Marketing and promotional efforts focus on value, food taste, menu choice and the customer experience. The Company continuously endeavors to improve its social responsibility and environmental practices to achieve long-term sustainability, which benefits McDonald’s and the communities it serves. The Company has disposed of non-McDonald’s restaurant businesses to concentrate resources on its core business. In February 2009, the Company sold its minority ownership interest in Redbox Automated Retail, LLC, and in April 2008, the Company sold its minority ownership interest in U. K. -based Pret A Manger. †¢Products McDonald’s restaurants offer a substantially uniform menu, although there are geographic variations to suit local consumer preferences and tastes. In addition, McDonald’s tests new products on an ongoing basis. McDonald’s menu includes hamburgers and cheeseburgers, Big Mac, Quarter Pounder with Cheese, Filet-O-Fish, several chicken sandwiches, Chicken McNuggets, Chicken Selects, Snack Wraps, french fries, salads, shakes, McFlurry desserts, sundaes, soft serve cones, pies, cookies, soft drinks, coffee, McCafe? beverages and other beverages. In addition, the restaurants sell a variety of other products during limited-time promotions. McDonald’s restaurants in the U. S. and many international markets offer a full or limited breakfast menu. Breakfast offerings may include Egg McMuffin, Sausage McMuffin with Egg, McGriddles, biscuit and bagel sandwiches and hotcakes. Source: MCDONALDS CORP, 10-K, February 25, 2011Powered by Morningstar  ® Document ResearchSM Table of Contents †¢Intellectual property The Company owns or is licensed to use valuable intellectual property including trademarks, service marks, patents, copyrights, trade secrets and other proprietary information. T he Company considers the trademarks â€Å"McDonald’s† and â€Å"The Golden Arches Logo† to be of material importance to its business. Depending on the jurisdiction, trademarks and service marks generally are valid as long as they are used and/or registered. Patents, copyrights and licenses are of varying remaining durations. †¢Seasonal operations The Company does not consider its operations to be seasonal to any material degree. †¢ Working capital practices Information about the Company’s working capital practices is incorporated herein by reference to Management’s discussion and analysis of financial condition and results of operations for the years ended December 31, 2010, 2009, and 2008 in Part II, Item 7, pages 10 through 27, and the Consolidated statement of cash flows for the years ended December 31, 2010, 2009 and 2008 in Part II, Item 8, page 30 of this Form 10-K. †¢ Customers The Company’s business is not dependent upon either a single customer or small group of customers. †¢ Backlog Company-operated restaurants have no backlog orders. †¢Government contracts No material portion of the business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the U. S. government. †¢ Competition McDonald’s restaurants compete with international, national, regional and local retailers of food products. The Company competes on the basis of price, convenience, service, menu variety and product quality in a highly fragmented global restaurant industry. In measuring the Company’s competitive position, management reviews data compiled by Euromonitor International, a leading source of market data with respect to the global restaurant industry. The Company’s primary competition, which management refers to as the Informal Eating Out (IEO) segment, includes the following restaurant categories defined by Euromonitor International: quick-service eating establishments, casual dining full-service restaurants, 100% home delivery/takeaway providers, street stalls or kiosks, specialist coffee shops and self-service cafeterias. The IEO segment excludes establishments that primarily serve alcohol and full-service restaurants other than casual dining. Based on data from Euromonitor International, the global IEO segment was composed of approximately 6. 3 million outlets and generated $868 billion in annual sales in 2009, the most recent year for which data is available. McDonald’s Systemwide 2009 restaurant business accounted for approximately 0. 5% of those outlets and about 8% of the sales. 2 Management also on occasion benchmarks McDonald’s against the entire restaurant industry, including the IEO segment defined above and all other full-service restaurants. Based on data from Euromonitor International, the restaurant industry was composed of approximately 13. 1 million outlets and generated about $1. 79 trillion in annual sales in 2009. McDonald’s Systemwide restaurant business accounted for approximately 0. 