Teach Your Children Well Essays - Justice, Philosophy Of Law

Teach Your Children Well New California law states that it is up to the prosecutors in a case as to whether minors are charged as adults for violent crimes. What should a judge do when eight boys from suburban middle class families, confess to armed robbery and assault and battery of five Hispanic immigrant farm workers? In this case, one must realize what a delicate situation this has come to be. If tried as adults these eight boys could spend their next sixteen years in juvenile detention. They were described as being 'good boys' with no other marks on their records. With only one reason for committing such a crime, these boys need to face their racism while justice is being served, with non-traditional punishment that will teach an unforgettable lesson. As upper-middle class, above-average students, even some athletes, these boys obviously do not know what life is all about. Authorities said that the boys were specifically looking for Hispanic workers to attack, so that shows the boys had some type of motive. In this day and age where Americans have a need to be treated as equal; equal opportunity employers, equal rights for men, women, African-American, Chinese-American, and every other group of people in this country, one would think that somewhere along the line children would get the message that we are all the same. Children should be taught to love, not hate. It is painful to see such a crime committed just for the mere fact that they were different. Didn't hate crimes end in the sixties? Why is it that still parents cannot or will not instill in their children ideals of an equal human race? Black or white, brown or red, rich or poor, aren't we all the same when you turn out the lights? I am not saying that I think this is ent irely the parents' fault, but they do need to take blame. At the age these boys are at, their parents are some of their few role models, and they always will be, but at this age, parents are the most influential people in a child's life, nothing can come close to a mother's scorn, or a fathers praise. In that sense too, children believe in what their parents believe in, not because it is right, but because it is the only way they know. So, parents should watch when they say they hate someone or some group and we should all try to be better people, for the sake of our children. (Gil Garcetti 588-590) In a crime this violent, considering the assailants and their victims, a measure of justice needs to be served. The assailants need to take responsibility for their actions. However, sixteen years in a juvenile detention facility does not seem the best answer. James Twitchell believes that, In recent years the dispensers of the law are finally realizing that shame has a place in punishment. (602) And so, there needs to be a way of measuring how the boys are rehabilitated, and their community needs to be involved, as well as their parents and friends. Justice means fairness. It means righteousness, impartiality, honesty, and integrity. Justice should be measured by the victims themselves, they should get to see their assailants suffer and learn from their mistakes. That is what justice is all about. These boy assailants need to witness justice first hand in order for it to have any affect ct on them. (Garcetti 588-590) A punishment that can validate such a hiesous crime needs to be quite creative. One could just shout An eye for an eye! As Mark Costanzo concedes, even the often misinterpreted 'eye for an eye' passage in the bible was meant to restrain rather than require vengeance. (592) But that is not how our judicial system works, although it would be fair. Still there are others, like Bradley O'Leary who implies that the punishment?should fit the crime, not the age of the violent offender. As a society, we cannot show any sympathy for, or excuses from, the youth thugs?who are destroying our schools and neighborhoods. (590) These boys will be punished, as they should be, but their judge has an opportunity to change their lives forever. If Teach Your Children Well Essays - Justice, Philosophy Of Law Teach Your Children Well New California law states that it is up to the prosecutors in a case as to whether minors are charged as adults for violent crimes. What should a judge do when eight boys from suburban middle class families, confess to armed robbery and assault and battery of five Hispanic immigrant farm workers? In this case, one must realize what a delicate situation this has come to be. If tried as adults these eight boys could spend their next sixteen years in juvenile detention. They were described as being 'good boys' with no other marks on their records. With only one reason for committing such a crime, these boys need to face their racism while justice is being served, with non-traditional punishment that will teach an unforgettable lesson. As upper-middle class, above-average students, even some athletes, these boys obviously do not know what life is all about. Authorities said that the boys were specifically looking for Hispanic workers to attack, so that shows the boys had some type of motive. In this day and age where Americans have a need to be treated as equal; equal opportunity employers, equal rights for men, women, African-American, Chinese-American, and every other group of people in this country, one would think that somewhere along the line children would get the message that we are all the same. Children should be taught to love, not hate. It is painful to see such a crime committed just for the mere fact that they were different. Didn't hate crimes end in the sixties? Why is it that still parents cannot or will not instill in their children ideals of an equal human race? Black or white, brown or red, rich or poor, aren't we all the same when you turn out the lights? I am not saying that I think this is ent irely the parents' fault, but they do need to take blame. At the age these boys are at, their parents are some of their few role models, and they always will be, but at this age, parents are the most influential people in a child's life, nothing can come close to a mother's scorn, or a fathers praise. In that sense too, children believe in what their parents believe in, not because it is right, but because it is the only way they know. So, parents should watch when they say they hate someone or some group and we should all try to be better people, for the sake of our children. (Gil Garcetti 588-590) In a crime this violent, considering the assailants and their victims, a measure of justice needs to be served. The assailants need to take responsibility for their actions. However, sixteen years in a juvenile detention facility does not seem the best answer. James Twitchell believes that, In recent years the dispensers of the law are finally realizing that shame has a place in punishment. (602) And so, there needs to be a way of measuring how the boys are rehabilitated, and their community needs to be involved, as well as their parents and friends. Justice means fairness. It means righteousness, impartiality, honesty, and integrity. Justice should be measured by the victims themselves, they should get to see their assailants suffer and learn from their mistakes. That is what justice is all about. These boy assailants need to witness justice first hand in order for it to have any affect ct on them. (Garcetti 588-590) A punishment that can validate such a hiesous crime needs to be quite creative. One could just shout An eye for an eye! As Mark Costanzo concedes, even the often misinterpreted 'eye for an eye' passage in the bible was meant to restrain rather than require vengeance. (592) But that is not how our judicial system works, although it would be fair. Still there are others, like Bradley O'Leary who implies that the punishment?should fit the crime, not the age of the violent offender. As a society, we cannot show any sympathy for, or excuses from, the youth thugs?who are destroying our schools and neighborhoods. (590) These boys will be punished, as they should be, but their judge has an opportunity to change their lives forever. If

Capital punishment2 essays

Capital punishment2 essays Capital Punishment is a term used for criminals who are punished by being put to death. Ever since the early 1800's, most executions have been a result of murder convictions. Some other crimes that have invoked the use of the death penalty are; robbery, kidnapping, rape, and treason. When it comes down to it this is a controversial issue that questions morality. In England during the 18th century, death was decreed for several hundred specific offenses, particularly for those against property. During that time, however, limitations began to be placed on the number and types of offenses for which criminals were put to death. The 1970's had eliminated death as a statutory punishment in many countries such as; Portugal, Denmark, Venezuela, Austria, Brazil, Switzerland, and Great Britain. In other countries if it still occurred it was a rare thing. Within the US there are death penalty statutes in some states but not all. In 1972 the Supreme Court made a ruling stating, that capital punishment laws as they stood were unconstitutional . However later on an other supreme court ruling upheld the constitutionality of the death penalty per se, and since then many states have passed death penalty laws with in the regulations of the court's ruling. Many people oppose the death penalty because they think it is morally wrong and cruel. Some even warn against the risk of executing people who are wrongly accused and convicted. Other people believe that if someone takes a human life then they deserve theirs. The early 1990's have executed about 150 people executed in the United States since 1976 and 2,000 people are on death row. The United Nations has to take a good look at this situation and put their own morality behind them when they decide what they want to do. Thousands of humans are in the hands of the UN. This topic needs serious consideration and a well thought out solution. ...

