Kiran Kumar Cherupalli

Report Writing

2008-10-15T10:46:25+02:00

Sample numbering system used in report writing

1. INTRODUCTION
1.1. Aim
1.2. Scope
1.3. Background to study
2. PROCEDURE
2.1. Data collection method
2.2. Literature review
2.2.1. Literature review of journals 2000 - 2001
3. ANALYSIS Of DATA
3.1. Water flow of Blue River
3.2. Sediment levels of Blue River
3.3. Fish stock numbers
3.4. Weed infiltration rates
3.5. Salinity levels of Blue River
3.6. Likely areas to be flooded
4. CONCLUSIONS
5. RECOMMENDATIONS
REFERENCES
APPENDICES

Aim

In this section you indicate the purpose of the report.
Scope

This shows what the report includes and excludes. For example:
This feasibility study indicates the environmental feasibility of the proposed damming of the Blue River between Johnson's Creek and Blackstump Creek. It does not include building specifications of the dam itself. A further proposal would be offered if council decides to proceed with the recommendations of this study.

Background to study

This section contains any relevant details regarding the background information that may be needed to make sense of the information in the report. It may outline the history of a project, or major players in the project. For example:

In January 1999, Kalkadoo township experienced severe water shortages as a result of prolonged drought periods during 1997 and 1998. The Kalkadoo Shire Council has made it a priority for this situation to be remedied so that this situation does not occur in the future. The Shire Council had conducted investigations into providing a dam for the region in the mid-1980s but plans were halted due to public dissatisfaction with the outcome of those investigations. Further environmental studies needed to be conducted over a longer period to determine the impact of the dam on neighbouring farms and Crown land reserves. This series of investigations was completed in December 2000. The outcome suggested no significant negative environmental or economic impacts would be felt. In June 2001, the Shire Council proposed that the final stages of the feasibility study should be conducted, and conclusions and recommendations from the entire study should be tabled at Council's Planning Committee meeting scheduled for 12 January 2002. This feasibility study report should thus enable Council to make a final decision regarding improving water supplies to the Shire. This is one of its three priority areas for the period 2001-2002.

Procedures

Data collection methods

In this section, you would briefly outline how you collected the data that will provide the basis for analysis that will produce conclusions and recommendations. Even though it may be called something different, all reports use specific data and ways of collecting it that would be included in this section.

• In research reports, you would probably use a different heading because your data would come mainly from texts and journal articles. This is the section where you would discuss the main issues arising from your research.

• In reports that are based on data you have collected yourself, like the report used in the example so far, this section would detail the methods you used to collect that data and why those methods were chosen. You would also outline the steps taken during the process of collecting data and carrying out research. An example is set out below:
During this six-month feasibility study, data was collected and analysed according to the criteria outlined for environmental impact studies as set out in the Queensland Department of Primary Industry's Environmental Studies Handbook (2001). Water flow rates were measured according to rate of flow 100ml per hour. These rates were recorded three times per week during the study. Sediment and salinity levels were measured according to the percentage of suspended siltation carried in the fastest flowing section of the river channel. These measurements were also taken three times per week, and more often during the change of tides. Fish stock numbers were recorded once per month where tagged fish were counted and measured. Specific areas within the study region were targeted and fish stock numbers randomly checked using sonar equipment. Weed infiltration rates were recorded, both in the river itself, and in the land regions that would be directly affected by flooding. Weekly recordings were made of the types of species already present in the areas of study, and identification of new varieties was monitored.

Analysis of data

This section is perhaps the longest section in most reports and it is where, using visual displays, you outline the data you have collected.

• Graphs, charts, tables, maps, graphic displays should always be used to summarise the findings you have made from the data you have collected.

• Each set of data may be displayed in more than one way and each diagram or visual should have a title, figure or table number, and should be thoroughly labelled.

• Each set of data is systematically displayed and analysed in a paragraph under the appropriate diagram. For example:
Water flow rates

Table 1: Water flow rates—Blue River, 1 June 2001-7 December 2001
Date Time Volume/Hour 100ml/Hour Recommended flow rate for viable damming

The table indicates that periods of peak flow occurred between July and September 2001. The rates of flow are 50% higher than those rates recommended to be viable for substantial damming of an area. The lowest flow recorded occurred during November but is still significantly higher than the recommended flow rate for viable damming. There is no evidence to suggest that these levels are unusual for this region. Table 2 compares water flow rates for the same periods from studies conducted over the period 1985-1999 (See Table 2, page 12). This indicates that the water flow rates are stable and there is very little variation from year to year or month to month.

Conclusions

The conclusions are dot pointed and are drawn directly from the analysis section of the report. Dot points are used when the sequential order is not important. For each section under the main heading 'Analysis', there should be at least one corresponding conclusion. For example:

• The Blue River flow rate is significantly higher than was expected. Damming the Blue River between Johnson's Creek and Blackstump Creek would not affect average water (flow rates upstream or downstream from this area).

• Sediment levels remained between 0.02% and 0.05% during the dry months. Sediment levels of 1.2% are considered to be acceptable. Damming the river will not significantly increase sedimentation downstream. Upstream, sediment levels will increase between 0.5% and 1.0%. This increase is still within the acceptable range according to guidelines (given by the Department of Primary Industries).

Recommendations

These are suggestions for further action based on your conclusions. Not all reports will ask for recommendations. Some will have a section where both conclusions and recommendations are given. Recommendations are numbered as they normally follow sequentially. For example:

1. The damming of the Blue River between Johnson's Creek and Blackstump Creek should proceed.

2. Damming of this area could lead to significant economic advantages.
References

A reference list with publication details of sources used should be included after the conclusions/recommendations section. Any appendices follow the reference list.

Additional sections that may be required

Appendices

Appendices include things like raw data sheets, extra or supplementary information or diagrams, maps of regions etc. You draw your reader's attention to the appropriate appendix by indicating this briefly at the appropriate place in the report. For example:
Water flow rates indicate that there is no significant change between 1998 and 2001. Comprehensive flow rate charts for the period 1998-2000 are included as Appendix 1.
Here are some examples of appendices:
National Science Foundation Home page
http://www.nsf.gov
Go to Program Areas—Social, Behavioural, Economic Science
Go to Science Resources Statistics, then Featured Publications and look at Women, Minorities and Persons with Disabilities
Look at the appendices: Technical Notes and Statistical Tables
Note how tables are shown in Appendix 2: Statistical Tables

Glossary

Sometimes, when there is a lot of 'jargon' contained in a report (as in Science or Engineering), a glossary of terms should also be included. This ensures that those reading the report understand the way you have used the terms or jargon in your report. Sometimes words can have different meanings in different disciplines. If you need to include a glossary, it would generally be placed just after the contents page.

Language style

The style of language used in reports is concrete, active and formal as a rule. The rules of plain English definitely apply most of the time.
There is no room for bias or 'fudging' results especially when they are considered to be legal documents. This is particularly the case in engineering, business, the sciences and some social sciences.

Layout

The use of white space is very important in report writing. Spacing between headings, subheadings, paragraphs, ends of sections, diagrams etc. need to be uniform. As a guide - one space between heading and subheading, one space between paragraphs, and two spaces between the end of a section and the next heading. Whatever you choose, make sure you aim for consistency.

Comments

FINANCIAL ANALYSIS

2008-10-15T10:42:29+02:00

The important aspect of analyzing a case study and writing a case study analysis is the role and use of financial information. A careful analysis of the company's financial condition immensely improves a case write-up. After all, financial data represent the concrete results of the company's strategy and structure. Although analyzing financial statements can be quite complex, a general idea of a company's financial position can be determined through the use of ratio analysis. Financial performance ratios can be calculated from the balance sheet and income statement. These ratios can be classified into five different subgroups: profit ratios, liquidity ratios, activity ratios, leverage ratios, and shareholder-return ratios. These ratios should be compared with the industry average or the company's prior years of performance. It should be noted, however, that deviation from the average is not necessarily bad; it simply warrants further investigation. For example, young companies will have purchased assets at a different price and will likely have a different capital structure than older companies. In addition to ratio analysis, a company's cash flow position is of critical importance and should be assessed. Cash flow shows how much actual cash a company possesses.

Profit Ratios

Profit ratios measure the efficiency with which the company uses its resources. The more efficient the company, the greater is its profitability. It is useful to compare a company's profitability against that of its major competitors in its industry. Such a comparison tells whether the company is operating more or less efficiently than its rivals. In addition, the change in a company's profit ratios over time tells whether its performance is improving or declining. A number of different profit ratios can be used, and each of them measures a different aspect of a company's performance. The most commonly used profit ratios are gross profit margin, net profit margin, return on total assets, and return on stockholders' equity.

Gross profit margin. The gross profit margin simply gives the percentage of sales available to cover general and administrative expenses and other operating costs. It is defined as follows:

Gross Profit Margin
=
Sales Revenue - Cost of Goods Sold
-------------------------------------
Sales Revenue

Net profit margin. Net profit margin is the percentage of profit earned on sales. This ratio is important because businesses need to make a profit to survive in the long run. It is defined as follows:

Net Profit Margin
=
Net Income
-------------
Sales Revenue

Return on total assets. This ratio measures the profit earned on the employment of assets. It is defined as follows:

Return on Total Assets
=
Net Income Available to Common Stockholders
-------------------------------------------
Total Assets

4. Net income is the profit after preferred dividends (those set by contract) have been paid. Total assets include both current and noncurrent assets.

Return on stockholders' equity. This ratio measures the percentage of profit earned on common stockholders' investment in the company. In theory, a company attempting to maximize the wealth of it stockholders should be trying to maximize this ratio. It is defined as follows:

Return on Stockholders' Equity
=
Net Income Available to Common Stockholders
-------------------------------------
Stockholders' Equity

Liquidity Ratios

A company's liquidity is a measure of its ability to meet short-term obligations. An asset is deemed liquid if it can be readily converted into cash. Liquid assets are current assets such as cash, marketable securities, accounts receivable, and so on. Two commonly used liquidity ratios are current ratio and quick ratio.