2% of those outlets and about 4% of the sales. †¢Research and development The Company operates research and development facilities in the U. S. , Europe and Asia. While research and development activities are important to the Company’s business, these expenditures are not material. Independent suppliers also conduct research activities that benefit the Company, its franchisees and suppliers (collectively referred to as the System). †¢Environmental matters Increased focus by U. S. and overseas governmental authorities on environmental matters is likely to lead to new governmental initiatives, particularly in the area of climate change. While we cannot predict the precise nature of these initiatives, we expect that they may impact our business both directly and indirectly. Although the impact would likely vary by world region and/or market, we believe that adoption of new regulations may increase costs, including for the Company, its franchisees and suppliers. Also, there is a possibility that governmental initiatives, or actual or perceived effects of changes in weather patterns or climate, could have a direct impact on the operations of our restaurants or the operations of our suppliers in ways which we cannot predict at this time. The Company monitors developments related to environmental matters and plans to respond to governmental initiatives in a timely and appropriate manner. At this time, the Company has already undertaken its own initiatives relating to preservation of the environment, including the development of means of monitoring and reducing energy use, in many of its markets. †¢Number of employees The Company’s number of employees worldwide, including Company- operated restaurant employees, was approximately 400,000 as of year-end 2010. d. Financial information about geographic areas Financial information about geographic areas is incorporated herein by reference to Management’s discussion and analysis of financial condition and results of operations in Part II, Item 7, pages 10 through 27 and Segment and geographic information in Part II, Item 8, page 40 of this Form 10-K. e. Available information The Company is subject to the informational requirements of the Securities Exchange Act of 1934 (Exchange Act). The Company therefore files periodic reports, proxy statements and other information with the Securities and Exchange Commission (SEC). Such reports may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, D. C. 20549, or by calling the SEC at (800) SEC-0330. In addition, the SEC maintains an internet site (www. sec. gov) that contains reports, proxy and information statements and other information.

AP Government Chapter 2 Summary Essay

Within the first pages of this chapter, we are introduced with the topic of the constitution and actions of Gregory Lee Johnson. The case of Gregory Lee Johnson is about that of him burning an American flag and protesting that when the government became involved, it was against his freedom of speech. This is where the constitution of the United States comes into play and supersedes the ordinary law. The question though, what exactly is a constitution? A constitution is a nation’s basic laws. Essentially it creates political institutions, provides rights for citizens and holds power within the government. The constitution also holds the unwritten traditions and precedents that have been established. Most people do not always agree with how the constitution is written and don’t always agree with how the government is ran, but this constitution is the basis of how all things are ran. Next is the Declaration of Independence. Between 1775 and 1776 there was a tremendous amount of discontent with the English and the Continental Congress was in session for that continuous year. When all the men were coming up with ideas and a basis for the Declaration of Independence, most ideas and propositions were adopted from John Locke who argued that humans have all natural rights and are not dependent upon the government. Later this Declaration was written primarily by Thomas Jefferson and adopted on July 4th, 1776. Essentially this was written to announce and justify the revolution that was happening. Lastly, all the colonists needed foreign assistance to conquest the most powerful nation in the world. Going back to fully understand Locke and his ideas, we take a look at the idea that Locke was one of the most influential philosophers of this time. John Locke built most of his philosophy on the idea of natural rights. Natural rights are rights inherent of people and who are not dependent on the government. Also, John argued that the government should be built upon the consent of the governed, meaning that people agree on who their rulers are. He also argued that our nation should have a limited government so that there are restrictions on what a ruler can do. As Locke was coming up with his philosophy, he came up with a brilliant idea that governments should have standing laws in which people know if an act is acceptable or not before doing it. Now we come to the point of the government the failed. Congress was needed to make a plan for the permanent union of the states and the first plan to the constitution was the Articles of Confederation. The Articles only initially established a legislature with one house which was a big problem at the time and would be a big problem today. There was no president at the time, no national court and the powers were extremely limited for the national legislature. After the states ratified this Article, problems were still proceeding. This included that Congress was only able to maintain an army and navy, no more. All in all, Congress had no power. The only advantage to the Articles of