Saladin, Hero of Islam Profile

Saladin, Hero of Islam Profile Saladin, the sultan of Egypt and Syria, watched as his men finally breached the walls of Jerusalem and poured into the city full of European Crusaders and their followers. Eighty-eight years earlier, when the Christians had taken the city, they massacred the Muslim and Jewish inhabitants. Raymond of Aguilers boasted, In the Temple and the porch of Solomon, men rode in blood up to their knees and bridle reins. Saladin, however, was both more merciful and more chivalrous that Europes knights; when he recaptured the city, he ordered his men to spare the Christian non-combatants of Jerusalem. At a time when the nobility of Europe believed that they held a monopoly on chivalry, and on Gods favor, the great Muslim ruler Saladin proved himself more compassionate and courtly than his Christian opponents. More than 800 years later, he is remembered with respect in the west, and revered in the Islamic world. Early Life: In 1138, a baby boy named Yusuf was born to a Kurdish family of Armenian descent living in Tikrit, Iraq. The babys father, Najm ad-Din Ayyub, served as the castellan of Tikrit under the Seljuk administrator Bihruz; there is no record of the boys mothers name or identity. The boy who would become Saladin seemed to have been born under a bad star. At the time of his birth, his hot-blooded uncle Shirkuh killed the commander of the castle guard over a woman, and Bihruz banished the entire family from the city in disgrace. The babys name comes from the Prophet Joseph, an unlucky figure, whose half-brothers sold him into slavery. After their expulsion from Tikrit, the family moved to the Silk Road trading city of Mosul. There, Najm ad-Din Ayyub and Shirkuh served Imad ad-Din Zengi, the famous anti-Crusader ruler and founder of the Zengid Dynasty. Later, Saladin would spend his adolescence in Damascus, Syria, one of the great cities of the Islamic world. The boy reportedly was physically slight, studious and quiet. Saladin Goes to War After attending a military training academy, the 26-year-old Saladin accompanied his uncle Shirkuh on an expedition to restore Fatimid power in Egypt in 1163. Shirkuh successfully reinstalled the Fatimid vizier, Shawar, who then demanded that Shirkuhs troops withdraw. Shirkuh refused; in the ensuing fight, Shawar allied himself with European Crusaders, but Shirkuh, ably assisted by Saladin, managed to defeat the Egyptian and European armies at Bilbays. Shirkuh then withdrew the main body of his army from Egypt, in accordance with a peace treaty. (Amalric and the Crusaders also withdrew, since the ruler of Syria had attacked the Crusader States in Palestine during their absence.) In 1167, Shirkuh and Saladin once again invaded, intent on deposing Shawar. Once again, Shawar called on Amalric for assistance. Shirkuh withdrew from his base in Alexander, leaving Saladin and a small force to defend the city. Besieged, Saladin managed to protect the city and provide for its citizens despite his uncles refusal to attack the surrounding Crusader/Egyptian army from behind. After paying restitution, Saladin left the city to the Crusaders. The following year, Amalric betrayed Shawar and attacked Egypt in his own name, slaughtering the people of Bilbays. He then marched on Cairo. Shirkuh jumped into the fray once again, recruiting the reluctant Saladin to come with him. The 1168 campaign proved decisive; Amalric withdrew from Egypt when he heard that Shirkuh was approaching, but Shirkuh entered Cairo and took control of the city early in 1169. Saladin arrested the vizier Shawar, and Shirkuh had him executed. Taking Egypt Nur al-Din appointed Shirkuh as the new vizier of Egypt. A short time later, however, Shirkuh died after a feast, and Saladin succeeded his uncle as vizier on March 26, 1169. Nur al-Din hoped that together, they could crush the Crusader States that lay between Egypt and Syria. Saladin spent the first two years of his rule consolidating control over Egypt. After uncovering an assassination plot against him among the black Fatimid troops, he disbanded the African units (50,000 troops) and relied instead upon Syrian soldiers. Saladin also brought members of his family into his government, including his father. Although Nur al-Din knew and trusted Saladins father, he viewed this ambitious young vizier with increasing distrust. Meanwhile, Saladin attacked the Crusader Kingdom of Jerusalem, crushed the city of Gaza, and captured the Crusader castle at Eilat as well as the key town of Ayla in 1170. In 1171, he began to march on the famous castle-city of Karak, where he was supposed to join Nur al-Din in attacking the strategic Crusader fortress, but withdrew when his father passed away back in Cairo. Nur al-Din was furious, rightly suspecting that Saladins loyalty to him was in question. Saladin abolished the Fatimid caliphate, taking power over Egypt in his own name as the founder of the Ayubbid Dynasty in 1171, and reimposing Sunni religious worship instead of Fatimid-style Shiism. Capture of Syria In 1173-4, Saladin pushed his borders west into what is now Libya, and southeast as far as Yemen. He also cut back payments to Nur al-Din, his nominal ruler. Frustrated, Nur al-Din decided to invade Egypt and install a more loyal underling as vizier, but he suddenly died early in 1174. Saladin immediately capitalized on Nur al-Dins death by marching to Damascus and taking control of Syria. The Arab and Kurdish citizens of Syria reportedly welcomed him joyfully into their cities. However, the ruler of Aleppo held out and refused to acknowledge Saladin as his sultan. Instead, he appealed to Rashid ad-Din, head of the Assassins, to kill Saladin. Thirteen Assassins stole into Saladins camp, but they were detected and killed. Aleppo refused to accept Ayubbid rule until 1183, nonetheless. Fighting the Assassins In 1175, Saladin declared himself king (malik), and the Abbasid caliph in Baghdad confirmed him as sultan of Egypt and Syria. Saladin thwarted another Assassin attack, waking and catching the knife-mans hand as he stabbed down towards the half-asleep sultan. After this second, and much closer, threat to his life, Saladin became so wary of assassination that he had chalk powder spread around his tent during military campaigns so that any stray footprints would be visible. In August of 1176, Saladin decided to lay siege to the Assassins mountain strongholds. One night during this campaign, he awoke to find a poisoned dagger beside his bed. Stuck to the dagger was a note promising that he would be killed if he did not withdraw. Deciding that discretion was the better part of valor, Saladin not only lifted his siege, but also offered an alliance to the Assassins (in part, to prevent the Crusaders from making their own alliance with them). Attacking Palestine In 1177, the Crusaders broke their truce with Saladin, raiding toward Damascus. Saladin, who was in Cairo at the time, marched with an army of 26,000 into Palestine, taking the city of Ascalon and getting as far as the gates of Jerusalem in November. On November 25, the Crusaders under King Baldwin IV of Jerusalem (son of Amalric) surprised Saladin and some of his officers while the vast bulk of their troops were out raiding, however. The European force of just 375 was able to route Saladins men; the sultan narrowly escaped, riding a camel all the way back to Egypt. Undaunted by his embarrassing retreat, Saladin attacked the Crusader city of Homs in the spring of 1178. His army also captured the city of Hama; a frustrated Saladin ordered the beheading of the European knights captured there. The following spring King Baldwin launched what he thought was a surprise retaliatory attack on Syria. Saladin knew he was coming, though, and the Crusaders were soundly thrashed by Ayubbid forces in April of 1179. A few months later, Saladin took the Knights Templar fortress of Chastellet, capturing many famous knights. By the spring of 1180, he was in position to launch a serious attack on the Kingdom of Jerusalem, so King Baldwin sued for peace. Conquest of Iraq In May of 1182, Saladin took half of the Egyptian army and left that part of his kingdom for the last time. His truce with the Zengid dynasty that ruled Mesopotamia expired in September, and Saladin resolved to seize that region. The emir of the Jazira region in northern Mesopotamia invited Saladin to take suzerainty over that area, making his task easier. One by one, other major cities fell: Edessa, Saruj, ar-Raqqah, Karkesiya, and Nusaybin. Saladin repealed taxes in the newly-conquered areas, making him very popular with the local residents. He then moved toward his former hometown of Mosul. However, Saladin was distracted by a chance to finally capture Aleppo, the key to northern Syria. He made a deal with the emir, allowing him to take everything he could carry as he left the city, and paying the emir for what was left behind. With Aleppo finally in his pocket, Saladin once more turned to Mosul. He laid siege to it on November 10, 1182, but was unable to capture the city. Finally, in March of 1186, he made peace with the citys defense forces. March toward Jerusalem Saladin decided