Current ratio. The current ratio measures the extent to which the claims of short-term creditors are covered by assets that can be quickly converted into cash. Most companies should have a ratio of at least 1, because failure to meet these commitments can lead to bankruptcy. The ratio is defined as follows:

Current Ratio
=
Current Assets
-----------------
Current Liabilities

Quick ratio. The quick ratio measures a company's ability to pay off the claims of short-term creditors without relying on the sale of its inventories. This is a valuable measure since in practice the sale of inventories is often difficult. It is defined as follows:

Quick Ratio
=
Current Assets - Inventory
---------------------------
Current Liabilities

Activity Ratios

Activity ratios indicate how effectively a company is managing its assets. Inventory turnover and days sales outstanding (DSO) are particularly useful:

Inventory turnover. This measures the number of times inventory is turned over. It is useful in determining whether a firm is carrying excess stock in inventory. It is defined as follows:

Inventory Turnover
=
Cost of Goods Sold
-------------------
Inventory

2. Cost of goods sold is a better measure of turnover than sales, since it is the cost of the inventory items. Inventory is taken at the balance sheet date. Some companies choose to compute an average inventory, beginning inventory, plus ending inventory, but for simplicity use the inventory at the balance sheet date.

Days sales outstanding (DSO), or average collection period. This ratio is the average time a company has to wait to receive its cash after making a sale. It measures how effective the company's credit, billing, and collection procedures are. It is defined as follows:

DSO
=
Accounts Receivable
---------------------
Total Sales/360

Accounts receivable is divided by average daily sales. The use of 360 is standard number of days for most financial analysis.
Leverage Ratios
A company is said to be highly leveraged if it uses more debt than equity, including stock and retained earnings. The balance between debt and equity is called the capital structure. The optimal capital structure is determined by the individual company. Debt has a lower cost because creditors take less risk; they know they will get their interest and principal. However, debt can be risky to the firm because if enough profit is not made to cover the interest and principal payments, bankruptcy can occur.

Three commonly used leverage ratios are debt-to-assets ratio, debt-to-equity ratio, and times-covered ratio.

Debt-to-assets ratio. The debt-to-asset ratio is the most direct measure of the extent to which borrowed funds have been used to finance a company's investments. It is defined as follows:

Debt-to-Assets Ratio
=
Total Debt
-----------
Total Assets

2. Total debt is the sum of a company's current liabilities and its long-term debt, and total assets are the sum of fixed assets and current assets.

Debt-to-equity ratio. The debt-to-equity ratio indicates the balance between debt and equity in a company's capital structure. This is perhaps the most widely used measure of a company's leverage. It is defined as follows:

Debt-to-Equity Ratio
=
Total Debt
---------------
Total Equity

Times-covered ratio. The times-covered ratio measures the extent to which a company's gross profit covers its annual interest payments. If the times-covered ratio declines to less than 1, then the company is unable to meet its interest costs and is technically insolvent. The ratio is defined as follows:

Times-Covered Ratio
=
Profit Before Interest and Tax
-------------------------------
Total Interest Charges

Shareholder-Return Ratios

Shareholder-return ratios measure the return earned by shareholders from holding stock in the company. Given the goal of maximizing stockholders' wealth, providing shareholders with an adequate rate of return is a primary objective of most companies. As with profit ratios, it can be helpful to compare a company's shareholder returns against those of similar companies. This provides a yardstick for determining how well the company is satisfying the demands of this particularly important group of organizational constituents. Four commonly used ratios are total shareholder returns, price-earnings ratio, market to book value, and dividend yield.

Total shareholder returns. Total shareholder returns measure the returns earned by time t + 1 on an investment in a company's stock made at time t. (Time t is the time at which the initial investment is made.) Total shareholder returns include both dividend payments and appreciation in the value of the stock (adjusted for stock splits) and are defined as follows:

Total Shareholder Returns
=
Stock Price (t + 1) - Stock Price (t) + Sum of Annual Dividends per Share
---------------------
Stock Price (t)

2. Thus, if a shareholder invests $2 at time t, and at time t + 1 the share is worth $3, while the sum of annual dividends for the period t to t + 1 has amounted to $0.2, total shareholder returns are equal to (3 - 2 + 0.2)/2 = 0.6, which is a 60 percent return on an initial investment of $2 made at time t.

Price-earnings ratio. The price-earnings ratio measures the amount investors are willing to pay per dollar of profit. It is defined as follows:

Price-Earnings Ratio
=
Market Price per Share
---------------------
Earnings per Share

Market to book value. Another useful ratio is market to book value. This measures a company's expected future growth prospects. It is defined as follows:

Market to Book Value
=
Market Price per Share
----------------------
Earnings per Share

Dividend yield. The dividend yield measures the return to shareholders received in the form of dividends. It is defined as follows:

Dividend Yield
=
Dividend per Share
-------------------
Market Price per Share

Market price per share can be calculated for the first of the year, in which case the dividend yield refers to the return on an investment made at the beginning of the year. Alternatively, the average share price over the year may be used. A company must decide how much of its profits to pay to stockholders and how much to reinvest in the company. Companies with strong growth prospects should have a lower dividend payout ratio than mature companies. The rationale is that shareholders can invest the money elsewhere if the company is not growing. The optimal ratio depends on the individual firm, but the key decider is whether the company can produce better returns than the investor can earn elsewhere.

Cash Flow

Cash flow position is simply cash received minus cash distributed. The net cash flow can be taken from a company's statement of cash flows. Cash flow is important for what it tells us about a company's financing needs. A strong positive cash flow enables a company to fund future investments without having to borrow money from bankers or investors. This is desirable because the company avoids the need to pay out interest or dividends. A weak or negative cash flow means that a company has to turn to external sources to fund future investments. Generally, companies in strong-growth industries often find themselves in a poor cash flow position (because their investment needs are substantial), whereas successful companies based in mature industries generally find themselves in a strong cash flow position.

A company's internally generated cash flow is calculated by adding back its depreciation provision to profits after interest, taxes, and dividend payments. If this figure is insufficient to cover proposed new-investment expenditures, the company has little choice but to borrow funds to make up the shortfall or to curtail investments. If this figure exceeds proposed new investments, the company can use the excess to build up its liquidity (that is, through investments in financial assets) or to repay existing loans ahead of schedule.

Comments

Market Capitalisation

2008-08-01T20:11:24+02:00

What is "market capitalization"?

You probably think that you have never heard of the term “market capitalization” before. You have! When you are talking about “mid-cap”, “small-cap” and “large-cap” stocks, you are talking about market capitalization!

Market cap or market capitalization is simply the worth of a company in terms of it’s shares! To put it in a simple way, if you were to buy all the shares of a particular company, what is the amount you would have to pay? That amount is called the “market capitalization”!

To calculate the market cap of a particular company, simply multiply the “current share price” by the “number of shares issued by the company”! Just to give you an idea, ONGC, has a market cap of “Rs.170,705.21 Cr” (when this article was written)

Depending on the value of the market cap, the company will either be a “mid-cap” or “large-cap” or “small-cap” company! Now the question is, how do YOU calculate the market cap of a particular company? You don’t! Just go to a website like MoneyControl.com and look up the company whose market cap you are interested in finding out! The figure in front of “Mkt. Cap” will be the market cap value.

Having seen what market cap is and how to find out the market cap of a particular company, let us try to understand the concept of “free-float market cap”

What is "free-float market capitalization"?

Many different types of investors hold the shares of a company! The Govt. may hold some of the shares. Some of the shares may be held by the “founders” or “directors” of the company. Some of the shares may be held by the FDI’s etc. etc!

Now, only the “open market” shares that are free for trading by anyone, are called the “free-float” shares. When we are calculating the Sensex, we are interested in these “free-float” shares!

A particular company, may have certain shares in the open market and certain shares that are not available for trading in the open market.

According the BSE, any shares that DO NOT fall under the following criteria, can be considered to be open market shares:

Holdings by founders/directors/ acquirers which has control element

Holdings by persons/ bodies with "controlling interest"

Government holding as promoter/acquirer

Holdings through the FDI Route

Strategic stakes by private corporate bodies/ individuals

Equity held by associate/group companies (cross-holdings)

Equity held by employee welfare trusts

Locked-in shares and shares which would not be sold in the open market in normal course.

A company has to submit a complete report about “who has how many of the company’s shares” to the BSE. On the basis of this, the BSE will decide the “free-float factor” of the company. The “free-float factor” is a very valuable number! If you multiply the "free-float factor" with the “market cap” of that company, you will get the “free-float market cap” which is the value of the shares of the company in the open market!

A simple way to understand the “free-float market cap” would be, the total cost of buying all the shares in the open market!

So, having understood what the “free float market cap” is, now what? How do you find out the value of the Sensex at a particular point? Well, it’s pretty simple….

First: Find out the “free-float market cap” of all the 30 companies that make up the Sensex!

Second: Add all the “free-float market cap’s” of all the 30 companies!

Third: Make all this relative to the Sensex base. The value you get is the Sensex value!

The “third” step probably confused you. To understand it, you will need to understand “ratios and proportions” from 5th standard mathematics. Think of it this way:

Suppose, for a “free-float market cap” of Rs.100,000 Cr... the Sensex value is 4000…

Then, for a “free-float market cap” of Rs.150,000 Cr... the Sensex value will be..

So, the Sensex value will be 6000 if the “free-float market cap” comes to Rs.150,000 Cr!

Please Note: Every time one of the 30 companies has a “stock split” or a "bonus" etc. appropriate changes are made in the “market cap” calculations.