confederation was that when the new Constitution was written, the writers knew the things to avoid. Next was the issue of economic turmoil and the Shays rebellion. After the war, many farmers were left with a debt that could not be paid and were threatened that their farms would be lost. So in order to try and pay this, many printed paper money which was worthless and tried to pay the outstanding debt back. Now the farmers felt a sigh of relief when the Shays rebellion took place. This was a series of attacks on courthouses to prevent the judges from having farmers and their families foreclose on the farms. Now we officially decided to make a constitution at the Philadelphia convention. Fifty five delegates were chosen to write what became the U.S. Constitution. Most these people were wealthy planters or successful merchants and lawyers. Most issue differed in the aspect of debates on big-issues to the self-interest of very small issues. Most men in fact did not share the same political aspect and some issues arose from this. In fact, all these men had a very cynical view point of human nature and believed that men love power. As the words of this document were written,  factions arose up. Factions are parties or interest groups. Most of the delegates believed that if a government is ran by factions, the government would be prone to instability, tyranny and that of violence. So, within the Declaration of Independence, there are three issues that arise. First was the issue of equality. This issue was basically that of states coming up with different plans and hoping it would work. The New Jersey Plan, the Virginia Plan and the Connecticut Compromise were all different in aspects of what should be done. Another issue was that of the economy. The writers of the Constitution committed to a strong national government and agreed that the economy was in complete disaster and disarray. The problem was that paper money was worthless in some states and Congress was having issues raising money due to the fact the economy was in a recession. And lastly were the rights of an individual. The Founders agreed that it was important to safeguard individualism and keep threats away from personal freedom. The Constitution offers protections, including that of upholding the right to a trial by jury and that of not looking at a person’s religion to withhold them from a governmental position. Now we take a look at the ratification of the Constitution. In order for this Constitution to be processed, it needed to be ratified by nine of the thirteen states. But there were problems that occurred for this to be ratified because there were federalists and anti-federalist. Federalists supported the Constitution and anti-federalists did not. This is where the big issue arose. Some of the differences these groups faced were one being that anti-federalists preferred a strong government while the federalists preferred a weak one. Another problem was that the anti-federalists wanted a direct election of governmental officials and the federalists did not. Lastly was the inclusion of the Bill of Rights. The Bill of Rights was the first ten amendments to the Constitution in response to the concerns of the anti-federalists. The amendments actually give us the basic liberties, that of freedom of speech or religion. Yet the road to the Constitution and the ratification of it was not easy, the work of these men made it possible and fought to make it work. Without the work of these men, We would not be  where we are today and life as we know it would be completely different.

Microeconomics

Question 1) With examples give 5 reasons why the study of microeconomics is important. Microeconomics is a field of economic study that focuses on how an individual's behaviour and decisions affect the supply and demand for goods and services. For the purpose of microeconomics, the actions of individuals, households and businesses are crucial, unlike the study of macroeconomics, which focuses on national and international economic trends. Despite the differences between the two fields, however, micro-level trends and the study of microeconomics are considered the basis of modern macroeconomics.Macroeconomics is concerned with the big picture, for example, the national economy and gross domestic product. By contrast, microeconomics is concerned with the small picture and focuses on theories of supply and demand. Firstly, microeconomics is very important in business, especially when it comes to a new business. Entrepreneurs create businesses by purchasing and utilizing factors of produ ction. In order to estimate the potential return on investment (ROI) of those factors of production, entrepreneurs must have a basic knowledge of microeconomic concepts such as supply, demand, cost and profit.Without the basics of microeconomics, it is impossible to know how much a particular good can be sold for in a particular area. Furthermore, without microeconomic basics on costs and earnings, it is impossible to estimate ROI, thus will lead to poor financial investments. Microeconomics is very useful in business decision making. It helps business to achieve maximum production with the given amount of resources. Business firms can