that the time was ripe to take on the Kingdom of Jerusalem. In September of 1182, he marched into Christian-held lands across the River Jordan, picking off small numbers of knights along the Nablus road. The Crusaders mustered their largest army ever, but it was still smaller than Saladins, so they merely harassed the Muslim army as it moved toward Ayn Jalut. Finally, Raynald of Chatillon sparked open fighting when he threatened to attack the holy cities of Medina and Mecca. Saladin responded by besieging Raynalds castle, Karak, in 1183 and 1184. Raynald retaliated by attacking pilgrims making the hajj, murdering them and stealing their goods in 1185. Saladin countered by building a navy that attacked Beirut. Despite all of these distractions, Saladin was making gains on his ultimate goal, which was the capture of Jerusalem. By July of 1187, most of the territory was under his control. The Crusader kings decided to mount a last, desperate attack to try and drive Saladin from the kingdom. Battle of Hattin On July 4, 1187, the army of Saladin clashed with the combined army of the Kingdom of Jerusalem, under Guy of Lusignan, and the Kingdom of Tripoli, under King Raymond III. It was a smashing victory for Saladin and the Ayubbid army, which nearly wiped out the European knights and captured Raynald of Chatillon and Guy of Lusignan. Saladin personally beheaded Raynald, who had tortured and murdered Muslim pilgrims, and also had cursed the Prophet Muhammad. Guy of Lusignan believed that he would be killed next, but Saladin reassured him by saying, It is not the wont of kings to kill kings, but that man transgressed all bounds, and therefore did I treat his thus. Saladins merciful treatment of the King Consort of Jerusalem helped cement his reputation in the west as a chivalrous warrior. On October 2, 1187, the city of Jerusalem surrendered to Saladins army after a siege. As noted above, Saladin protected the Christian civilians of the city. Although he demanded a low ransom for each Christian, those who could not afford to pay were also allowed to leave the city rather than being enslaved. Low-ranking Christian knights and foot-soldiers were sold into slavery, however. Saladin invited Jewish people to return to Jerusalem once more. They had been murdered or driven out by the Christians eighty years before, but the people of Ashkelon responded, sending a contingent to resettle in the holy city. The Third Crusade Christian Europe was horrified by the news that Jerusalem had fallen back under Muslim control. Europe soon launched the Third Crusade, led by Richard I of England (better known as Richard the Lionheart). In 1189, Richards forces attacked Acre, in what is now northern Israel, and massacred 3,000 Muslim men, women, and children who had been taken prisoner. In retaliation, Saladin executed every Christian soldier his troops encountered for the next two weeks. Richards army defeated Saladins at Arsuf on September 7, 1191. Richard then moved toward Ascalon, but Saladin ordered the city emptied and destroyed. As the dismayed Richard directed his army to march away, Saladins force fell upon them, killing or capturing most of them. Richard would continue to try to retake Jerusalem, but he had only 50 knights and 2,000 foot-soldiers remaining, so he would never succeed. Saladin and Richard the Lionheart grew to respect one another as worthy adversaries. Famously, when Richards horse was killed at Arsuf, Saladin sent him a replacement mount. In 1192, the two agreed to the Treaty of Ramla, which provided that the Muslims would retain control of Jerusalem, but Christian pilgrims would have access to the city. The Crusader Kingdoms were also reduced to a thin sliver of land along the Mediterranean coast. Saladin had prevailed over the Third Crusade. Death of Saladin Richard the Lionheart left the Holy Land early in 1193. A short time later, on March 4, 1193, Saladin died of an unknown fever in his capital at Damascus. Knowing that his time was short, Saladin had donated all of his wealth to the poor  and had no money left even for a funeral. He was buried in a simple mausoleum outside of the Umayyad Mosque in Damascus. Sources Lyons, Malcolm Cameron and D.E.P. Jackson. Saladin: The Politics of the Holy War, Cambridge: Cambridge University Press, 1984.Nicolle, David and Peter Dennis. Saladin: The Background, Strategies, Tactics and Battlefield Experiences of the Greatest Commanders of History, Oxford: Osprey Publishing, 2011.Reston, James Jr. Warriors of God: Richard the Lionheart and Saladin in the Third Crusade, New York: Random House, 2002.

Land law Essay Example | Topics and Well Written Essays - 750 words

Land law - Essay Example Over a period of time she gained ascendancy over him. Her action against him was set aside as she failed to disprove this presumption (Re Craig , 1971). In Dunbar Bank plc v. Nadeem, the bank provided a mortgage loan to the couple in their joint names. In the trial court it was held that there had been undue influence brought to bear on the wife, as she had not made any contribution to the purchase, but all the same she was being held jointly liable with her husband. The appellate court set aside this judgment and ruled that she had not suffered any disadvantage and as she had failed to establish undue influence (Dunbar Bank plc v. Nadeem , 1998 ). The courts of equity, in their role of a court of conscience, initiated undue influence as a basis for the obtention of relief. To this end the courts endeavour to determine the underlying reason for entering into a transaction. In all cases, where the cause proves to be objectionable, the transaction will be rescinded. From the perspective of equity, undue influence occurs in the following cases. If there are threats or other overtly improper or intimidating acts and if the relationship between the parties accords to one of them a superior position, which is exploited by that party to the detriment of the other party. In O’Brien, the House of Lords specified the measures to be adopted by a bank, in order to avoid the ill effect of a husband’s undue influence, while granting loans to a couple. The outcome of this decision was that a contract could become unenforceable if one of the parties to the contract had done so as a consequence of a third party’s transgression (Barclays Bank v. OBrien, 1993). In Etridge it was held that it was the duty of the bank to take all such reasonable steps as would ensure that the wife should be properly apprised of the consequences of the transaction that she was about to enter into. To this end an

Comparisons And Differences In Intention By The 1960s& 1990s Musicians Essay

Comparisons And Differences In Intention By The 1960s& 1990s Musicians - Essay Example He mainly focused on things that touch people around him and then wrote good lyrics or had them written down by good songwriters for him to sing. He was born in Gary in 1958, at a place called Gary, Indiana in the United States. His father, Joseph Jackson was a guitarist but had to give up following his marriage. Michael Jackson had several nicknames e.g. The Gloved One, Wacko Jacko, MJ and King of Pop. Apart from entertaining through singing, he also had dancing skills which gave a trademark. In his black shoes, white socks and trousers above heel, he showcase the moonlight walk style. His hit 'heal the world' resulted to a Foundation which helped collect funds to purchase foods medical supplies to the then war torn Sarajevo, running of immunization drug abuse educational programmes ,paying child's liver transplants in Hungary. He also did 'We are the world' with Lionel Richie, a co-writer and other musicians like Stevie Wonder. The song was a call to everyone in the world to come o ut and give aid to people in Africa. The income generated was used in buying essential necessities for people in Africa mainly. Former America's president Ronald Reagan wanted to award him with a Humanitarian Rights Award together with other two but, a Chief Justice of the Supreme Court advised against the whole idea, saying it was much worthy of a pop star. His music also educated people, black or white was a song done to inform that skin color did not really matter, whether black or white, there was an equal access to rights at that time when there was tension between blacks &whites. Bellie jean was a ballad, telling a story about how a certain guy impregnated a particular lady and later on denied it. These are things that do happen day in day out to people we know in our societies. It plays the role of an eye-opener (Michael Jackson.com, 2008). Using different song themes, a wide range of ideas were spread to all parts of the world.'Beat it' was used in commercials against drunk driving. The intentional was to evoke changes in lifestyles, warn of the likely dangers and the same time bring fun through the classical beats. 'Jacko'as he was sometimes referred to remains to be one of the greatest artists of all times. As a general expectation of a musician, he did perform songs in praise of women who got him charmed such as you rock my world. Michael Jackson was able to achieve a lot through music. He was the first solo artist to have no.1 hits and albums in the billboard charts. As a result this won him fame and recognition globally. He managed to appear in the Guinness Book of Records as one of the best singers/dancer. When the U.S invaded Iraq, MJ decided to do an anti-war song to show his dislike of the act and as well represent others with the same opinion. The song title was we've had enough. Though little was done about the invasion, at least it showed that people were watching or rather following (Michael Jackson.com, 2008). The second artist am going to highlight about is Stevie Wonder, I chose because of his uniqueness and the ability to sing& play an instrument,