Now, there is only one question left to be answered, which 30 companies, why those 30 companies, why no other companies?

The 30 companies that make up the Sensex are selected and reviewed from time to time by an “index committee”. This “index committee” is made up of academicians, mutual fund managers, finance journalists, independent governing board members and other participants in the financial markets.

The main criteria for selecting the 30 stocks is as follows:

Market capitalization: The company should have a market capitalization in the Top 100 market capitalization’s of the BSE. Also the market capitalization of each company should be more than 0.5% of the total market capitalization of the Index.

Trading frequency: The company to be included should have been traded on each and every trading day for the last one year. Exceptions can be made for extreme reasons like share suspension etc.

Number of trades: The scrip should be among the top 150 companies listed by average number of trades per day for the last one year.

Industry representation: The companies should be leaders in their industry group.

Listed history: The companies should have a listing history of at least one year on BSE.

Track record: In the opinion of the index committee, the company should have an acceptable track record.

Having understood all this, you now know how the Sensex is calculated.

Comments

Bankruptcy

2008-08-01T20:07:36+02:00

Bankruptcy

The origin of the word bankruptcy can be traced back to Italy during the Medieval Period. In those days, when a businessman was unable to pay his debts, the practice at that time was to destroy his trading bench. From the term "broken bench" or "banca rotta" comes the word "bankruptcy”.

In the US, early bankruptcy laws were temporary measures passed in response to harsh economic conditions. In general, when economic conditions improved, bankruptcy laws were repealed. In modern days, bankruptcy laws became permanent and have been periodically amended or revised to meet current economic and political conditions.

Bankruptcy today seeks the dual purpose of benefiting the debtor as well as the creditor by finding a happy medium where the debtor can comfortably meet their monthly obligation and the creditors recoup their investment.

The main emphasis is on rehabilitating the debtor (reorganization) who is in distress. The laws in place today protect two different segments of our society, the business sector, both profit and non-profit, and the consumer.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy or "straight bankruptcy" is the most popular form of bankruptcy because it allows the debtor to "wipe the slate clean" and start all over. This code is available to individuals, couples, corporations and partnerships. Discharge normally occurs within 4-6 months after filing.

Non-exempt assets will go under the care of a trustee who liquidates them to satisfy creditors in order of their secured interests. Any wages a debtor earns is off limits to creditors who had a vested interest on the date of filing.

This code is generally used by those who lack sufficient income to cover outstanding debts after taking care of basic necessities, and who have no hope of ever repaying their creditors. There are certain obligations that are not dischargeable, for example:
• Alimony and child support
• Back taxes under 3 years old and student loans
• Recently made purchases for substantial amounts
• Property executed contracts involving titles or liens

Before considering chapter 7 you should take an inventory of the types of debt owed. This will give you a better idea if filing will give you the relief you seek.

Who should consider chapter 7.

* If there is no hope of repaying any of your debts.
* If there are no cosigners involved,
* If court action by creditors is imminent, filing stays all collection
proceeding while in court.

Downsides

Ruins your credit. If you have a cosigner, they will still be responsible for the debt you discharge. Pay attorneys, court and filing fees upfront.

Alternatives

If you can't discharge enough of your debts or have to sacrifice too much property you may want to consider chapter 13 or a credit counseling / debt consolidation repayment plan.

Chapter 11 Bankruptcy

Individuals may file under this chapter but it is used primarily for business debt. (Sole proprietor not included) A Small Business Debtor is one whose debts exceeds the limits of chapter 13 (unsecured $250,000 and secured $750,000) and has an aggregate non-contingent secured and unsecured debts of $2,000,000.00 or less. (excluding one who owns or operates real estate) If qualified the debtor can be fast-tracked and treated differently than a large corporation.

This chapter allows the debtor (business) to continue normal business activities while reorganizing (Like chapter 13) its finances so that it may pay its employees, reduce obligations to its creditors and produce a return for its stock holders. During this chapter the debtor retains possession of assets and continues operation. Plan may last up to 6 years.

The theory behind this chapter is that an ongoing business is of greater value than if it is foreclosed on and assets liquidated. After a successful chapter 11, the business can continue with a restructured debt load and operate more efficiently than before and in doing so preserve jobs and assets. Repayment of debts is made from future profits, sale of some assets, mergers or recapitalization.
Who Should Consider Chapter 11?

* Those whose unsecured business debt exceeds $250,000 and secured debt of $750,000 and whose total debt does not exceed $2,000,000.00.
* You have little chance of meeting your obligation under the current terms.
* Creditor's threatening legal action against your company.
* You have a viable going concern that would be ensured through debt restructuring.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is the reorganization of an individual consumer's debt with a new payment schedule. If you have too much disposable income to qualify for chapter 7 or have assets you want to protect, you may want to consider this code. Your debts must be below a certain level and you must have steady income.

With this chapter the debtor reaffirms to pay all or a part of their debt. The amount of repayment can range from 10% to 100% depending on the debtor’s income and the composition of amount owed. This code allows the debtor to restructure their payments and set up a new payment schedule (usually 3-5 years) that is more manageable.
For an individual to qualify under this code unsecured debt may not exceed $250,000 and secured debts $750,000. Payments are made to secure creditors first to the extent of their secured interest and priority. Non priority creditors may be partially paid- credit cards and some taxes etc. In general, creditor approval is not required. Secured creditors can object to the repayment plan however, the court can force acceptance. (Cramdown)
This form of bankruptcy is used when the petitioner has property they want to keep like a mortgage that is about to be foreclosed on and other non-exempt assets that would be liquidated under chapter 7. Filing under this code will also halt all collection and foreclosure proceedings (including IRS) and allow the debtor to catch up on their payments and reinstate their original agreement. Your payments will be made to a Trustee who will disburse them in a manner called for in the court-approved plan. During this time the Trustee will have control over your (personal) finances and any credit-related matters will have to be cleared through him.

Who should consider this chapter?
* If you are behind on your mortgage and need to catch up or if you owe the IRS.
* If the assets you want to protect would be liquidated under a chapter 7 and your disposable income is to high to qualify for a chapter 7.
* If you need relief from collection proceedings or if you wish keep your obligation to pay your creditors and need some breathing room.
* If you wish to leave the option of filing a chapter 7 at some time in the future. If you are a farmer who does not qualify for chapter 12 and have debt unrelated to farming.
* You filed chapter 7 sometime in the past 6 years. You have a co-signer. If you could pay your debts within 3-5 years.
Downside of Chapter 13

Chapter 13 ruins your credit. It will remain on your credit report for up to 10 years. It will also cost you more for any credit you do get in the form of higher interest rates. The Trustee appointed to oversee the completion of your filing may charge up to 8% of the amount filed on. You will have to pay attorneys, court and filing fees up front.
Alternatives

If your debts are primarily unsecured debt, (credit cards, medical bills, unsecured loans etc.) you may want to consider debt restructuring through a credit counseling or debt management agency who specializes in consolidation of unsecured debt.

Long Term Effects

Keep in mind, bankruptcy doesn't come without some trade offs. Often times, you see advertisements promoting bankruptcy as "fast and easy", but that generally applies to the lawyer who files on your behalf, not you. Your lawyer isn't the one who has to live with the stigma of filing for up to 7-10 years.

Filing puts the world on notice about your personal financial affairs. Since its a civil court proceeding, it becomes a matter of public record. In some cases, (chapter 13) even your employer can be involved because this chapter requires deductions from you paycheck.
Bankruptcy also stays on your credit report for up to 10 years and can hinder your ability to get a job, establish new credit, get insurance and even a place to live. You will also have to pay court, attorney and filing fees up front. Furthermore, you will lose control over your finances since a Trustee will be appointed to oversee the completion of your filing. Trustees don't come cheap either. They charge an average of 8% to oversee the successful discharge of your bankruptcy petition.
(Example: $25,000 (total debt) x .08 (Trustee Fee) = $2,000 plus attorney, court and filing fees)

This in addition to the fact that filing doesn't necessarily get you out of all your obligations, bankruptcy may not be that end-all solution that its portrayed to be.

Other Alternatives
* You can simply walk away? If you have no assets, creditor can't attach any property. Unless a creditor has a substantial amount invested in you and/or your state prohibits garnishment of wages, you probably don't have anything to worry about. However, you should be prepared for collection attempts via phone and mail, and threats of lawsuits if you decide to go this route. This is not a recommended way to deal with your obligations.
* You can try to deal with the creditors yourself and work out a new payment plan.
* You can try to budget your expenses and live a more frugal lifestyle, or take on a second job to bring in more income.
* You can contact one of the many debt consolidation / credit counseling services that specialize in helping consumer with credit problems.
Bankruptcy Terms

Automatic Stay - Precludes and halts all collection activities from creditors and even the IRS. You can even get seized property back from the IRS in a chapter 13 or chapter 11.
Assets - Assets are generally anything of value. For example: property, real estate, cash, notes, stocks, bonds, accounts receivables, securities, and any other item of value that could be used to pay off debt.

Chapter 7 Bankruptcy - Straight bankruptcy- may be voluntary or involuntary. Liquidation of all non-exempt assets. Taxes in order of precedence - Federal Income Tax, Withholding tax, Employment tax, Excise tax, Customs and duty tax, Any pecuniary loss penalty on any of the foregoing.

Chapter 13 Bankruptcy- Simply put, is the reorganization of consumer debt with a new payment schedule.
Chapter 11 Bankruptcy- An individual may file under this chapter but it is used primarily for business debt. Like a chapter 13, this chapter halts collection activities an allows the business debtor to restructure their payments. This applies to business debt that exceeds $250,000 in unsecured debt and $750,000 in secured debt. Total debt may not exceed $2,000,000.00

Conversion- If the court believes the petitioner can pay all or a part of his bills it can deny a chapter 7 and convert to a chapter 13.