make decisions in demand analysis, cost analysis and methods of calculating prices.Second, marketing people must have a basic understanding of microeconomics so that they can set prices for products and decide in which markets to sell those products. For example, with an understanding of microeconomics, a computer company marketing manager can advise the CEO to start allowing instalment payments in case of an economic downturn, thus recovering business from customers hit hard by the recession. A marketing manager without a sense of economics might not realize that such options are available. Third, microeconomics is important when it comes to management.Managers must understand the concept of return on investment (ROI) when setting salaries for new hires, as employees are supposed to generate profits for the company. Managers must also have an understanding of microeconomics when making general budget decisions. A project shouldn't be given a budget that exceeds what the project is expected to produce in future earnings. These kinds of decisions are based on the microeconomic concepts of cost, revenue and profit. Fourth, Finance and Accounting also requires the understandings of microeconomics.Finance people probably use microeconomics more than anyone else in business. Financial analysts use microeconomic and macroeconomic theo ries in order to forecast the future value of financial assets. For example, gold, stocks, bonds and other investments. A securities analyst might use microeconomic data to determine the change in income of people in a given country, then use the microeconomic concept of â€Å"price elasticity of demand† for the responsiveness of consumer demand to changes in consumer income and to determine whether the price of a given asset will rise or fall in that country.Accountants use financial ratios that are derived from microeconomics. Lastly, the understanding of microeconomic is needed to provide tools for economic policies. Microeconomic helps to impose tax rates by analyzing the demand and supply factors. It also helps to determine the government policies on the resource allocation and pricing. Government also make policies to control the prices of goods by using the theory of price ceiling and price floor. By understanding microeconomics, we can examine the implications and eff ectiveness of the government policies. Question 2) Define â€Å"ceteris paribus â€Å".Explain why the device of ceteris paribus is so important in economics. Ceteris Paribus is a Latin phrase that translates approximately to â€Å"holding other things constant† and is usually rendered in English as â€Å"all other things being equal†. In Economics the term â€Å"Ceteris Paribus† is used quite often to assume all other factors to remain the same, while analysing the relationship between any two variables. For example, when discussing the laws of supply and demand, one could say that if demand for a given product outweighs supply, ceteris paribus, prices will rise.Here, the use of â€Å"ceteris paribus† is simply saying that as long as all other factors that could affect the outcome such as the existence of a substitute product remain constant, prices will increase in this situation. One of the disciplines in which ceteris paribus are most widely used is economics, in which they are employed to simplify the formulation and description of economic outcomes and the theoretical relationship of cause and effect. When using ceteris paribus in economics, assume all other variables except those under immediate consideration are held constant.For example, it can be predicted that if the price of beef increases, ceteris paribus, the quantity of beef demanded by buyers will decrease. In this example, the clause is used to operationally describe everything surrounding the relationship between both the price and the quantity demanded of an ordinary good. This operational description intentionally ignores both known and unknown factors that may also influence the relationship between price and quantity demanded, and thus to assume ceteris paribus is to assume away any interference with the given example.Such factors that would be intentionally ignored include the relative change in price of substitute goods like the price of beef vs. chicken, t he level of risk dislikes among buyers like the fear of mad cow disease, and the level of overall demand for a good regardless of its current price level like a societal shift toward vegetarianism. If we try to establish the relationship between demand and price, there may be other variables which may also influence demand besides price. The influence of other factors may invalidate the hypothesis that quantity demanded of a commodity is inversely related to its price.If rise in price takes place along with an increasing in income or a change technology, then the effect of price change may not be the same. However, the assumption that the other variables are unchanged will eliminate the interrupting influences of other variables. Ceteris Paribus is important in economics as it is an assumption which we are bound to make when there are complexities in the reality. It is necessary for the sake of convenience. The limitations of human intelligence and