Challenges and Techniques of the Oil Industry

Challenges and Techniques of the Oil Industry The Oil Sand Energy availability and economic progress go hand in hand. It is not possible to achieve economic progress in the absence of cheap, reliable energy availability. The use of energy on the part of society has increased systematically over the past two centuries, since the time of the industrial revolution. And there is no end in sight to the increase in the consumption of energy. This will continue because as global population continues to increase and especially in some of the emerging countries like China and India, the consumption of energy is bound to increase exponentially. In the past fifty years, global energy consumption has increased monotonously and how is this demand satisfied? This demand is being meet primarily with crude oil. Crude oil has been the largest energy component since 1960 and grew very rapidly in the 1970s and ever since, has grown less rapidly. Though oil has been losing ground but nevertheless, it remains the most important source of energy, second being coal, according to the Energy Information Administration (EIA). Oil is a fossil fuel and the world is about 80 to 85% dependent on fossil fuels for our energy supply. This is a challenge because when fossil fuels are burnt, they emit CO2 in the atmosphere and since CO2 is a greenhouse gas, it contributes to global warming Oil is a mix of hydrocarbons that are liquid under atmospheric conditions. The fact that they are liquid allows for easier processing, transportation, storage, and has a higher content of energy per volume. These are the greatest advantages that oil has over other energy resources.   However, there are scenarios where the oil is not trapped in a cap rocks and forces it way out to the surface, or very close to the surface of the ground, at which point, the lighter molecules evaporate into the atmosphere and what is left are heavier molecules, which are normally called extra heavy oil or bitumen. This is known as Oil sands or Tar sand and it is made up of a mixture of sand, water, clay, and bitumen[1]. Oil sands or Tar sand are found in various countries throughout the world, but the vast quantities of oil sand reserves are found in Canada and Venezuela, according to EIA. Alberta, Canada, is estimated to have about 1.7 to 2.5 trillion barrels of oil sand reserve, thus, represent ing the largest single reserve of oil in the world.[2] Accordingly, Canada produced about 3.8 million barrel per day of crude oil, in 2014 alone. Of this, 2.2 million barrel per day was produced from the oil sands.[3] About 10% of the worlds oil reserves are located in the Alberta oil sands and about 96 percent of Canadas total oil reserves are contained in the oil sands.[4] Moreover, Canada is said to be the leading supplier of crude oil and refined oil products to the United States and the trend continues to grow in terms of percentage of US oil imports. About 60 percent of Canadas production capacity from oil sand, about 1.34 million barrels per day is exported to the US.[5] Energy as found in nature needs to mined, processed, refined and transported before it is available for end use. Unlike oil produced by conventional oil drilling which is generally less dense than water, extracting oil from oil sands is more complex. There are two methods for getting bitumen out of the ground and turning it into usable products in-situ and open pit mining. The extraction method used will depend on how deep the oil sand deposits are below the surface. Both methods are complex, energy-intensive and expensive processes. In-situ (in place) In-situ extraction process is used to mine bitumen that lies deep below the surface of the ground (greater than 75 meters underground). According to studies, about 80% of oil sands reserves in Canada are accessible via in-situ techniques.[6] The in-situ method normally uses a process called Steam Assisted Gravity Drainage (SAGD). This method requires the drilling of two horizontal wells; one is used for injecting steam into the oil sand deposit to heat the oil sand making the bitumen to become more fluid and easy to flow more easily. The second well is used to pump out the flowing bitumen to the surface.[7] Open-Pit Mining Like the conventional oil mining Open-pit mining is used when mining oil sand reserves that are closer to the surface of the ground (less than 75 meters below the ground). According to industry report, 20% of oil sand reserves in Canada are extracted using this mining technique.[8] With this method, trees and top layer of soil are cleared, large shovels are used to scoop the oil sand, which is mix of sand, water and bitumen into large trucks and then moved it to onsite processing facility, where hot water is added to this mixture of sand, clay, bitumen, in a large separation vessel. Bitumen froth is forced to rise to the surface, during the separation process and then removed and diluted with chemicals.[9] Normally, the spent sand and other materials that are recovered during this process is then returned to the mines to fill in empty space that has been mined as a way of reclamation Upgrading Once the Bitumen is recovered from either through open-pit or from in-situ operation, the viscous substance is then processed in order to make it easier to transport through pipelines to various refinery, where it is to be used as feedstock. This process is called upgrade. The purpose of upgrading is to transform bitumen into synthetic crude oil, a high quality, light sweet crude oil, by removing carbon and adding hydrogen and chemical to bitumen.[10] Typically the upgrading process comes in two phases namely primary and secondary upgrading. The primary upgrading involves breaking down the heavy molecules of bitumen into lighter and less viscous molecules. The secondary upgrading is used to further cleanse and purify the bitumen attained from primary phase. This phase involves removing other impurities such as nitrogen, Sulphur, and trace metals and get it ready for oil refineries.[11] Refining The bitumen is finally delivered to through pipelines the refinery through pipelines. The SCO product is then sent to a downstream refinery for conversion into final product.[12] Here the oil is processed and converted into final products like gasoline, jet fuel, diesel, plastics, asphalt and other consumer and industrial products. Environmental Challenges The mining and processing of oil sands present a variety of environmental impacts, such as global warming and greenhouse gas emissions, disturbance of land structure, and air and water quality. It also may have significant social and economic impactson local communities. Another major concern is related to the tremendous amount of water required for oil sands development -extraction, upgrading and refining. It is estimated that the process requires an average of three barrels of water for one barrel of oil produced,[13] though some of the water are be recycled. The major environmental challenges to oil sand extraction among others are land, water, air: Land Development of oil sand crate concern about the accumulation of large amounts of residual waste known as tailings. Tailing, which contain a mix of water, clay, un-recovered bitumen, and dissolved chemicals, including some organic compounds are considered to be extremely toxic and very hazardous to the environment. Moreover, the tailings are stored in large ponds and causes seepage into the surrounding landscape, though the water released from the ponds can be recycled and reused, however, most still remains as mud almost indefinitely. The massive activities associated with oil sand project are also known to create tremendous structural disturbances of the landscape including seismic exploration and construction of wells, roads pipelines etc. negatively impact the environment and endangers the wildlife. Water Since oil sand is made up of a mixture of sand, water, clay and bitumen, a hot water process is required to separates the bitumen from the associated sand, water, clay and minerals. The process takes enormous amount of water of fresh water to produce a barrel of bitumen from mined oil sands. In many cases, the water is sourced from ground water aquifers. Rapid expansion of oil sands projects are causing great strains on fresh water resources, which leads to ecological and environmental problems.[14] Also, since bitumen is denser than water, it can be harder to clean up when there is a spill. Additionally, oil sands mining operations produce huge amounts of toxic waste, known as tailings, which consist of water, sand, silt, clay, hydrocarbons and contaminants.   