marketers start with market segmentation to identify and profile distinct groups of buyers who might prefer or require varying products and marketing mixes. Market segments can be identified by examining
demographic, psychographic, and behavioral differences among buyers.
The firm then decides which segments present the greatest opportunity—those whose needs
the firm can meet in a superior fashion.
Market Segmentation>>>Target Market>> Market offering >> Positioning of offering to give central benefit
Marketing is an integrated communications-based process through which individuals and communities discover that existing and newly-identified needs and wants may be satisfied by the products and services of others.
Marketing is defined by the American Marketing Association as the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large. [1] The term developed from the original meaning which referred literally to going to market, as in shopping, or going to a market to buy or sell goods or services.
Real Risk-Free Rate – This assumes no risk or uncertainty, simply reflecting differences in timing: the preference to spend now/pay back later versus lend now/collect later.
Expected Inflation - The market expects aggregate prices to rise, and the currency's purchasing power is reduced by a rate known as the inflation rate. Inflation makes real dollars less valuable in the future and is factored into determining the nominal interest rate (from the economics material: nominal rate = real rate + inflation rate).
Default-Risk Premium - What is the chance that the borrower won't make payments on time, or will be unable to pay what is owed? This component will be high or low depending on the creditworthiness of the person or entity involved.
Liquidity Premium- Some investments are highly liquid, meaning they are easily exchanged for cash (U.S. Treasury debt, for example). Other securities are less liquid, and there may be a certain loss expected if it's an issue that trades infrequently. Holding other factors equal, a less liquid security must compensate the holder by offering a higher interest rate.
Maturity Premium - All else being equal, a bond obligation will be more sensitive to interest rate fluctuations the longer to maturity it is.
2. Markets are perfect and efficient so there will be no transaction and information cost.
3. The firm's cost of capital is constant over time and is not affected by the amount of funds invested in capital projects
4. All projects have same degree of risk as the firm overall
5. Management must set benchmarks for the evaluation of capital expenditure
eg: pay back period, Rate of return
6. Investement opportunities are independent of each other.
7. Borrowing and lending rates are equal.
There are 4 approaches to evaluate the Capital Budget.
1. Net Income Approach (commercial real estate)
2. Net Operating Approach
3. Traditional approach
4. Miller and Modigliani's approach.
Net Income Approach
The net income approach makes the simplest assumptions, that neither creditors nor investors increase their required rates of return as a company takes on debt. The cost of capital declines as higher-cost equity is replaced with lower-cost debt. This approach concludes that the optimal financing mix is all debt.
Assumptions:
* Change in Capital structure does not make any change in business risk of company and there is no
financial risk
implications:
a. Cost of debit and cost of equity in a given risk class will remain constant and not affected by change in capital structure.
===> i. For a zero debt firm, cost of equity and overall capital is same
Ke= Ko
===> As company introduces more and more debt in its capital structure, the overall cost of capital decreases at decreasing rate so the value of firm increases.
Net Operating Approach
The net operating income approach assumes that creditors do not increase their required rate of return as a company takes on debt, but investors do. Further, the rate at which investors increase their required rate of return as the financing mix is shifted toward debt exactly offsets the weighting away from the more expensive equity and toward the cheaper debt. The result is that the cost of capital remains constant regardless of the financing mix. This approach concludes that there is no optimal financing mix¾any mix is as good as any other.
Assumptions:
1. Cost of debt remain constant with change in d/e ratio.
2. cost of equtiy increases with increase of Debt capital structure.
3. Overall cost of capital remain constant.
Implications:
=====>i. for Zero debt company Ke= Ko
=====>ii. In a given risk category, firms with different capital structure will have same cost of debt and
cost of captial
Traditional Approach
The traditional approach assumes that both creditors and investors increase their required rates of return as a company takes on debt. At first this increase is small, and the weighting toward lower-cost debt pushes the cost of capital down. Eventually, the rate at which creditors and investors increase their required rates of return accelerates and dominates the weighting toward debt, pushing the cost of capital back upward. The result is that the cost of capital declines with debt and reaches a minimum point before rising again. This approach concludes that there is a optimal financing mix consisting of some debt and some equity.
Assumptions:
1. When a capital structure is changed cost of debt and cost of equity change. At loc D/E ratio cost of debt and equity are relatively low.
As more the debt is introduced, the cost of debt, cost of equity will rise.
Cost of debt increases at marginal stage initially but after it will start rising fast. Ke also increases at increasing rate.
===> Initial stages althrough individual ke and Kd marginally increase, then Ko starts increasing. As more debt is inroduces, the Ko tends to decline to certain stage after which it starts increasing. According to traditional approach there is an optimum capital structure.
Miller and Modigliani's Approach
A financial theory stating that the market value of a firm is determined by its earning power and the risk of its underlying assets, and is independent of the way it chooses to finance its investments or distribute dividends. Remember, a firm can choose between three methods of financing: issuing shares, borrowing or spending profits (as opposed to dispersing them to shareholders in dividends). The theorem gets much more complicated, but the basic idea is that, under certain assumptions, it makes no difference whether a firm finances itself with debt or equity.
It explains from behavioural point of view of stand taken by Net operation approache. ie,, change in capital will not affect value of firm.
Assumptions
1. Security can be purchased
2. Markets are competative.
3. no transaction and info cost.
4. All have homogeneous expectations.
5. No cost of rising.
6. Fund can change captial structure without additional cost.
7. Individual invester can be at same cost at corporate standard.
The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project. NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield.
Assumptions:
The NPV analysis then gives a precise formula for deciding whether or not to proceed with the investment project.Applying NPV analysis requires judgements about revenues,expenses, depreciation tax shields, true economic lives of plant and equipment, and the appropriate discount rate.Precision of method is not the same as precision of result.The validity of the assumptions is also critically important.garbage-in, garbage-out
Steps to Calculate
1. Calculation of expected Free cash flows that result out of the investment.
2. Substract/Discount for the cost of capital
3. Substract initial Investments.
Limitations:
1. NPV is widely used for making insvestment decisions.,
a disadvantage of NPV is it does not account for flexibility
after the project decision.
2. NPV is unable to deal with intangible benefits. This inability
decreases its usefulness for stategic issues and projects.
Promotion : Promotional Strategy,Ads,Personal selling, Public relation, Marketing communication budget.
Limitations :
Marketing 4 p's was useful in early days of marketing concepts . Since today marketing is more integrated with the organization and with wider variety of products and market , some experts feel to include another " P"
which is people, packing , process . Despite its limitation, it is universally accepted because of its simplicity.
1. Entrepreneurial Marketing: Most companies are started by individuals who visualize an opportunity and knock on every door to gain attention.
2. Formulated Marketing After achieving success by small companies, they do marketing department carries market research, adopting some of the tools used in profession. Latest ratings, scanning research reports, trying to fine-tune dealer relations and ad messages.
3. Intrepreneurial Marketing : Large companies stuck in formulated due to lack of creativity and passion. Brand and product mangers start to living with their customers and visualizing new ways to add value to their consumers lives.