Cramdown - The courts authority to force acceptance by creditors, stock holders, irs etc of a reorganization or liquidation plan as empowered by the bankruptcy code.

Creditor - A person or entity to whom money is due, or one who has extended credit and has a vested interest in getting paid.

Discharge - To release from debt after fulfilling ones obligations

Exemption - Assets that cannot be touched by creditors during bankruptcy proceedings.

Insolvent - Unable to pay ones debts.

Involuntary Bankruptcy - This is when creditor take legal action against a debtor and files petition in court.

Secured Debt - debt that is backed by collateral. For example: mortgage or car loan.

Substantial Abuse- dismissal of a chapter 7 filing because income of petitioner is sufficient to service debt.

Tax Abatement- After a bankruptcy court has discharged any tax liability as outlined in the bankruptcy codes, a form (3870) will be filed with the IRS as official notice.

Trustee - Person appointed to oversee the completion of a bankruptcy filing.

Unsecured Debt - debt that is not backed by collateral. For example: credit cards, medical bills, utility bills.

Voluntary Bankruptcy - This is when the debtor takes the initiative to file bankruptcy on their own rather than being forced by creditors.

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TOP FIVE CAREER MISTAKES

2008-04-19T02:25:31+02:00

1. Going by scores

This is the most common and biggest mistake one can make.

"Many factors determine one's choice of career -- aptitude, personality, interests and skills -- apart from scoring high marks in one subject or the other.

"You may score good marks in a particular subject like Math. But can you visualise yourself crunching numbers for the next 20 to 30 years?" asks Parveen Shaikh, head psychologist with YoungBuzz, a career counselling and manpower development organisation that runs a state-of-the-art career development centre in Mumbai.

This, coupled with a laidback 'let the results come' attitude, can lead to wrong career moves, says Shaikh. "You cannot let your one-time marks decide your whole future."

2. Succumbing to parental/ peer pressure

Your best friend has decided to study engineering and you blindly follow suit without taking into account your interest or aptitude for such a technical stream.

Or your parents are doctors so you want to become one as well.

But that is no reason to choose your career.

"These days, I think it is more often the herd instinct or peer pressure that influences one's choice of career rather than parental interference," observes Manju Malkhani, head of HR, HDFC.

She adds, "Most parents are liberal and educated enough to let their children choose their own area of interests.

"If you want an MBA in Finance or Personnel, what are you doing at an engineering college [assuming your friends are doing engineering]?"

Also, a wrong career move based on peer pressure may lead to disastrous results. "You are often stuck in a groove and stagnate for want of better options or motivation to change for the better," says Manju.

3. Lack of focus or back-up plans

You must have clarity of vision or a fixed goal when it comes to pursuing career plans, feels G Vedamani, CEO, Retailers' Association of India.

Vedamani has worked as a management expert in retail operations in corporate houses like Bata India , Shoppers' Stop and Crossroads among others, and has also taught at Welingkar's, Mumbai, and the Mudra Institute of Communication, Ahmedabad.

He bemoans the lack of well-planned career objectives and a back-up plan among today's youth.

"Simply put, one can singlemindedly aspire to pursue medicine if one so wishes. But if you don't get an admission into a course of your choice, you should have alternate plans and not drift aimlessly into something or the other.

"Planning -- be it for the future or a viable back-up plan -- is the key factor in planning your career in today's job market," he says.

4. Resistance to change/ non-flexibility

This is a given: Change is a constant factor in your career; you must be prepared for it.

Subhrojit Mullik is a consultant for business development at BEA Systems. An IIM-Calcutta alumni, he has moved from consumer marketing to the financial sector to the IT sector to consultancy over the last 17 years.

He believes change is a key factor for progress and adds, "Several factors determine one's decision to change -- the need for a bigger creative/ challenging field, monetary incentives or the sheer necessity to survive."

When you plan to take the plunge, you must have the answers to the following questions:

1. Will this lead to a greater professional/ personal growth?

2. Am I good at learning new skills and delivering fast?

If you can sniff out the right opportunities and incentives within the prevailing conditions, you need not look beyond your immediate sector of specialisation.

Change need not be only lateral or only vertical. It can combine both, and more!

5. You need not work before you specialise

Gaining some work experience before enrolling in a specialised course might not be extremely popular in India , what with the current scramble to enroll in management, computer and other institutes catering to specialised streams.

But this is very much a global phenomenon.

"If you want to study management -- any aspect of it -- why not work in a company for a few years, gain practical knowledge and then learn to apply them in a better way?" asks Hima Bindu, manager-admissions at the Indian School of Business, Hyderabad .

"Management study focuses greatly on practical case studies. Mere theorising does not really help you get there."

Similarly, if you want to join a designing or a hotel management course, it would help if you have worked as an apprentice or an assistant at a good hotel/ restaturant/ fashion store before deciding to pursue a full-time career course in the same.

Comments

Enterpreneurship

2008-04-19T02:24:55+02:00

The Push and Pull factors

Be introspective about your motive to become an entrepreneur. I have met many company executives who want to branch off on their own because they are frustrated in their current positions. This is the 'Push' factor; be wary of it.

Then there are the very successful executives, who are happy to give up their cozy perks to pursue a compelling idea. That's the 'Pull' factor; succumb to it! (Of course, think through all the other issues but you get the point).

The 'Push' factor has the danger of pushing you from the frying pan into the fire. If you find you have the 'Push' factor, try and evolve that into a 'Pull' by thinking through various ideas and plans until one becomes compelling in its own right. In this respect, a 'Push' factor can be a healthy trigger for an entrepreneur.

Aim to be the best possible in whatever you do

Dream Big. This may sound like a motherhood statement but the advice stems from the spread and acceptance of entrepreneurship in our society. Is it far fetched to conceive that soon entrepreneurship may evolve into a kind of 'career of choice' where ambitions may be restricted to taking one's idea 'just far enough' to enable one make 'just enough' money?

If so, it is likely that one will make none. Dreaming Big for success will never be something that only our pioneering entrepreneurs needed to do in their days. Some aspects of entrepreneurship may change and ease up, but never Dreaming Big.

Partnership helps in the beginning

Try and alleviate the inevitable loneliness a promoter feels at the genesis stage. I am a great believer that having partners at this stage is a great help; not least in developing a more realistic business plan, during which process the hard questions can get better addressed and the promoter group's compatibility better assessed.

The transitioning of a competent, compatible and complementary promoter group from the genesis stage to startup is music to an Angel VC's ear. On the other hand a Big Idea conceived by an individual and sought to be executed by her/him with her/his employee management team creates its own risks.

Trust your gut feeling

Lastly, wait for that instinctive feeling that 'the time is ripe and it is now.' Do not burn all your bridges till you reach that point. Do not set a timetable that forces you to take your leap 'on or before' a particular date.

They say the harder you work the luckier you get. To this I would add, 'and more likely your instincts will be correct.' If you have worked hard on your gameplan and have done all your preparations, trust your instincts.

Here's an analogy that golfers may relate to -- you have driven the ball 250 yards and pitched it 80 yards to within 6 ft of the hole. Now is the time to pause, take your time and gently swing your putter only when you are ready; rush and you are likely to lose the hole -- and all your hard work would be in vain.

Yet, all said and done, many, like me, feel that the genesis period is one with the highest level of creativity, where there are no boundaries or stakes to restrict your thinking.

Angel investors like me derive much pleasure from vicariously participating with startup entrepreneurs in this creative process and, hopefully, adding value to their gameplans, and not just funds.

Comments

BUSINESS VALUATION

2008-04-17T05:03:29+02:00

BUSINESS VALUATION

Business valuation is a process and a set of procedures used to determine the economic value of an owner’s interest in a business. Business valuation is often used to estimate the selling price of a business, resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among the business assets, establish a formula for estimating the value of partners' ownership interest for buy-sell agreements, and many other business and legal disputes.

Standard and Premise of Business Value

Before the value of a business can be measured, the valuation assignment must specify the reason for and circumstances surrounding the business valuation. These are formally known as the business value standard and premise of value.

Business valuation results can vary considerably depending upon the choice of both the standard and premise of value. For example, a business buyer and seller may bargain to establish the value of business assets that approaches the fair market value standard.

However, the value conclusions based on the going concern premise and that of assemblage of business assets may be quite different. One reason is that an operating business creates value by means of its ability to coordinate its capital, human and management resources to produce economic income. The same set of assets not currently used to produce income is generally worth less.

Reasons for Business Valuation

Business people may need to conduct business valuation for a number of reasons including sale, estate tax planning, estate tax valuation, divorce, business purchase price allocation, collateral documentation, litigation and documenting that a sales price is equitable.

Fair market value

“Fair market value”, a central standard of measuring business value, is defined as the price at which property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. See IRS Rev. Rul. 59-60, 1959-1, Cum. Bulletin 237, codified at 26 C.F.R. § 20.2031-1(b).

The fair market value standard incorporates certain assumptions, including the assumptions that the hypothetical purchaser is reasonably prudent and rational but is not motivated by any synergistic or strategic influences; that the business will continue as a going concern and not be liquidated; that the hypothetical transaction will be conducted in cash or equivalents; and that the parties are willing and able to consummate the transaction.

These assumptions might not, and probably do not, reflect the actual conditions of the market in which the subject business might be sold. However, these conditions are assumed because they yield a uniform standard of value, after applying generally-accepted valuation techniques, which allows meaningful comparison between businesses which are similarly situated.

Elements of business valuation

Economic conditions

A business valuation report generally begins with a description of national, regional and local economic conditions existing as of the valuation date, as well as the conditions of the industry in which the subject business operates. A common source of economic information for the first section of the business valuation report is the Federal Reserve Board’s Beige Book, published quarterly by the Federal Reserve Bank. State governments and industry associations often publish useful statistics describing regional and industry conditions.