The contaminates may contain various levels of naphthenic acids, polycyclic aromatic hydrocarbons, phenolic compounds, ammonia and mercury etc., some of which, according to International Agency for Research on Cancer an d the U.S. Environmental Protection Agency, are known to be cancer-causing agent.[15] Even worst, the tailings are mostly stored in ponds or man-made dams, thus causing the tailing to leak into ground water and surrounding water resources. It is estimated that about four billion liters of tailings leak each year, thereby triggering immense environment devastation.[16] Air Extracting Oil sands require a substantial amount of energy in processing to process, upgrading and refining bitumen to the final products suitable for market. The entire development process is so energy intensive that it contributes immensely in carbon emissions. Reports suggest that the oil sand industry is among the highest contributors of national air emissions in Canada. Oil is produced to be consumed, more than half of the oil consumed in the world is for transportation fueling societys unquenchable demand for mobility. More than 50 percent of oil produced is used for transportation needs.[17]. As the worlds population grows, so will the global passenger mobility, global freight and transportation volumes. Additionally, the current global rise in urbanization, the global economic growth, as well as high level of economic development are other important factors prompting the increase in demand for oil. As fossil fuel, final oil products are burnt for energy through the various applications for which they are used. When burnt, they emit high amounts of harmful emissions, including nitrogen oxides, sulfur dioxide, and particles that drift into the atmosphere and contribute to air pollution. Carbon dioxide and water vapor, along with other gases such as ozone and nitrous oxide, are known greenhouse gases and the increasing amounts of these greenhouse g ases in the atmosphere are linked to global warming and could have disastrous environmental consequences.[18] However, since the business of producing oil from oil sand is base generally on oil price, chances are that there will be some slowdown in sand oil operations around the world, as oil prices decline. Due to the recent downward trend of oil prices, the economic viability and financial attractiveness of oil sands projects have also declined. Financial analysts including those from Goldman Sachs and Total have concluded that oil sands projects require long-term prices in excess of $80/barrel to break even[19]. Deutsche Bank and BP, among others, have raised doubts about the future of investing in oil sand and Shell Oil has significantly scaled back its oil sands plans[20]. If these phenomena should continue, it might be the preeminent way in reducing and mitigating the environmental degradation being caused by oil sand. [1] http://www.canadasoilsands.ca/en/what-are-the-oil-sands/recovering-the-oil [2] http://www.nrcan.gc.ca/energy [3] lbid [4] www.oilsandsmagazine.com/technical/oilsands-101 [5] Kenny Bruno, Bruce Baizel, Susan Casey-Lefkowitz, Elizabeth Shope, and Kate Colarulli, Tax Sands Invasion: How Dirty and Expensive Oil from Canada Threatens Americas New Energy Economy (May 2010) [6] http://www.suncor.com/about-us/oil-sands [7] http://www.canadasoilsands.ca/en/what-are-the-oil-sands/recovering-the-oil [8] http://www.nrcan.gc.ca/energy [9] http://www.canadasoilsands.ca/en/what-are-the-oil-sands/recovering-the-oil [10] http://www.nrcan.gc.ca/energy [11] lbid [12] http://www.oilsandsmagazine.com/technical/oilsands-101 [13] http://www.nrcan.gc.ca/energy [14] lbid [15] Kenny Bruno, Bruce Baizel, Susan Casey-Lefkowitz, Elizabeth Shope, and Kate Colarulli, Tax Sands Invasion: How  Ãƒâ€šÃ‚   Dirty and Expensive Oil from Canada Threatens Americas New Energy Economy (May 2010) [16] lbid [17] https://www.iea.org [18] Kenny Bruno, Bruce Baizel, Susan Casey-Lefkowitz, Elizabeth Shope, and Kate Colarulli, Tax Sands Invasion: How Dirty and Expensive Oil from Canada Threatens Americas New Energy Economy (May 2010) [19] lbid [20] lbid

Fin 331 Study Guide

Finance Final Study Guide FIN 331 – Moser – Study Guide for Exam 1 – Spring 2011 Important Concepts * Forms of Business Organization * Proprietorship- an unincorporated business owned by one individual * Partnership- legal arrangement between two or more people who decide to do business together * Advantages * Ease of formation * Subject to few regulations * No corporate income taxes * Disadvantages * Limited life * Unlimited liability * Difficult to raise capital * Corporation- legal entity created by a state, and it is separate and distinct from its owner and managers. Advantages * Unlimited life * Easy transfer of ownership * Limited liability * Ease of raising capital * Disadvantages * Double taxation * Cost of set-up and report filing * Conflicts between Managers and Stockholders * Managers are naturally inclined to act in their own best interests (which are not always the same as the interest of stockholders). * But the following factors affect managerial b ehavior: * Managerial compensation packages * Direct intervention by shareholders * The threat of firing * The threat of takeover * Shareholder Value The price at which the stock would sell if all investors had all knowable information about a stock. * The primary financial goal of management is shareholder wealth maximization, which translates to maximizing stock price. * Value of any asset is present value of cash flow stream to owners. * Most significant decisions are evaluated in terms of their financial consequences. * Stock prices change over time as conditions change and as investors obtain new information about a company’s prospects. * Intrinsic value * In equilibrium, a stock’s price should equal its â€Å"true† or intrinsic value. Intrinsic value is a long-run concept. * To the extent that investor perceptions are incorrect, a stock’s price in the short run may deviate from its intrinsic value. * Ideally, managers should avoid actions that reduc e intrinsic value, even if those decisions increase the stock price in the short run. * Capital allocation process * In a well-functioning economy, capital flows efficiently from those who supply capital to those who demand it. * Suppliers of capital – individuals and institutions with â€Å"excess funds. † These groups are saving money and looking for a rate of return on their investment. Demanders or users of capital – individuals and institutions who need to raise funds to finance their investment opportunities. These groups are willing to pay a rate of return on the capital they borrow. * Direct transfers * Investment banking house * Financial intermediaries * Types of financial markets * Physical asset markets versus financial asset markets * Physical asset markets are for products such as wheat, autos, real estate, computers, and machinery. * Financial asset markets, on the other hand, deal with stocks, bonds, notes, and mortgages. Spot markets versus futu re markets * Spot markets are markets in which assets are bought or sold for â€Å"on-the-spot† delivery. * Future markets are markets in which participants agree today to buy or sell an asset at some future date * Money markets versus capital markets * Money markets are the markets for short-term, highly liquid debt securities. The New York, London, and Tokyo money markets are among the world’s largest. * Capital Markets are the markets for intermediate- or long-term debt and corporate stocks. The NYSE * Primary markets versus secondary markets Primary markets are the markets in which corporations raise new capital. If a company were to sell a new issue of common stock to raise capital. * Secondary markets are markets in which existing, already outstanding securities are traded among investors. * Private markets versus public markets * Private markets, where transactions are negotiated directly between two parties, are differentiated from†¦public markets. Ex. Com mon stock and corporate bonds * Public markets, where standardized contracts are traded on organized exchanges. Ex.Bank loans and private debt payments to an insurance company. * Importance of financial markets * Well-functioning financial markets facilitate the flow of capital from investors to the users of capital. * Markets provide savers with returns on their money saved/invested, which provides them money in the future. * Markets provide users of capital with the necessary funds to finance their investment projects. * Well-functioning markets promote economic growth. * Economies with well-developed markets perform better than economies with poorly-functioning markets. * Derivatives A derivative security’s value is â€Å"derived† from the price of another security (e. g. , options and futures). * Can be used to â€Å"hedge† or reduce risk. For example, an importer, whose profit falls when the dollar loses value, could purchase currency futures that do well w hen the dollar weakens. * Also, speculators can use derivatives to bet on the direction