capacity compel us to make this as sumption.Besides, without the assumption we cannot reach on economic relations, sequences and conclusions. In fact, there are large numbers of variables interacting simultaneously at a given time. If our analysis has to be accurate we may have to examine two variables at a time which makes it inevitable to assume other variables to remain unchanged. For the ceteris paribus assumption, let’s take for example by assuming an economist examines a model explaining the relationship between the price and quantity purchased of Coca-Cola. The theory is â€Å"if the price increases, then the quantity of Coca-Cola decreases, ceteris paribus. Now assume the process of Coca-Cola was observed to increased one summer and some people actually bought more, not less. Based on this real-world observation, you would declare the theory is wrong but actually the economist responds that this is a reasoning pitfall because the model is valid based on the assumption of ceteris paribus, and your obse rvation gives no reason to reject the model. The reason the model appeared flawed is because another factor which is a sharp rise in the temperature. The rise in temperature caused people to buy more Coca-Cola in spite of its higher price.If the temperature and all other factors were held constant as the price of Coca-Cola rises, then people indeed would buy less Coca-Cola, as the model predicts. Therefore, the assumption that the other variables are unchanged will eliminate the interrupting influences of other variables. As a conclusion, ceteris paribus is important as it enhances our understandings towards the theoretical relationship of cause and effect as we can analyse the relationship between two variable without having any other variable influencing the results.The assumption of Ceteris Paribus eliminates the influence of other factors which may get in the way of establishing a scientific statement regarding the behaviour of economic variables. References Question 1 reference : Importance of microeconomics, http://www. slideshare. net/tribhuwan64/presentation-on-importance-of-microecon omics Importance of microeconomics, http://www. ehow. com/info_8301181_importance-microeconomics-business. html Question 2 reference: Microeconomics for Today, books. google. com. my/books? isbn=0538469447 Basic Tools in Economics, http://wikieducator. org/Basic_Tools_in_Economic_Analysis Microeconomics Question 1) With examples give 5 reasons why the study of microeconomics is important. Microeconomics is a field of economic study that focuses on how an individual's behaviour and decisions affect the supply and demand for goods and services. For the purpose of microeconomics, the actions of individuals, households and businesses are crucial, unlike the study of macroeconomics, which focuses on national and international economic trends. Despite the differences between the two fields, however, micro-level trends and the study of microeconomics are considered the basis of modern macroeconomics.Macroeconomics is concerned with the big picture, for example, the national economy and gross domestic product. By contrast, microeconomics is concerned with the small picture and focuses on theories of supply and demand. Firstly, microeconomics is very important in business, especially when it comes to a new business. Entrepreneurs create businesses by purchasing and utilizing factors of produ ction. In order to estimate the potential return on investment (ROI) of those factors of production, entrepreneurs must have a basic knowledge of microeconomic concepts such as supply, demand, cost and profit.Without the basics of microeconomics, it is impossible to know how much a particular good can be sold for in a particular area. Furthermore, without microeconomic basics on costs and earnings, it is impossible to estimate ROI, thus will lead to poor financial investments. Microeconomics is very useful in business decision making. It helps business to achieve maximum production with the given amount of resources. Business firms can make decisions in demand analysis, cost analysis and methods of calculating prices.Second, marketing people must have a basic understanding of microeconomics so that they can set prices for products and decide in which markets to sell those products. For example, with an understanding of microeconomics, a computer company marketing manager can advise the CEO to start allowing instalment payments in case of an economic downturn, thus recovering business from customers hit hard by the recession. A marketing manager without a sense of economics might not realize that such options are available. Third, microeconomics is important when it comes to management.Managers must understand the concept of return on investment (ROI) when setting salaries for new hires, as employees are supposed to generate profits for the company. Managers must also have an understanding of microeconomics when making general budget decisions. A project shouldn't be given a budget that exceeds what the project is expected to produce in future earnings. These kinds of decisions are based on the microeconomic concepts of cost, revenue and profit. Fourth, Finance and Accounting also requires