Financial Analysis

The financial statement analysis generally involves common size analysis, ratio analysis (liquidity, turnover, profitability, etc.), trend analysis and industry comparative analysis. This permits the valuation analyst to compare the subject company to other businesses in the same or similar industry, and to discover trends affecting the company and/or the industry over time. By comparing a company’s financial statements in different time periods, the valuation expert can view growth or decline in revenues or expenses, changes in capital structure, or other financial trends. How the subject company compares to the industry will help with the risk assesment and ultimately help determine the discount rate and the selection of market multiples.

Normalization of financial statements

The most common normalization adjustments fall into the following four categories:

Comparability Adjustments. The valuator may adjust the subject company’s financial statements to facilitate a comparison between the subject company and other businesses in the same industry or geographic location. These adjustments are intended to eliminate differences between the way that published industry data is presented and the way that the subject company’s data is presented in its financial statements.

Non-operating Adjustments. It is reasonable to assume that if a business were sold in a hypothetical sales transaction (which is the underlying premise of the fair market value standard), the seller would retain any assets which were not related to the production of earnings or price those non-operating assets separately. For this reason, non-operating assets (such as excess cash) are usually eliminated from the balance sheet.

Non-recurring Adjustments. The subject company’s financial statements may be affected by events that are not expected to recur, such as the purchase or sale of assets, a lawsuit, or an unusually large revenue or expense. These non-recurring items are adjusted so that the financial statements will better reflect the management’s expectations of future performance.

Discretionary Adjustments. The owners of private companies may be paid at variance from the market level of compensation that similar executives in the industry might command. In order to determine fair market value, the owner’s compensation, benefits, perquisites and distributions must be adjusted to industry standards. Similarly, the rent paid by the subject business for the use of property owned by the company’s owners individually may be scrutinized.

Income, Asset and Market Approaches

Three different approaches are commonly used in business valuation: the income approach, the asset-based approach, and the market approach. Within each of these approaches, there are various techniques for determining the fair market value of a business. Generally, the income approaches determine value by calculating the net present value of the benefit stream generated by the business (discounted cash flow); the asset-based approaches determine value by adding the sum of the parts of the business (net asset value); and the market approaches determine value by comparing the subject company to other companies in the same industry, of the same size, and/or within the same region.

In determining which of these approaches to use, the valuation professional must exercise discretion. Each technique has advantages and drawbacks, which must be considered when applying those techniques to a particular subject company. Most treatises and court decisions encourage the valuator to consider more than one technique, which must be reconciled with each other to arrive at a value conclusion. A measure of common sense and a good grasp of mathematics is helpful.

INCOME APPROACHES

The income approaches determine fair market value by multiplying the benefit stream generated by the subject company times a discount or capitalization rate. The discount or capitalization rate converts the stream of benefits into present value. There are several different income approaches, including capitalization of earnings or cash flows, discounted future cash flows (“DCF”), and the excess earnings method (which is a hybrid of asset and income approaches). Most of the income approaches consider the subject company’s historical financial data; only the DCF method requires the subject company to provide projected financial data. Most of the income approaches look to the company’s adjusted historical financial data for a single period; only DCF requires data for multiple future periods. The discount or capitalization rate must be matched to the type of benefit stream to which it is applied. The result of a value calculation under the income approach is generally the fair market value of a controlling, marketable interest in the subject company, since the entire benefit stream of the subject company is most often valued, and the capitalization and discount rates are derived from statistics concerning public companies.

Discount or capitalization rates

A discount or capitalization rate is used to determine the present value of the expected returns of a business. The discount rate and capitalization rate are closely related to each other, but distinguishable. Generally speaking, the discount rate or capitalization rate may be defined as the yield necessary to attract investors to a particular investment, given the risks associated with that investment. The discount rate is applied only to discounted cash flow (DCF) valuations, which are based on projected business data over multiple periods of time. In DCF valuations, a series of projected cash flows is divided by the discount rate to derive the present value of the discounted cash flows. The sum of the discounted cash flows is added to a terminal value, which represents the present value of business cash flows into perpetuity. The sum of the discounted cash flows and the terminal value is the value of the business.

On the other hand, a capitalization rate is applied in methods of business valuation that are based on historical business data for a single period of time. The after-tax net cash flow capitalization rate is equal to the discount rate minus the long-term sustainable growth rate. The after-tax net cash flow of a business is divided by the capitalization rate to derive the present value. Capitalization rates may be modified so that they may be applied to after-tax net income or pre-tax cash flows or income. There are several different methods of determining the appropriate discount rates. The discount rate is composed of two elements: (1) the risk-free rate, which is the return that an investor would expect from a secure, practically risk-free investment, such as a government bond; plus (2) a risk premium that compensates an investor for the relative level of risk associated with a particular investment in excess of the risk-free rate. Most importantly, the selected discount or capitalization rate must be consistent with stream of benefits to which it is to be applied.

Build-Up Method

The Build-Up Method is a widely-recognized method of determining the after-tax net cash flow discount rate, which in turn yields the capitalization rate. The figures used in the Build-Up Method are derived from various sources. This method is called a “build-up” method because it is the sum of risks associated with various classes of assets. It is based on the principle that investors would require a greater return on classes of assets that are more risky. The first element of an Build-Up capitalization rate is the risk-free rate, which is the rate of return for long-term government bonds. Investors who buy large-cap equity stocks, which are inherently more risky than long-term government bonds, require a greater return, so the next element of the Build-Up method is the equity risk premium. In determining a company’s value, the long-horizon equity risk premium is used because the Company’s life is assumed to be infinite. The sum of the risk-free rate and the equity risk premium yields the long-term average market rate of return on large public company stocks.

Similarly, investors who invest in small cap stocks, which are riskier than blue-chip stocks, require a greater return, called the “size premium.” Size premium data is generally available from two sources: Morningstars' (formerly Ibbotson & Associates') Stocks, Bonds, Bills & Inflation and Duff & Phelps' Risk Premium Report.

By adding the first three elements of a Build-Up discount rate, we can determine the rate of return that investors would require on their investments in small public company stocks. These three elements of the Build-Up discount rate are known collectively as the “systematic risks.”

In addition to systematic risks, the discount rate must include “unsystematic risks,” which fall into two categories. One of those categories is the “industry risk premium.” Morningstar’s yearbooks contain empirical data to quantify the risks associated with various industries, grouped by SIC industry code.

The other category of unsystematic risk is referred to as “specific company risk.” Historically, no published data has been available to quantify specific company risks. However as of late 2006, new research has been able to quantify, or isolate, this risk for publicly-traded stocks through the use of Total Beta calculations. P. Butler and K. Pinkerton have outlined a procedure using a modified Capital Asset Pricing Model (CAPM) to calculate the company specific risk premium. The model uses an equality between the standard CAPM which relies on the total beta on one side of the equation; and the firm's beta, size premium and company specific risk premium on the other. The equality is then solved for the company specific risk premium as the only unknown. While this is ground-breaking research, it has yet to be adopted and used by the valuation community at large.

It is important to understand why this capitalization rate for small, privately-held companies is significantly higher than the return that an investor might expect to receive from other common types of investments, such as money market accounts, mutual funds, or even real estate. Those investments involve substantially lower levels of risk than an investment in a closely-held company. Depository accounts are insured by the federal government (up to certain limits); mutual funds are composed of publicly-traded stocks, for which risk can be substantially minimized through portfolio diversification; and real estate almost invariably appreciates in value of long time horizons.

Closely-held companies, on the other hand, frequently fail for a variety of reasons too numerous to name. Examples of the risk can be witnessed in the storefronts on every Main Street in America. There are no federal guarantees. The risk of investing in a private company cannot be reduced through diversification, and most businesses do not own the type of hard assets that can ensure capital appreciation over time. This is why investors demand a much higher return on their investment in closely-held businesses; such investments are inherently much more risky.

Capital Asset Pricing Model (“CAP-M”)

The Capital Asset Pricing Model is another method of determining the appropriate discount rate in business valuations. The CAP-M method originated from the Nobel Prize winning studies of Harry Markowitz, James Tobin and William Sharpe. Like the Ibbotson Build-Up method, the CAP-M method derives the discount rate by adding a risk premium to the risk-free rate. In this instance, however, the risk premium is derived by multiplying the equity risk premium times “beta,” which is a measure of stock price volatility. Beta is published by various sources (including Ibbotson Associates, which was used in this valuation) for particular industries and companies. Beta is associated with the systematic risks of an investment.

One of the criticisms of the CAP-M method is that beta is derived from the volatility of prices of publicly-traded companies, which are likely to differ from private companies in their capital structures, diversification of products and markets, access to credit markets, size, management depth, and many other respects. Where private companies can be shown to be sufficiently similar to public companies, however, the CAP-M model may be appropriate.

Weighted Average Cost of Capital (“WACC”)

The weighted average cost of capital is the third major approach to determining a discount rate. The WACC method determines the subject company’s actual cost of capital by calculating the weighted average of the company’s cost of debt and cost of equity. The WACC capitalization rate must be applied to the subject company’s net cash flow to invested equity. One of the problems with this method is that the valuator may elect to calculate WACC according to the subject company’s existing capital structure, the average industry capital structure, or the optimal capital structure. Such discretion detracts from the objectivity of this approach, in the minds of some critics.

Once the capitalization or discount rate is determined, it must be applied to an appropriate economic income streams: pretax cash flow, aftertax cash flow, pretax net income, after tax net income, excess earnings, projected cash flow, etc. The result of this formula is the indicated value before discounts. Before moving on to calculate discounts, however, the valuation professional must consider the indicated value under the asset and market approaches.