of future stock prices, interest rates, exchange rates, and commodity prices. In many cases, these transactions produce high returns if you guess right, but large losses if you guess wrong. Here, derivatives can increase risk. * Financial institutions Commercial banks * Bank of America, Citibank, Wells Fargo * Investment banks * Help companies raise capital * Financial services corporations * Conglomerates that combine many different financial institutions within a single corporation. * Credit unions * Employees, members or organization * Pension funds * Life insurance companies * Mutual funds * Hedge funds * Largely unregulated * Large minimum investment * Exchange traded funds (ETF’s) * Private equity companies * Like hedge funds * IPO * An initial public offering (IPO) is where a company issues stock in the public market for the first time. â€Å"Going public† enables a companyâ €™s owners to raise capital from a wide variety of outside investors. Once issued, the stock trades in the secondary market. * Public companies are subject to additional regulations and reporting requirements. * Efficient market hypothesis – implications * Securities are normally in equilibrium and are â€Å"fairly priced. † * Investors cannot â€Å"beat the market† except through good luck or better information. * Efficiency continuum * When markets are efficient, investors can buy and sell stocks and be confident that they are getting good prices.When markets are inefficient, investors may be afraid to iinvest and may put their money â€Å"under the pillow,† which will lead to a poor allocation of capital and economic stagnation. * Balance sheet * Provides a â€Å"snapshot† of a firm’s position at a specific point in time. The left side shows the assets that the company owns, while the right side shows the firm’s liabilities and stockholders’ equity, which are claims against the firm’s assets. * Assets * Current assets: * Cash and equivalents * A/R * Inventories * Total Current Assets * Net fixed assets: Net plan and equipment(cost minus depreciation) * Other assets expected to last more than a year * Total Assets * Liabilities and Equity * Current liabilities: * A/P * Accruals * Notes Payable * Total current liabilities * Long-term bonds * Total debt * Common equity: * Common stock * Retained earning * Total common equity * Total liabilities and equity * Income statement * Summarizes a firm’s revenues and expenses over a given period of time. * Sales * (COGS) * (Other Expenses) * (Depreciation) * EBIT * (Interest Expense) * EBT * (Taxes) * Net Income Statement of cash flows * Reports the impact of a firm’s activities on cash flows over a given period of time. Shows how much cash the firm is generating. * Cash @ end 2007 * O/A * I/A * F/A * Cash @ end 2008 * Working capital * An ything that is cash or can be converted to cash within a year. A/R and Inventory * Net working capital (NWC) * Current assets (A/R, Inventory, Cash) – (Payables + Accruals) * Free cash flow (FCF) * Everything left over for investors. Amount of cash that can be withdrawn to investors without harming the ability of the company to operate and produce. FCF = EBIT(1-T) + Depreciation – (Capital expenditures + Increase in NWC) (Income Statement) ( in gross FA/current) Balance Sheet * Corporate and personal taxes * Both have a progressive structure (the higher the income, the higher the marginal tax rate). * Corporations * Rates begin at 15% and rise to 35% for corporations with income over $10 million, although corporations with income between $15 million and $18. 33 million pay a marginal tax rate of 38%. * Also subject to state tax (around 5%). * Individuals * Rates begin at 10% and rise to 35% for individuals with income over $349,700. May be subject to state tax. * Tax t reatment of interest and dividends * Interest paid – tax deductible for corporations (paid out of pre-tax income), but usually not for individuals (interest on home loans being the exception). * Interest earned – usually fully taxable (an exception being interest from a â€Å"muni†). * Dividends paid – paid out of after-tax income. * Dividends received – Most investors pay 15% taxes. * Investors in the 10% or 15% tax bracket pay 0% on dividends in 2008-2010. * Dividends are paid out of net income which has already been taxed at the corporate level, this is a form of â€Å"double taxation†. A portion of dividends received by corporations is tax excludable, in order to avoid â€Å"triple taxation†. * Taxes – carrybacks and carryforwards * Tax Loss Carry-Back and Carry-Forward – since corporate incomes can fluctuate widely, the Tax Code allows firms to carry losses back to offset profits in previous years or forward to offs et profits in the future. * Taxes – capital gains * Defined as the profits from the sale of assets not normally transacted in the normal course of business, capital gains for individuals are generally taxed as ordinary income if held for less than a year, and at the capital gains rate if held for more than a year.Corporations face somewhat different rules. * Importance of ratios * Ratios standardize numbers and facilitate comparisons. * Ratios are used to highlight weaknesses and strengths. * Ratio comparisons should be made through time and with competitors. * Trend analysis. * Peer (or industry) analysis. * 5 categories of ratios * Liquidity: Can we make required payments? * Current = current assets/current liabilities * Quick = Current assets-inventories/current liabilities * Asset management: right amount of assets vs. sales? * Inventory T/O Ratio = Sales/Inventories * Days sales outstanding(DSO) = AR/(Sales/365) Fixed Asset T/O Ratio = Sales/Net Fixed AssetsNet FA=Balanc e Sheet * T/A Turnover = Sales/Total AssetsTA=Balance Sheet * How many times the PM is earned each year * Below avg. T/A T/O means that it has more assets than it needs * Debt management: Right mix of debt and equity? * Debt Ratio = Total Debt/Total AssetsBalance Sheet * Times-Interest-Earned(TIE) = EBIT/Interest ExpenseIncome Statement * Profitability: Do sales prices exceed unit costs, and are sales high enough as reflected in PM, ROE, and ROA? * Operating Margin = EBIT/Sales * Profit Margin = Net income/Sales PM is how much a firm earns on its sales * Below avg. PM means that the firm’s costs are not being controlled as well as they should be, therefore they cannot charge premium prices * Basic Earning Power(BEP) = EBIT/Total Assets * ROA = Net Income/Total Assets * ROE = Net Income/total common equityBalance Sheet * ROE and shareholder wealth are correlated, but problems can arise when ROE is the sole measure of performance. * ROE does not consider risk. * ROE does not co nsider the amount of capital invested. * Might encourage managers to make investment decisions that do not benefit shareholders. ROE focuses only on return and a better measure would consider risk and return. * Market value: Do investors like what they see as reflected in P/E and M/B ratios? * Price/Earnings (P/E) ratio = Price per share/Earnings per share * Earnings per share * Market/Book Ratio (M/B)= Market price per share/Book value per share * Book Value per share = Common equity/Shares outstandingBalance Sheet * P/E: How much investors are willing to pay for $1 of earnings. * M/B: How much investors are willing to pay for $1 of book value equity. For each ratio, the higher the number, the better. * P/E and M/B are high if ROE is high and risk is low. * DuPont system * ROE = Profit Margin(PM) X Total Asset Turnover X Equity Multiplier(EM) NI/Sales Sales/TA TA/Total common equity I______ _______I I ROA * ROA Focuses on expense control (PM), asset utilization (TA TO), and debt ut ilization (equity multiplier). * Uses of freed up cash * Old A/R * (New A/R) * Cash freed up * Uses: * Repurchase stock * Expand business * Reduce debt * All these actions would likely improve the stock price. * Limitations of ratio analysis Comparison with industry averages is difficult for a conglomerate firm that operates in many different divisions. * â€Å"Average† performance is not necessarily good, perhaps the firm should aim higher. * Seasonal factors can distort ratios. * â€Å"Window dressing† techniques can make statements and ratios look better. * Different operating and accounting practices can distort comparisons. * Sometimes it is hard to tell if a ratio is â€Å"good† or â€Å"bad. † * Difficult to tell whether a company is, on balance, in strong or weak position. * Sales forecast * Use historical sales data (approx. 5 years) Collect input from product development, marketing, and operations * Sales growth has a cost * Bad forecasts have a cost * Forecasting sales is the most important input in predicting future financial performance * Additional Financing Needed (AFN) * AFN = (A*/S0)? S – (L*/S0) ? S – M(S1)(RR) * = Projected asset increase – Spontaneous liabilities increase – Increase in retained earnings (How many assets to buy)L*(liab. Bs) M(S1)=future profits * A* = assets * L* = spontaneous liabilities * S = sales * M = profit margin * RR = retention ratio * FIN 331 – Moser – Study Guide for Midterm II – Spring 2011Important Concepts * Time Value of Money * The  idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This  core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. * Future Value (FV) * The amount to which a cash flow or series of cash flows will grow over a given period of time when compounded at a given interest rate. * Finding the FV of a cash flow or series of cash flows is called compounding * What is the FV of an initial $100 after 3 years, if I/YR = 10%? N=3I/YR=10PV=100PMT=0FV=CPT * Future Value = 133. 