the understandings of microeconomics.Finance people probably use microeconomics more than anyone else in business. Financial analysts use microeconomic and macroeconomic theo ries in order to forecast the future value of financial assets. For example, gold, stocks, bonds and other investments. A securities analyst might use microeconomic data to determine the change in income of people in a given country, then use the microeconomic concept of â€Å"price elasticity of demand† for the responsiveness of consumer demand to changes in consumer income and to determine whether the price of a given asset will rise or fall in that country.Accountants use financial ratios that are derived from microeconomics. Lastly, the understanding of microeconomic is needed to provide tools for economic policies. Microeconomic helps to impose tax rates by analyzing the demand and supply factors. It also helps to determine the government policies on the resource allocation and pricing. Government also make policies to control the prices of goods by using the theory of price ceiling and price floor. By understanding microeconomics, we can examine the implications and eff ectiveness of the government policies. Question 2) Define â€Å"ceteris paribus â€Å".Explain why the device of ceteris paribus is so important in economics. Ceteris Paribus is a Latin phrase that translates approximately to â€Å"holding other things constant† and is usually rendered in English as â€Å"all other things being equal†. In Economics the term â€Å"Ceteris Paribus† is used quite often to assume all other factors to remain the same, while analysing the relationship between any two variables. For example, when discussing the laws of supply and demand, one could say that if demand for a given product outweighs supply, ceteris paribus, prices will rise.Here, the use of â€Å"ceteris paribus† is simply saying that as long as all other factors that could affect the outcome such as the existence of a substitute product remain constant, prices will increase in this situation. One of the disciplines in which ceteris paribus are most widely used is economics, in which they are employed to simplify the formulation and description of economic outcomes and the theoretical relationship of cause and effect. When using ceteris paribus in economics, assume all other variables except those under immediate consideration are held constant.For example, it can be predicted that if the price of beef increases, ceteris paribus, the quantity of beef demanded by buyers will decrease. In this example, the clause is used to operationally describe everything surrounding the relationship between both the price and the quantity demanded of an ordinary good. This operational description intentionally ignores both known and unknown factors that may also influence the relationship between price and quantity demanded, and thus to assume ceteris paribus is to assume away any interference with the given example.Such factors that would be intentionally ignored include the relative change in price of substitute goods like the price of beef vs. chicken, t he level of risk dislikes among buyers like the fear of mad cow disease, and the level of overall demand for a good regardless of its current price level like a societal shift toward vegetarianism. If we try to establish the relationship between demand and price, there may be other variables which may also influence demand besides price. The influence of other factors may invalidate the hypothesis that quantity demanded of a commodity is inversely related to its price.If rise in price takes place along with an increasing in income or a change technology, then the effect of price change may not be the same. However, the assumption that the other variables are unchanged will eliminate the interrupting influences of other variables. Ceteris Paribus is important in economics as it is an assumption which we are bound to make when there are complexities in the reality. It is necessary for the sake of convenience. The limitations of human intelligence and capacity compel us to make this as sumption.Besides, without the assumption we cannot reach on economic relations, sequences and conclusions. In fact, there are large numbers of variables interacting simultaneously at a given time. If our analysis has to be accurate we may have to examine two variables at a time which makes it inevitable to assume other variables to remain unchanged. For the ceteris paribus assumption, let’s take for example by assuming an economist examines a model explaining the relationship between the price and quantity purchased of Coca-Cola. The theory is â€Å"if the price increases, then the quantity of Coca-Cola decreases, ceteris paribus. Now assume the process of Coca-Cola was observed to increased one summer and some people actually bought more, not less. Based on this real-world observation, you would declare the theory is wrong but actually the economist responds that this is a reasoning pitfall because the model is valid based on the assumption of ceteris paribus, and your obse rvation gives no reason to reject the model. The reason the model appeared flawed is because another factor which is a sharp rise in the temperature. The