Careful matching of the discount rate to the appropriate measure of economic income is critical to the accuracy of the business valuation results. Net cash flow is a frequent choice in professionally conducted business appraisals. The rationale behind this choice is that this earnings basis corresponds to the equity discount rate derived from the Build-Up or CAP-M models: the returns obtained from investments in publicly traded companies can easily be represented in terms of net cash flows. At the same time, the discount rates are generally also derived from the public capital markets data.

Asset-based approaches

The value of asset-based analysis a business is equal to the sum of its parts. That is the theory underlying the asset-based approaches to business valuation. The asset approach to business valuation is based on the principle of substitution: no rational investor will pay more for the business assets than the cost of procuring assets of similar economic utility. In contrast to the income-based approaches, which require the valuation professional to make subjective judgments about capitalization or discount rates, the adjusted net book value method is relatively objective. Pursuant to accounting convention, most assets are reported on the books of the subject company at their acquisition value, net of depreciation where applicable. These values must be adjusted to fair market value wherever possible. The value of a company’s intangible assets, such as goodwill, is generally impossible to determine apart from the company’s overall enterprise value. For this reason, the asset-based approach is not the most probative method of determining the value of going business concerns. In these cases, the asset-based approach yields a result that is probably lesser than the fair market value of the business. In considering an asset-based approach, the valuation professional must consider whether the shareholder whose interest is being valued would have any authority to access the value of the assets directly. Shareholders own shares in a corporation, but not its assets, which are owned by the corporation. A controlling shareholder may have the authority to direct the corporation to sell all or part of the assets it owns and to distribute the proceeds to the shareholder(s). The non-controlling shareholder, however, lacks this authority and cannot access the value of the assets. As a result, the value of a corporation's assets is rarely the most relevant indicator of value to a shareholder who cannot avail himself of that value. Adjusted net book value may be the most relevant standard of value where liquidation is imminent or ongoing; where a company earnings or cash flow are nominal, negative or worth less than its assets; or where net book value is standard in the industry in which the company operates. None of these situations applies to the Company which is the subject of this valuation report. However, the adjusted net book value may be used as a “sanity check” when compared to other methods of valuation, such as the income and market approaches.

Market approaches

The market approach to business valuation is rooted in the economic principle of competition: that in a free market the supply and demand forces will drive the price of business assets to a certain equilibrium. Buyers would not pay more for the business, and the sellers will not accept less, than the price of a comparable business enterprise. It is similar in many respects to the “comparable sales” method that is commonly used in real estate appraisal. The market price of the stocks of publicly traded companies engaged in the same or a similar line of business, whose shares are actively traded in a free and open market, can be a valid indicator of value when the transactions in which stocks are traded are sufficiently similar to permit meaningful comparison.

The difficulty lies in identifying public companies that are sufficiently comparable to the subject company for this purpose. Also, as for a private company, the equity is less liquid (in other words its stocks are less easy to buy or sell) than for a public company, its value is considered to be slightly lower than such a market-based valuation would give

Guideline Public Company method

The Guideline Public Company method entails a comparison of the subject company to publicly traded companies. The comparison is generally based on published data regarding the public companies’ stock price and earnings, sales, or revenues, which is expressed as a fraction known as a “multiple.” If the guideline public companies are sufficiently similar to each other and the subject company to permit a meaningful comparison, then their multiples should be nearly equal. The public companies identified for comparison purposes should be similar to the subject company in terms of industry, product lines, market, growth, and risk.

Transaction Method or Direct Market Data Method

Using this method, the valuation analyst may determine market multiples by reviewing published data regarding actual transactions involving either minority or controlling interests in either publicly traded or closely held companies. In judging whether a reasonable basis for comparison exists, the valuation analysis must consider: (1) the similarity of qualitative and quantitative investment and investor characteristics; (2) the extent to which reliable data is known about the transactions in which interests in the guideline companies were bought and sold; and (3) whether or not the price paid for the guideline companies was in an arms-length transaction, or a forced or distressed sale.

Discounts and premiums

The valuation approaches yield the fair market value of the Company as a whole. In valuing a minority, non-controlling interest in a business, however, the valuation professional must consider the applicability of discounts that affect such interests. Discussions of discounts and premiums frequently begin with a review of the “levels of value.” There are three common levels of value: controlling interest, marketable minority, and non-marketable minority. The intermediate level, marketable minority interest, is lesser than the controlling interest level and higher than the non-marketable minority interest level. The marketable minority interest level represents the perceived value of equity interests that are freely traded without any restrictions. These interests are generally traded on the New York Stock Exchange, AMEX, NASDAQ, and other exchanges where there is a ready market for equity securities. These values represent a minority interest in the subject companies – small blocks of stock that represent less than 50% of the company’s equity, and usually much less than 50%. Controlling interest level is the value that an investor would be willing to pay to acquire more than 50% of a company’s stock, thereby gaining the attendant prerogatives of control. Some of the prerogatives of control include: electing directors, hiring and firing the company’s management and determining their compensation; declaring dividends and distributions, determining the company’s strategy and line of business, and acquiring, selling or liquidating the business. This level of value generally contains a control premium over the intermediate level of value, which typically ranges from 25% to 50%. An additional premium may be paid by strategic investors who are motivated by synergistic motives. Non-marketable, minority level is the lowest level on the chart, representing the level at which non-controlling equity interests in private companies are generally valued or traded. This level of value is discounted because no ready market exists in which to purchase or sell interests. Private companies are less “liquid” than publicly-traded companies, and transactions in private companies take longer and are more uncertain. Between the intermediate and lowest levels of the chart, there are restricted shares of publicly-traded companies. Despite a growing inclination of the IRS and Tax Courts to challenge valuation discounts , Shannon Pratt suggested in a scholarly presentation recently that valuation discounts are actually increasing as the differences between public and private companies is widening . Publicly-traded stocks have grown more liquid in the past decade due to rapid electronic trading, reduced commissions, and governmental deregulation. These developments have not improved the liquidity of interests in private companies, however. Valuation discounts are multiplicative, so they must be considered in order. Control premiums and their inverse, minority interest discounts, are considered before marketability discounts are applied.

Discount for lack of control

The first discount that must be considered is the discount for lack of control, which in this instance is also a minority interest discount. Minority interest discounts are the inverse of control premiums, to which the following mathematical relationship exists: MID = 1 – [ 1 / (1 + CP)] The most common source of data regarding control premiums is the Control Premium Study, published annually by Mergerstat since 1972. Mergerstat compiles data regarding publicly announced mergers, acquisitions and divestitures involving 10% or more of the equity interests in public companies, where the purchase price is $1 million or more and at least one of the parties to the transaction is a U.S. entity. Mergerstat defines the “control premium” as the percentage difference between the acquisition price and the share price of the freely-traded public shares five days prior to the announcement of the M&A transaction. While it is not without valid criticism, Mergerstat control premium data (and the minority interest discount derived therefrom) is widely accepted within the valuation profession.

Discount for lack of marketability

Another factor to be considered in valuing closely held companies is the marketability of an interest in such businesses. Marketability is defined as the ability to convert the business interest into cash quickly, with minimum transaction and administrative costs, and with a high degree of certainty as to the amount of net proceeds. There is usually a cost and a time lag associated with locating interested and capable buyers of interests in privately-held companies, because there is no established market of readily-available buyers and sellers. All other factors being equal, an interest in a publicly traded company is worth more because it is readily marketable. Conversely, an interest in a private-held company is worth less because no established market exists. The IRS Valuation Guide for Income, Estate and Gift Taxes, Valuation Training for Appeals Officers acknowledges the relationship between value and marketability, stating: “Investors prefer an asset which is easy to sell, that is, liquid.” The discount for lack of control is separate and distinguishable from the discount for lack of marketability. It is the valuation professional’s task to quantify the lack of marketability of an interest in a privately-held company. Because, in this case, the subject interest is not a controlling interest in the Company, and the owner of that interest cannot compel liquidation to convert the subject interest to cash quickly, and no established market exists on which that interest could be sold, the discount for lack of marketability is appropriate. Several empirical studies have been published that attempt to quantify the discount for lack of marketability. These studies include the restricted stock studies and the pre-IPO studies. The aggregate of these studies indicate average discounts of 35% and 50%, respectively. Some experts believe the Lack of Control and Marketabilty discounts can aggregate discounts for as much as ninety percent of a Company's fair market value, specifically with family owned companies.

Restricted stock studies

Restricted stocks are equity securities of public companies that are similar in all respects to the freely traded stocks of those companies except that they carry a restriction that prevents them from being traded on the open market for a certain period of time, which is usually one year (two years prior to 1990). This restriction from active trading, which amounts to a lack of marketability, is the only distinction between the restricted stock and its freely-traded counterpart. Restricted stock can be traded in private transactions and usually do so at a discount. The restricted stock studies attempt to verify the difference in price at which the restricted shares trade versus the price at which the same unrestricted securities trade in the open market as of the same date. The underlying data by which these studies arrived at their conclusions has not been made public. Consequently, it is not possible when valuing a particular company to compare the characteristics of that company to the study data. Still, the existence of a marketability discount has been recognized by valuation professionals and the Courts, and the restricted stock studies are frequently cited as empirical evidence. Notably, the lowest average discount reported by these studies was 26% and the highest average discount was 45%.

Option pricing

In addition to the restricted stock studies, U.S. publicly traded companies are able to sell stock to offshore investors (SEC Regulation S, enacted in 1990) without registering the shares with the Securities and Exchange Commission. The offshore buyers may resell these shares in the United States, still without having to register the shares, after holding them for just 40 days. Typically, these shares are sold for 20% to 30% below the publicly traded share price. Some of these transactions have been reported with discounts of more than 30%, resulting from the lack of marketability. These discounts are similar to the marketability discounts inferred from the restricted and pre-IPO studies, despite the holding period being just 40 days. Studies based on the prices paid for options have also confirmed similar discounts. If one holds restricted stock and purchases an option to sell that stock at the market price (a put), the holder has, in effect, purchased marketability for the shares. The price of the put is equal to the marketability discount. The range of marketability discounts derived by this study was 32% to 49%.