10 * Present Value (PV) * The value today of a future cash flow or series of cash flows * What is the PV of $100 due in 3 years, if I/YR= 10%? * N=3I/YR=10PV=CPTPMT=0FV= 100 * PV=-75. 13 * Solving for Interest Rate * Solving for I: What interest rate would cause $100 to grow to 125. 97 in 3 years? * N=3I=CPTPV=100 PMT=0FV=125. 97 * Interest Rate = 8% * Solving for # of Time Periods * N = Number of periods involved in the analysis. * If sales grow at 20% per year, how long before sales double? * N=? I/YR=20PV=-1PMT=0 FV=2 * N=3. 8 * Ordinary Annuity vs. Annuity Due Ordinary Annuity * Payments occur at the end of each year(deferred annuity) * Set calculator to END * FV * 3-year ordinary annuity of $100 at 10%? * N=3 I/YR=10 PV=0 PMT=100 FV=CPT * FV=331 * PV * N=3 I/YR =10 PV=CPT PMT=100 FV=0 * PV=-248. 69 * Annuity Due * Set calculator to BEGIN * The payments are made at the beginning of each year * FV * 3-year annuity due of $100 at 10%? * N=3 I/YR=10 PV=0 PMT=100 FV=CPT * FV=364. 10 * PV * N=3 I/YR=10 PV=CPT PMT=100 FV=0 * PV=273. 55 * Perpetuity * An annuity with an extended life. * N=infinity * PV of a perpetuity = PMT/I * PV=PMT/I=$100/0. 1 = $1,000 Compound Interest * A 20-year-old student wants to save $3 a day for her retirement. Every day she places $3 in a drawer. At the end of the year, she invests the accumulated savings ($1,095) in a brokerage account with an expected annual return of 12%. * How much money will she have when she is 65 years old? * N=45 I/YR= 12 PV=0 PMT= 1095 FV=CPT * FV = 1,487,262 * Solving for annual payment * PV of uneven cash flows * * Effect of compounding more often * Compounding more often results in building interest upon interest * Nominal vs. Periodic vs. Effective Interest Rate * Written into contracts, q uoted by banks and brokers.Not used in calculations or shown on time lines. * Nominal rate (INOM) – also called the quoted or stated rate. An annual rate that ignores compounding effects. * INOM is stated in contracts. Periods must also be given, e. g. 8% quarterly or 8% daily interest. * Periodic rate (IPER) – amount of interest charged each period, e. g. monthly or quarterly. * * IPER = INOM/M, where M is the number of compounding periods per year. M = 4 for quarterly and M = 12 for monthly compounding. * Effective (or equivalent) annual rate (EAR = EFF%) – the annual rate of interest actually being earned, accounting for compounding. Used to compare returns on investments with different payments per year. Used in calculations when annuity payments don’t match compounding periods. * EFF% for 10% semiannual investment * EFF%= ( 1 + INOM/M )M – 1 * = ( 1 + 0. 10/2 )2 – 1 = 10. 25% * Should be indifferent between receiving 10. 25% annual inte rest and receiving 10% interest, compounded semiannually. * Semiannual/quarterly/monthly compounding * Annually * N=3 I/YR=10. 25 PV=0 PMT=100 FV=CPT * FV=331. 80 * 100(1. 025)^3=331. 80 * Semiannual * N=6 I/YR=5. 125 PV=0 PMT = 100 FV=CPT * FV=682. 33 * 100(. 5125)^6 * Quarterly * N=12 I=2. 6 PV=0 PMT=100 FV=CPT * * Loan Amortization * Amortization tables are widely used for home mortgages, auto loans, business loans, retirement plans, etc. * Financial calculators and spreadsheets are great for setting up amortization tables. * A loan that is to be repaid in equal amounts on a monthly, quarterly, or annual basis * Bonds * A long-term debt instrument in which a borrower agrees to make payments of principal and interest, on specific dates, to the holders of the bond. * Treasury * Government bonds * No default risk * Municipal * Bonds issued by state and local governments * Some default risk Advantage: Munis are exempt from Federal Taxes and from state taxes if the holder is resident of issuing state. * Corporate * Issued by business firms * Exposed to default risk * Higher the risk, the higher interest rate is demanded * Foreign * Issued by a foreign government * Currency exchange issues * Par value * face amount of the bond, which is paid at maturity (assume $1,000). * Coupon interest rate * Stated interest rate (generally fixed) paid by the issuer. Multiply by par value to get dollar payment of interest. * Maturity date * Years until the bond must be repaid. * Yield to maturity Rate of return earned on a bond held until maturity (also called the â€Å"promised yield†). * Call Provision * Allows issuer to refund the bond issue if rates decline (helps the issuer, but hurts the investor). * Borrowers are willing to pay more, and lenders require more, for callable bonds. * Most bonds have a deferred call and a declining call premium. * Sinking Fund * Provision to pay off a loan over its life rather than all at maturity. * Similar to amortization on a term loan. * Reduces risk to investor, shortens average maturity. * But not good for investors if rates decline after issuance. * Convertible Bond May be exchanged for common stock of the firm, at the holder’s option. * Warrant * Long-term option to buy a stated number of shares of common stock at a specified price. * Puttable bond * Allows holder to sell the bond back to the company prior to maturity. * Indexed bond * Interest rate paid is based upon the rate of inflation. * Valuing a bond * Problem * Discount bond vs. Premium bond and how you can tell by comparing the coupon and the YTM * Bond Values over time * Solving for YTM * Expected Total return= YTM = (Expected Current Yield) + (Expected Capital Gains Yield) * CY=Annual coupon payment/Current Price . 09(1000)/887 * CGY= Change in price/Beginning price * Or CGY = Current yield + Capital gains yield * Interest rate risk * The concern that rising interest rates will cause the value of a bond to fall. * 10year bond has more r isk than just a 1 year bond * Reinvestment rate risk * Reinvestment rate risk is the concern that rd will fall, and future CFs will have to be reinvested at lower rates, hence reducing income. * EXAMPLE: Suppose you just won $500,000 playing the lottery. You intend to invest the money and live off the interest. * You may invest in either a 10-year bond or a series of ten 1-year bonds.Both 10-year and 1-year bonds currently yield 10%. * If you choose the 1-year bond strategy: * After Year 1, you receive $50,000 in income and have $500,000 to reinvest. But, if 1-year rates fall to 3%, your annual income would fall to $15,000. * If you choose the 10-year bond strategy: * You can lock in a 10% interest rate, and $50,000 annual income for 10 years, assuming the bond is not callable. * Semiannual bonds * Multiply years by 2: Number of periods = 2N * Divide nominal rate by 2: Periodic rate (I/YR) = rd/2 * Divide annual coupon by 2: PMT = Annual coupon/2 * Yield to Call * Problem * Default risk If an issuer defaults, investors receive less than the promised return. Therefore, the expected return on corporate and municipal bonds is less than the promised return. * Influenced by the issuer’s financial strength and the terms of the bond contract. * Mortgage bond vs. debenture * Mortgage bond- backed up by collateral e. g. house,car,jewelry * Debenture- Not backed up * Investment-grade vs. junk bond * Investment grade-GE bond, lower risk and thus lower return * Junk bond- Speculative bonds that have high risk, but sometimes higher return * Significant risk of going default * 2 chapters of bankruptcy Two main chapters of the Federal Bankruptcy Act: * Chapter 11, Reorganization * If company can’t meet its obligations †¦ * It files under Chapter 11 to stop creditors from foreclosing, taking assets, and closing the business and it has 120 days to file a reorganization plan. * Court appoints a â€Å"trustee† to supervise reorganization. * Management u sually stays in control. * Company must demonstrate in its reorganization plan that it is â€Å"worth more alive than dead†. * If not, judge will order liquidation under Chapter 7. * Chapter 7, Liquidation * Typically, a company wants Chapter 11, while creditors may prefer Chapter 7. Priority of Claims in Liquidation * Secured creditors from sales of secured assets. * Trustee’s costs * Wages, subject to limits * Taxes * Unfunded pension liabilities * Unsecured creditors * Preferred stock * Common stock * Reorganization * In a liquidation, unsecured creditors generally get zero. This makes them more willing to participate in reorganization even though their claims are greatly scaled back. * Various groups of creditors vote on the reorganization plan. If both the majority of the creditors and the judge approve, company â€Å"emerges† from bankruptcy with lower debts, reduced interest charges, and a chance for success.Formulas that will be provided * Chapters 5 and 7 from Appendix C * Instructions on switching your calculator from END to BGN mode Chapter 8 * Investment Risk * Investment risk is related to the probability of earning a low