rise in temperature caused people to buy more Coca-Cola in spite of its higher price.If the temperature and all other factors were held constant as the price of Coca-Cola rises, then people indeed would buy less Coca-Cola, as the model predicts. Therefore, the assumption that the other variables are unchanged will eliminate the interrupting influences of other variables. As a conclusion, ceteris paribus is important as it enhances our understandings towards the theoretical relationship of cause and effect as we can analyse the relationship between two variable without having any other variable influencing the results.The assumption of Ceteris Paribus eliminates the influence of other factors which may get in the way of establishing a scientific statement regarding the behaviour of economic variables. References Question 1 reference : Importance of microeconomics, http://www. slideshare. net/tribhuwan64/presentation-on-importance-of-microecon omics Importance of microeconomics, http://www. ehow. com/info_8301181_importance-microeconomics-business. html Question 2 reference: Microeconomics for Today, books. google. com. my/books? isbn=0538469447 Basic Tools in Economics, http://wikieducator. org/Basic_Tools_in_Economic_Analysis

Corporate analysis research paper for Marvel Entertainment Essay

Research and Discussion Topic – Studio Entertainment & Media Networks Imagine time traveling within the last few decades – even present day and asking a young boy who he looks up to the most, or who he wants to be when he grows up. Unsurprisingly, he would blurt out, â€Å"Spiderman,† â€Å"Iron Man,† or â€Å"The Incredible Hulk!† These superheroes are only a few of the thousands of inspirational characters Marvel Studios has created in the last 70 years. Marvel World Wide Inc. is a media and entertainment-based company with an emphasis on consumer products, gaming, and film production. This company was founded in 1939 by Martin Goodman who initially called Marvel, Timely Comics (Wright). In the 1940’s not only did Timely Comics (now Marvel) create superhero fantasies they also expanded into a wider variety of stories, including horror, westerns, funny animals, mysterious crimes, war comics, jungle tales, romance, and even Bible and sport stories. This trend for genre expansion started to decline when the company not iced a huge consumer interest in their superheroes. They started to focus on turning normal misfit people into super natural creatures. Giving hope and aspiration to children, they, too, can become â€Å"super.† Unlike rival comics that based their superheroes on perfection, glamour, and staying within national borders. Marvel’s stories dealt with political issues, diversifying their savior of choice, and educating their audiences. When it comes to technology Marvel has expanded its horizons exponentially since its first comic books in the late 1930s. For Marvel, technology in the creation of films has been the trigger for their upward mobility of success. From using flipbooks to bring movement into the characters we now have the innovation of Chroma Key Compositing (green screnes) to breathe life within our icons. With this revolution artist can now create the most elaborate worlds and unlimited high pace scenes. Thank goodness, or we wouldn’t have a planet after all the battles in today’s movies. Not only has Marvel made a complete turnaround on the way people view the clash of superheroes and villains through film they have globalized their characters through merchandise, games, and entertainment. A large expansion has recently been released at Hong Kong Disneyland announcing the addition of The Iron Man Experience in 2016. This Marvel themed ride will be the first of many to  come into the p arks. (Disney Parks Blog) Of course, in every superhero story there will always be a villain to face. In the corporate world, the villain company for Marvel is DC Comics owned by Time Warner, Inc. Time Warner Inc. is a multi-national media corporation headquartered in New York City. As of 2010, it is the largest media and entertainment conglomerate and it is second largest conglomerate as for revenue. Time Warner is compiled of Warner Communication Inc., Time Inc., and Turner Broadcasting System Inc. This corporation excels in film, television and publishing. Time Warner Inc. owns HBO, The CW Television Network, Warner Bros, CNN, Castle Rock Entertainment, DC Entertainment, etc. DC Comics is a publishing unit from DC Entertainment and does extremely well at operating the American comic book market share as well as relating media. It produces well known characters such as Superman, Batman, Wonder Woman, Green Lantern, Flash, Aquaman, Justice League, Teen Titans and some villains incl uding the Joker, Catwoman, Lex Luthor, etc. The Walt Disney Company strives to excel in quite a variety of different segments. Of course, being a successful and global corporation, it generally comes with tough competition. It is the largest entertainment conglomerate as far as revenues (with Time Warner Inc. as a close second place). One of the five segments of The Walt Disney Company includes Studio Entertainment, which through Walt Disney Studios (formally known as The Disney Bros Cartoon