Pre-IPO studies

Another approach to measure the marketability discount is to compare the prices of stock offered in initial public offerings (IPOs) to transactions in the same company’s stocks prior to the IPO. Companies that are going public are required to disclose all transactions in their stocks for a period of three years prior to the IPO. The pre-IPO studies are the leading alternative to the restricted stock stocks in quantifying the marketability discount. The pre-IPO studies are sometimes criticized because the sample size is relatively small, the pre-IPO transactions may not be arm’s length, and the financial structure and product lines of the studied companies may have changed during the three year pre-IPO window.

Applying the studies

The studies confirm what the marketplace knows intuitively: Investors covet liquidity and loathe obstacles that impair liquidity. Prudent investors buy illiquid investments only when there is a sufficient discount in the price to increase the rate of return to a level which brings risk-reward back into balance. The referenced studies establish a reasonable range of valuation discounts from the mid-30%s to the low 50%s. The more recent studies appeared to yield a more conservative range of discounts than older studies, which may have suffered from smaller sample sizes. Another method of quantifying the lack of marketability discount is the Quantifying Marketability Discounts Model (QMDM).

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Financial Modeling

2008-04-17T05:03:06+02:00

FINANCIAL MODELING

Financial modeling is a process of forecasting performance of a certain asset, using relationships among operating, investing, and financing variables. The central aim of all financial modeling is valuation under uncertainty: how to estimate the value of a security when its future trajectory, or the trajectory of the other securities or economic variables it depends on, is unknown. Usually, financial modeling requires a great deal of spreadsheet work.

Financial Modeling Application

 Business valuation, especially discounted cash flow
 Cost of capital or WACC
 Modeling the term structure of interest rate and credit spread
 Option pricing
 Real options
 Risk modeling
 Portfolio problems

Standard and Premise of Business Value

Reasons for Business Valuation

Fair market value

Elements of business valuation

Economic conditions

Financial Analysis

Normalization of financial statements

The most common normalization adjustments fall into the following four categories:

Income, Asset and Market Approaches

Income approaches

Discount or capitalization rates

Build-Up Method

Capital Asset Pricing Model (“CAP-M”)

Weighted Average Cost of Capital (“WACC”)

Asset-based approaches

Market approaches

Guideline Public Company method

Transaction Method or Direct Market Data Method

The most widely used transactional databases include:

Institute of Business Appraisers (smaller companies)
BIZCOMPS® (smaller companies)
Pratt's Stats® (smaller to mid-sized companies)
Public Stats™ (larger companies)
DoneDeals® (larger companies)
Alacra (larger companies)

Discounts and premiums

Discount for lack of control

Discount for lack of marketability

Restricted stock studies

Option pricing

Pre-IPO studies

Applying the studies

DISCOUNTED CASH FLOW

In finance, the discounted cash flow (or DCF) approach describes a method to value a project, company, or financial asset using the concepts of the time value of money. All future cash flows are estimated and discounted to give them a present value. The discount rate used is generally the appropriate cost of capital, and incorporates judgments of the uncertainty (riskiness) of the future cash flows.

FV=PV (1+i)n

DPV=FV/(1+i)n

COST OF CAPITAL

The cost of capital for a firm is a weighted sum of the cost of equity and the cost of debt (see Capital investment decisions). It is also known as the "Hurdle Rate" or "Discount Rate".

Capital (money) used to fund a business should earn returns for the capital owner who risked his/her saved money. For an investment to be worthwhile the projected return on capital must be greater than the cost of capital. Otherwise stated, the risk-adjusted return on capital (that is, incorporating not just the projected returns, but the probabilities of those projections) must be higher than the cost of capital.

The cost of debt is relatively simple to calculate, as it is composed of the rate of interest paid. In practice, the interest-rate paid by the company will include the risk-free rate plus a risk component, which itself incorporates a probable rate of default (and amount of recovery given default). For companies with similar risk or credit ratings, the interest rate is largely exogenous.

Cost of equity is more challenging to calculate as equity does not pay a set return to its investors. Similar to the cost of debt, the cost of equity is broadly defined as the risk-weighted projected return required by investors, where the return is largely unknown. The cost of equity is therefore inferred by comparing the investment to other investments with similar risk profiles to determine the "market" cost of equity.

The cost of capital is often used as the discount rate, the rate at which projected cash flow will be discounted to give a present value or net present value.

Cost of debt

The cost of debt is computed by taking the rate on a non-defaulting bond whose duration matches the term structure of the corporate debt, then adding a default premium. This default premium will rise as the amount of debt increases (since the risk rises as the amount of debt rises). Since in most cases debt expense is a deductible expense, the cost of debt is computed as an after tax cost to make it comparable with the cost of equity (earnings are after-tax as well). Thus, for profitable firms, debt is discounted by the tax rate. Basically this is used for large corporations only.

Cost of equity

Cost of equity = Risk free rate of return + Premium expected for risk

Expected return

The expected return can be calculated as the "dividend capitalization model", which is (dividend per share / price per share) + growth rate of dividends (that is, dividend yield + growth rate of dividends).

Capital asset pricing model

The capital asset pricing model (CAPM) is used in finance to determine a theoretically appropriate price of an asset such as a security. The expected return on equity according to the capital asset pricing model. The market risk is normally characterized by the β parameter. Thus, the investors would expect (or demand) to receive:

WEIGHTED AVERAGE COST OF CAPITAL

The Weighted Average Cost of Capital (WACC) is used in finance to measure a firm's cost of capital.

The total capital for a firm is the value of its equity (for a firm without outstanding warrants and options, this is the same as the company's market capitalization) plus the cost of its debt (the cost of debt should be continually updated as the cost of debt changes as a result of interest rate changes). Notice that the "equity" in the debt to equity ratio is the market value of all equity, not the shareholders' equity on the balance sheet.

Calculation of WACC is an iterative procedure which requires estimation of the fair market value of equity capital

CAPITAL STRUCTURE

Because of tax advantages on debt issuance, it will be cheaper to issue debt rather than new equity (this is only true for profitable firms, tax breaks are available only to profitable firms). At some point, however, the cost of issuing new debt will be greater than the cost of issuing new equity. This is because adding debt increases the default risk - and thus the interest rate that the company must pay in order to borrow money. By utilizing too much debt in its capital structure, this increased default risk can also drive up the costs for other sources (such as retained earnings and preferred stock) as well. Management must identify the "optimal mix" of financing – the capital structure where the cost of capital is minimized so that the firms value can be maximized.

MODIGLIANI-MILLER THEOREM

If there were no tax advantages for issuing debt, and equity could be freely issued, Miller and Modigliani showed that the value of a leveraged firm and the value of an unleveraged firm should be the same.

INTEREST

Interest is a fee paid on borrowed capital. Assets lent include money, shares, consumer goods through hire purchase, major assets such as aircraft, and even entire factories in finance lease arrangements. The interest is calculated upon the value of the assets in the same manner as upon money. Interest can be thought of as "rent on money".

The fee is compensation to the lender for foregoing other useful investments that could have been made with the loaned money. Instead of the lender using the assets directly, they are advanced to the borrower. The borrower then enjoys the benefit of using the assets ahead of the effort required to obtain them, while the lender enjoys the benefit of the fee paid by the borrower for the privilege. The amount lent, or the value of the assets lent, is called the principal. This principal value is held by the borrower on credit. Interest is therefore the price of credit, not the price of money as it is commonly - and mistakenly - believed to be. The percentage of the principal that is paid as a fee (the interest), over a certain period of time, is called the interest rate.

Interest rates and credit risk

It is increasingly recognized that the business cycle, interest rates and credit risk are tightly interrelated. The Jarrow-Turnbull model was the first model of credit risk which explicitly had random interest rates at its core. Lando (2004), Darrell Duffie and Singleton (2003), and van Deventer and Imai (2003) discuss interest rates when the issuer of the interest-bearing instrument can default.

Money and inflation
Loans, bonds, and shares have some of the characteristics of money and are included in the broad money supply.

By setting i*n, the government institution can affect the markets to alter the total of loans, bonds and shares issued. Generally speaking, a higher real interest rate reduces the broad money supply.

Open market operations in the United States

The Federal Reserve (often referred to as 'The Fed') implements monetary policy largely by targeting the federal funds rate. This is the rate that banks charge each other for overnight loans of federal funds. Federal funds are the reserves held by banks at the Fed.

Open market operations are one tool within monetary policy implemented by the Federal Reserve to steer short-term interest rates. Using the power to buy and sell treasury securities, the Open Market Desk at the Federal Reserve Bank of New York can supply the market with dollars by purchasing T-notes, hence increasing the nation's money supply. By increasing the money supply or Aggregate Supply of Funding (ASF), interest rates will fall due to the excess of dollars banks will end up with in their reserves. Excess reserves may be lent in the Fed funds market to other banks, thus driving down rates.

Credit spread options: credit call spread is a "bearish" call spread, which has more premium on the short call. A credit put spread is a "bullish" put spread and has more premium on the short put.

Credit spread (bond): In finance, a credit spread is the difference in yield between different securities due to different credit quality. The credit spread reflects the additional net yield an investor can earn from a security with more credit risk relative to one with less credit risk. The credit spread of a particular security is often quoted in relation to the yield on a credit risk-free benchmark security or reference rate.

RISK MODELING

Risk modeling refers to the use of formal econometric techniques to determine the aggregate risk in a financial portfolio. Risk modeling is one of many subtasks within the broader area of financial modeling.