or negative actual return. * The greater the chance of lower than expected or negative returns, the riskier the investment. * stand-alone risk * The asset is considered by itself * The risk an investor would face if he or she held only this one asset. * Portfolio risk * Asset is held as one of a number of assets in a portfolio * Average returns (stocks vs. bonds) Bonds offer relatively low returns, but with relatively little risk * Stocks offer the chance of higher returns, but stocks are generally riskier than bonds * Expected return r^ * The rate of return expected to be realized from an investment; the weighted average of the probability distribution of possible results * Standard deviation (sigma) * A statistical measure of the variability of a set of observations * The tighter the probability distributio n, the lower the risk * Measure of how far the actual return is likely to deviate from the expected return * Coefficient of variation (CV) The standardized measure of the risk per unit of return; calculated as the standard deviation divided by the expected return * CV= ? /r^ * Risk aversion * Assumes investors dislike risk and require higher rates of return to encourage them to hold riskier securities. * Risk premium * The difference between the return on a risky asset and a riskless asset, which serves as compensation for investors to hold riskier securities. * Portfolio expected return r^p The weighted average of the expected returns on the assets held in the portfolio * The weights being the percentage of the total portfolio invested in each asset * Diversification effects on a portfolio * ? p decreases as stocks added, because they would not be perfectly correlated with the existing portfolio. * Expected return of the portfolio would remain relatively constant. * Eventually the diversification benefits of adding more stocks dissipates (after about 10 stocks), and for large stock portfolios, ? p tends to converge to 20%. * Market risk vs. diversifiable risk Stand-alone risk = Market risk + Diversifiable risk * Market risk – portion of a security’s stand-alone risk that cannot be eliminated through diversification. Measured by beta. * Diversifiable risk – portion of a security’s stand-alone risk that can be eliminated through proper diversification. * Failure to diversify * If an investor chooses to hold a one-stock portfolio (doesn’t diversify), would the investor be compensated for the extra risk they bear? * NO! * Stand-alone risk is not important to a well-diversified investor. * Rational, risk-averse investors are concerned with ? , which is based upon market risk. * There can be only one price (the market return) for a given security. * No compensation should be earned for holding unnecessary, diversifiable risk. * Ca pital Asset Pricing Model (CAPM) * Model linking risk and required returns. CAPM suggests that there is a Security Market Line (SML) that states that a stock’s required return equals the risk-free return plus a risk premium that reflects the stock’s risk after diversification. * ri = rRF + (rM – rRF)bi * Primary conclusion: The relevant riskiness of a stock is its contribution to the riskiness of a well-diversified portfolio. Beta * Measures a stock’s market risk, and shows a stock’s volatility relative to the market. * Indicates how risky a stock is if the stock is held in a well-diversified portfolio. * Can the beta of a security be negative? * Yes, if the correlation between Stock i and the market is negative (i. e. , ? i,m < 0). * If the correlation is negative, the regression line would slope downward, and the beta would be negative. * However, a negative beta is highly unlikely. * The Security Market Line (SML) (calculating required rates of return) * SML: ri = rRF + (rM – rRF)bi * ri = rRF + (RPM)bi Assume the yield curve is flat and that rRF = 5. 5% and RPM = 5. 0%. * Market risk premium * Additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk. * Its size depends on the perceived risk of the stock market and investors’ degree of risk aversion. * Varies from year to year, but most estimates suggest that it ranges between 4% and 8% per year. * Portfolio beta * The beta of a portfolio is the weighted average of each of the stock’s betas. * bP = wHTbHT + wCollbColl * bP = 0. 5(1. 32) + 0. 5(-0. 87) * bP = 0. 225 * Portfolio required returns The required return of a portfolio is the weighted average of each of the stock’s required returns. * Or, using the portfolio’s beta, CAPM can be used to solve for expected return. * rRF + (rpm)(stocks beta) * Discounted dividend model * Value of a stock is the present value of the future divide nds expected to be generated by the stock. * * Valuing stock with constant growth * A stock whose dividends are expected to grow forever at a constant rate, g. * D1 = D0(1 + g)1 * D2 = D0(1 + g)2 * Dt = D0(1 + g)t * If g is constant, the discounted dividend formula converges to: * * Dividend yield vs. capital gains yield Dividend yield * = D1/P0 = $2. 12/$30. 29 = 7. 0% * Capital gains yield * = (P1 – P0)/P0 * = ($32. 10 – $30. 29)/$30. 29 = 6. 0% * Valuing stock with nonconstant growth * During nonconstant growth, dividend yield and capital gains yield are not constant, and capital gains yield ? g. * Corporate Valuation model * Also called the free cash flow method. Suggests the value of the entire firm equals the present value of the firm’s free cash flows. * Remember, free cash flow is the firm’s after-tax operating income less the net capital investment. * FCF = EBIT(1 – T) – Net capital investment * Terminal value Often preferred to the discounted dividend model, especially when considering number of firms that don’t pay dividends or when dividends are hard to forecast. * Similar to discounted dividend model, assumes at some point free cash flow will grow at a constant rate. * Terminal value (TVN) represents value of firm at the point that growth becomes constant. * Firm Multiple method * Analysts often use the following multiples to value stocks. * P/E * P/CF * P/Sales * EXAMPLE: Based on comparable firms, estimate the appropriate P/E. Multiply this by expected earnings to back out an estimate of the stock price. Preferred stock * Hybrid security. * Like bonds, preferred stockholders receive a fixed dividend that must be paid before dividends are paid to common stockholders. * However, companies can omit preferred dividend payments without fear of pushing the firm into bankruptcy. Chapter 10 * Sources of capital * Long-term capital * Long-term debt * Preferred Stock * Common Stock * Retained earnings * New common stock * Weighted average cost of capital (WACC) * WACC=Wdrd(1-T) + Wp rp + Wc rs * W’s refer to the firms capital structure weights * r’s refer to the cost of each component Before-tax vs. after-tax capital costs * Stockholders focus on A-T CFs. Therefore, we should focus on A-T capital costs, i. e. use A-T costs of capital in WACC. Only rd needs adjustment, because interest is tax deductible. * Historical costs vs. Marginal costs * The cost of capital is used primarily to make decisions that involve raising new capital. So, focus on today’s marginal costs (for WACC). * How weights are determined * Use accounting numbers or market value (book vs. market weights)? * Use actual numbers or target capital structure? * Cost of debt * WACC = wdrd(1 – T) + wprp + wcrs rd is the marginal cost of debt capital. * The yield to maturity on outstanding L-T debt is often used as a measure of rd. * Why tax-adjust; i. e. , why rd(1 – T)? * Cost of preferre d stock * rp is the marginal cost of preferred stock, which is the return investors require on a firm’s preferred stock. * Preferred dividends are not tax-deductible, so no tax adjustments necessary. Just use nominal rp. * Our calculation ignores possible flotation costs. * The cost of preferred stock can be solved by using this formula: * rp= Dp/Pp * = $10/$111. 10 * = 9% * Cost of equity * Is there a cost of retained earnings? Earnings can be reinvested or paid out as dividends. * Investors could buy other securities, earn a return. * If earnings are retained, there is an opportunity cost (the return that stockholders could earn on alternative investments of equal risk). * Investors could buy similar stocks and earn rs. * Firm could repurchase its own stock and earn rs. * CAPM * CAPM: rs = rRF + (rM – rRF)b * DCF * DCF:rs = (D1/P0) + g * Bond-yield-plus-risk-premium * rs = rd + RP * Flotation costs * Flotation costs depend on the firm’s risk and the type of ca pital being raised. * Flotation costs are highest for common equity.However, since most firms issue equity infrequently, the per-project cost is fairly small. * We will frequently ignore flotation costs when calculating the WACC. * What affects WACC * Market conditions. * The firm’s capital structure and dividend policy. * The firm’s investment policy. Firms with riskier projects generally have a higher WACC. * The composite WACC reflects the risk of an average project undertaken by the firm. Therefore, the WACC only represents the â€Å"hurdle rate† for a typical project with average risk. * Different projects have different risks. The project’s WACC should be adjusted to reflect the project’s risk.