Studios); the company does an excellent job by producing multiple award winning films throughout the decades. At the end of 2009, the Walt Disney Company purchased Marvel Entertainment for $4 billion. Both Walt Disney Studios and Marvel Studios are now working in conjunction for marketing and distributing matters. Marvel Studios produces characters such as Iron Man, The Incredible Hulk, Thor, Captain America, Fantastic Four, X-Man, Spiderman, etc. Now, if you aren’t a â€Å"comic book su perhero geek†, then you’re perfectly okay! In certain ways, The Walt Disney Company and Time Warner Inc. are evidently similar. The Walt Disney Company focuses on 3 main priorities: technology, innovation, and global expansion. Time Warner Inc. also focuses on these same priorities as well, although portraying these qualities through a different aspect. Both technology and innovation are displayed through various levels and different types of creativity, from both of these competitive entertainment studios. For example, different plots make innovation opportunities for both types of  super heroes. The DC Comic superhero villains don’t tend to kill†¦whereas, the Marvel Comics do. Marvel characters are usually pretty simple coming from simple backgrounds. The DC characters on the other hand, usually are more detailed with different super powers and more fantasy characteristics. Technology comes into play when Marvel Studio’s tend to use more graphic a nd uses light science fiction when creating their films. DC Studios tends to obtain a higher sci-fi storyline and image. At the moment, because Marvel Studios is a part of Disney, it makes it easier as far as global expansion goes. Currently, there is a new Marvel’s Iron Man attraction said to be opening in 2016 at Disneyland Hong Kong. It will be an addition to the Stark Expo, which is in Tomorrowland. Because the Disney and Marvel Studios collaboration is still quite new, this is mostly likely just the beginning of the Marvel Entertainment expansion. DC Comics on the other hand, has an annually comic book fan convention (Comic-Con). Each year, it is based in a different hosting city. In 2012, it was based in New Jersey and Comic-Con 2013, was hosted in Utah, in Salt Lake City. The next one (in 2014) will be held in California, San Diego. Sometimes there will be more than one event. Usually, there will be one within the United States and in past years, there was also a conve ntion held in Canada and United Kingdom. As you can see, the 3 main priorities (technology, innovation, and global expansion) are lucidly very important to both Marvel Studios and DC Entertainment and their parent corporations (The Walt Disney Company and Time Warner Inc). Both competitors are changing the film and entertainment industry rapidly and it will be a mystery as to see what the future beholds. Refernces â€Å"Comic-Con International: San Diego.† Comic-Con International: San Diego. 2013 San Diego Comic Convention, 2013. Web. 25 Oct. 2013. http://www.comic-con.org/ â€Å"DC Comics | Welcome to DC Comics.† DC Comics. Warner Bros. Entertainment Company, 2012. Web. 25 Oct. 2013. http://www.dccomics.com/ Staggs, Tom. â€Å"Disney Parks Blog.† Marvel’s Iron Man coming to Hong Kong Disneyland in 2016. Disney, 08 Oct 2013. Web. 25 Oct. 2013. . â€Å"Superhero Nation: How to Write Superhero Novels, Comic Books and Superhero Books.† Superhero Nation: How to Write Superhero Novels, Comic Books and Superhero Books. 2012. Web. 25 Oct. 2013. http://www.superheronation.com/ Wright, Bradford W. (2001). Comic Book Nation: The Transformation of Youth Culture in America. The Johns Hopkins University Press. p. 57. ISBN 978-0-8018-6514-5.

Accounting for Decision Makers -Discussion Question Essay

Accounting for Decision Makers -Discussion Question - Essay Example The ABC model enables business organizations to adequately approximate the cost elements applicable to the products, activities and services. The cost elements enables business organizations make appropriate decisions. One decision entails identifying products and services that are loss generating or less profitable. The second decision entails removing the service and product which are ineffective, and ensure processing approach which results in better yielding products and services. ABC analyses the product and consumer expenses and also profitability, according to the production and the performing processes. Thus, ABC has the applied in supporting strategic business aspects like; pricing, outsourcing, and also the process improvement approaches (Hartgraves & Morse, 2015). ABC illustrates; fixed costs, variable costs, and overhead costs. The cost split illustrates the cost drivers. For example, in operating machines, the main cost driver is the machine operating driver. This is because the machine operating hours greatly influences the labor, power and also machine maintenance costs. ABC is effectively used in routine business processes. ABC ensures allocation of adequate resources to the profitable products and activities, resulting to enhanced profitability levels. ABC also ensures the removal of unnecessary costs, and this improves the revenues generation levels of the business organization (Hartgraves & Morse,