Risk modeling uses a variety of techniques including market risk, Value-at-Risk (VaR), Historical Simulation (HS), or Extreme Value Theory (EVT) in order to analyze a portfolio and make forecasts of the likely losses that would be incurred for a variety of risks. Such risks are typically grouped into credit risk, liquidity risk, interest rate risk, and operational risk categories.

Many large financial intermediary firms use risk modeling to help portfolio managers assess the amount of capital reserves to maintain, and to help guide their purchases and sales of various classes of financial assets.

Formal risk modeling is required under the Basel II proposal for all the major international banking institutions by the various national depository institution regulators.

Quantitative risk analysis and modeling have become important in the light of corporate scandals in the past few years (most notably, Enron), Basel II, the revised FAS 123R and the Sarbanes-Oxley Act. In the past, risk analysis was done qualitatively but now with the advent of powerful computing software, quantitative risk analysis can be done quickly and effortlessly.

PORTFOLIO PROBLEMS

In finance, a portfolio is an appropriate mix of or collection of investments held by an institution or a private individual. In building up an investment portfolio a financial institution will typically conduct its own investment analysis, whilst a private individual may make use of the services of a financial advisor or a financial institution which offers portfolio management services. Holding a portfolio is part of an investment and risk-limiting strategy called diversification. By owning several assets, certain types of risk (in particular specific risk) can be reduced. The assets in the portfolio could include stocks, bonds, options, warrants, gold certificates, real estate, futures contracts, production facilities, or any other item that is expected to retain its value.

Portfolio management involves deciding what assets to include in the portfolio, given the goals of the portfolio owner and changing economic conditions. Selection involves deciding what assets to purchase, how many to purchase, when to purchase them, and what assets to divest. These decisions always involve some sort of performance measurement, most typically expected return on the portfolio, and the risk associated with this return (i.e. the standard deviation of the return). Typically the expected return from portfolios of different asset bundles are compared.

Porfolio formation
Many strategies have been developed to form a portfolio.

 equally-weighted portfolio
 capitalization-weighted portfolio
 price-weighted portfolio
 optimal portfolio (for which the Sharpe ratio is highest)

VALUATION OF OPTIONS

Black–Scholes:

The term Black–Scholes refers to three closely related concepts:

 The Black–Scholes model is a mathematical model of the market for an equity, in which the equity's price is a stochastic process.
 The Black–Scholes PDE is a partial differential equation which (in the model) must be satisfied by the price of a derivative on the equity.
 The Black–Scholes formula is the result obtained by solving the Black-Scholes PDE for European put and call options.

Binomial options pricing model: In finance, the binomial options pricing model (BOPM) provides a generalisable numerical method for the valuation of options. The binomial model was first proposed by Cox, Ross and Rubinstein (1979). Essentially, the model uses a "discrete-time" model of the varying price over time of the underlying financial instrument. Option valuation is then computed via application of the risk neutrality assumption over the life of the option, as the price of the underlying instrument evolves.

Monte Carlo option model: In mathematical finance, a Monte Carlo option model uses Monte Carlo methods to calculate the value of an option with multiple sources of uncertainty or with complicated features.

REAL OPTIONS ANALYSIS

In corporate finance, real options analysis or ROA applies put option and call option valuation techniques to capital budgeting decisions.[1]

A real option is the right, but not the obligation, to undertake some business decision, typically the option to make a capital investment. For example, the opportunity to invest in the expansion of a firm's factory is a real option. In contrast to financial options, a real option is not often tradeable—e.g. the factory owner cannot sell the right to extend his factory to another party, only he can make this decision; however, some real options can be sold, e.g., ownership of a vacant lot of land is a real option to develop that land in the future. Some real options are proprietory (owned or exercisable by a single individual or a company); others are shared (can be exercised by many parties). Therefore, a project may have a portfolio of embedded real options; some of them can be mutually exclusive.

The terminology "real option" is relatively new, whereas business operators have been making capital investment decisions for centuries. However, the description of such opportunities as real options has occurred at the same time as thinking about such decisions in new, more analytically-based, ways. As such, the terminology "real option" is closely tied to these new methods. The term "real option" was coined by Professor Stewart Myers at the MIT Sloan School of Management; this happened most likely around 1977.

The concept of real options was popularized by Michael J. Mauboussin, the chief U.S. investment strategist for Credit Suisse First Boston and an adjunct professor of finance at the Columbia School of Business. Mauboussin uses real options in part to explain the gap between how the stock market prices some businesses and the "intrinsic value" for those businesses as calculated by traditional financial analysis, specifically discounted cash flows.

Additionally, with real option analysis, uncertainty inherent in investment projects is usually accounted for by risk-adjusting probabilities (a technique known as the equivalent martingale approach). Cash flows can then be discounted at the risk-free rate. With regular DCF analysis, on the other hand, this uncertainty is accounted for by adjusting the discount rate, using e.g. the cost of capital) or the cash flows (using certainty equivalents). These methods normally do not properly account for changes in risk over a project's lifecycle and fail to appropriately adapt the risk adjustment. More importantly, the real options approach forces decision makers to be more explicit about the assumptions underlying their projections.

Generally, the most widely used methods are: Closed form solutions, partial differential equations, and the binomial lattices. In business strategy, real options have been advanced by the construction of option space, where volatility is compared with value-to-cost, NPVq. Latest advances in real option valuation are models that incorporate fuzzy logic and option valuation in fuzzy real option valuation models.

Real options are a field of academic research, and at the present one of the leading names in academic real options is Professor Lenos Trigeorgis (University of Cyprus). An academic conference on real options is organized yearly (Annual International Conference on Real Options).

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Tell about Yourself

2005-11-07T17:37:24+01:00

Interview Skills for the Job Hungry

For many of us the first time we face the scrutiny of a 'serious' interview panel is when we try to convince a department to take us on as a PhD student. You may have run the interview gauntlet before then, for summer jobs for example, but the stakes--a career in science, or not--have probably never been so high. And as you progress--applying for postdocs, fellowships, and (whisper it!) permanent academic positions, the pressure just keeps piling on.

In an interview you may have as little as half an hour to give a stunning, or at least solid, answer to the one main question from each panel member. There could easily be six or more of them, and not surprisingly the number of people gazing at you from across the table seems to increase the higher the profile of the job. At the other extreme you could be in for a 2-hour grilling session when the challenge is to stay alert and sharp right until the end. But whatever the format or duration of your ordeal you need to develop a strategy that ensures you come up with the goods on your big day.

You would be amazed at how many people just turn up for interviews and give the first answers that come into their heads. This usually has disastrous consequences for their chances of getting the job. Worse still, some people have a well thought out strategy that vanishes as soon as the door to the interview room opens. Interviews do that to people.

In many ways an interview is like an oral examination. So why not prepare as you would for an exam? You don't know the questions beforehand but you can revise and try to second guess what might be asked. But most importantly, make sure you give the right performance to get the maximum mark--all the revision in the world counts for diddly squat if you lose your self-control when you find yourself 'on the hook'. I find the knack to a successful interview is to practice being both relaxed and alert. Practice is particularly essential if you feel these two states of mind are mutually exclusive.

What the panel is testing is obvious:

a) Do they believe you can do the job well?

How can you expect the interview panel to pin down your good qualities if you're not sure of them yourself? You also need to be able to turn your not-so-positive attributes into something more flattering (for example, you may have chaotic organisational skills, but are finding tremendous help in the form of lists) or demonstrate that they are outweighed by far by your skills in other areas. So get the facts about yourself clear in your mind. You may know you are strong in the lab but weak on writing up. Or you may be an excellent lecturer but poor on project management. However your SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis shapes up, make sure you've sussed yourself out thoroughly and honestly before you start. Getting constructive criticism from colleagues will undoubtedly help a lot.

b) Do they like the look of you?

It's true to say it's called an 'interview' because they call you 'in to view' you. Of course this has more to do with your attitude than with your haircut or the colour of your tie or blouse. You could seriously harm your chances with something as trivial as not smiling at all during the interview. This will be interpreted as either that you are not able to cope under pressure or that you were born miserable. Not good.

You are a happy person and you are not under pressure. You are relaxed, confident. You are likely to get lots of other offers. You are on your way to the top. This is the impression you want to create. This is the head-job you need to set in concrete in your mind before you walk through that door.

c) Do you show any strong contra-indications for either a) or b)?

Just one 'no-no' can turn the panel against you even if they quite like you in all other respects.

In a nutshell, for the whole interview never cease to be ENTHUSIASTIC (you're relaxed, so smile a little), ATTENTIVE (you are alert, maintaining good eye-contact and nodding a fair bit), and POSITIVE (give forward-looking answers).

WARNING! Do not go to the other extreme and appear cocky. No one likes a cocky person. Even if your CV is strong and you've already come across well during the interview, a little humbleness is always a very positive thing. Expressing a willingness to learn more or admitting a small weakness will make you appear honest. It will also create the impression that with you, what you see is what you get. They'll believe everything else you've said is fair comment and probably true.

I wouldn't dare to give any advice to women on how to dress appropriately for the occasion, but I am prepared to, humbly, stick my neck out for the men. Are you going for a financial services job? No, so don't dress like it. Yes, wear a jacket and tie, but guys, leave the power suit in the wardrobe. You'll look and feel overdressed. Aim for Indiana Jones at a conference dinner, not a young executive in a big multinational.

My last piece of advice would be to never let your guard down. Your sociability will almost certainly be tested over lunch. They'll ask people who met you on the tour of the department what they thought of you after you've left. Everyone you encounter needs to be impressed, from the porter to the head of department. So be prepared to think on your feet and charm them all. You'll end up feeling exhausted, but if you get your head straight before you start you'll find it much easier to sell yourself. And with the best of luck, you might just get that job.

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