Deck 16: Financial Management and Securities Markets Appendices

Question 1

Choosing among Projects
Background
As the senior executive in charge of exploration for High Octane Oil Co., you are constantly looking for projects that will add to the company's profitability-without increasing the company's risk. High Octane Oil is an international oil company with operations in Latin America, the Middle East, Africa, the United States, and Mexico. The company is one of the world's leading experts in deep-water exploration and drilling. High Octane currently produces 50 percent of its oil in the United States, 25 percent in the Middle East, 5 percent in Africa, 10 percent in Latin America, and 10 percent in Mexico. You are considering six projects from around the world.
Project 1 -Your deep-water drilling platform in the Gulf of Mexico is producing at maximum capacity from the Valdez oil field, and High Octane's geological engineers think there is a high probability that there is oil in the Sanchez field, which is adjacent to Valdez. They recommend drilling a new series of wells. Once commercial quantities of oil have been discovered, it will take two more years to build the collection platform and pipelines. It will be four years before the discovered oil gets to the refineries.
Project 2 -The Brazilian government has invited you to drill on some unexplored tracts in the middle of the central jungle region. There are roads to within 50 miles of the tract and British Petroleum has found oil 500 miles away from this tract. It would take about three years to develop this property and several more years to build pipelines and pumping stations to carry the oil to the refineries. The Brazilian government wants 20 percent of all production as its fee for giving High Octane Oil Co. the drilling rights or a $500 million up-front fee and 5 percent of the output.
Project 3 -Your fields in Saudi Arabia have been producing oil for 50 years. Several wells are old, and the pressure has diminished. Your engineers are sure that if you were to initiate high-pressure secondary recovery procedures, you would increase the output of these existing wells by 20 percent. High-pressure recovery methods pump water at high pressure into the underground limestone formations to enhance the movement of petroleum toward the surface.
Project 4 -Your largest oil fields in Alaska have been producing from only 50 percent of the known deposits. Your geological engineers estimate that you could open up 10 percent of the remaining fields every two years and offset your current declining production from existing wells. The pipeline capacity is available and, while you can only drill during six months of the year, the fields could be producing oil in three years.
Project 5 -Some of High Octane's west Texas oil fields produce in shallow stripper wells of 2,000- to 4,000-foot depths. Stripper wells produce anywhere from 10 to 2,000 barrels per day and can last for six months or 40 years. Generally, once you find a shallow deposit, there is an 80 percent chance that offset wells will find more oil. Because these wells are shallow, they can be drilled quickly at a low cost. High Octane's engineers estimate that in your largest tract, which is closest to the company's Houston refinery, you could increase production by 30 percent for the next 10 years by increasing the density of the wells per square mile.
Project 6 -The government of a republic in Russia has invited you to drill for oil in Siberia. Russian geologists think that this oil field might be the largest in the world, but there have been no wells drilled and no infrastructure exists to carry oil if it should be found. The republic has no money to help you build the infrastructure but if you find oil, it will let you keep the first five years' production before taking its 25 percent share. Knowing that oil fields do not start producing at full capacity for many years after initial production, your engineers are not sure that your portion of the first five years of production will pay for the infrastructure they must build to get the oil to market. The republic also has been known to have a rather unstable government, and the last international oil company that began this project left the country when a new government demanded a higher than originally agreed-upon percentage of the expected output. If this field is in fact the largest in the world, High Octane's supply of oil would be ensured well into the 21st century.
Task
1. Working in groups, rank the six projects from lowest risk to highest risk.
2. Given the information provided, do the best you can to rank the projects from lowest cost to highest cost.
3. What political considerations might affect your project choice?
4. If you could choose one project, which would it be and why?
5. If you could choose three projects, which ones would you choose? In making this decision, consider which projects might be highly correlated to High Octane Oil's existing production and which ones might diversify the company's production on a geographical basis.

Answer 1

The senior executive in-charge of exploration, one has to be accountable for company's profitability in minimum possible cost. The given company is one of the leading deep-water experts in exploration and drilling. According to the given scenario, each project is offering the company to explore. Each project is demanding its share differently. One of the projects is asking for a limited percentage share, another one is asking a fixed amount and similarly the demands are put forward by all the projects.
One can't choose to work with all the six projects simultaneously. Besides this each and every aspect should be considered while making decision. As per the costing is considered, the in-charge look after the scenario provided in each project and chooses the most cost-effective project.
The cost wise ranking from lowest cost to highest cost is as follows:
Rank 1: Project 1 - This drilling platform is already showing its maximum capacity; the capacity can further be extended by high percentage if the drilling in the adjacent field proves fruitful. The probability of getting successful results is very high as per engineers. The cost will be lowest as the drilling is to be done in the adjacent field.
Rank 2: Project 4 - Since the fields present in Alaska are already under company's exploration. At present the fields are just producing 50% of their exact potential. Every 2 years 10% of the remaining 50% can be gained with further proper explorations. The costing of this project will be lowest as no share is to be given to anyone.
Rank 3: Project 3 - The fields provided in this project are located in Saudi Arabia which is already under company's exploration. The fields are old and producing good profit till now. With the help of high pressure these fields can provide 20% more production. The cost is lower than other projects as no extra share is to be given to anyone.
Rank 4: Project 5 - The probability of getting more profit from Texas Oil fields is high. The fields are shallow and so the drilling cost will be low. The production can be increased by 30% for further 10 years which is a long duration to earn more profit with low investment cost.
Rank 5: Project 2 - The offer has been provided by Brazilian government. Though it is located near to the oil tract, the given field is not sure of having oil refineries. Let us suppose there is a oil refinery then also the project's cost will be higher than the above ones as the government demands its share in the form of 20% of the production or $500 plus 5% of the production.
Rank 6: Project 6 - The project has been offered by Russia. They are not providing any monetary help in creating infrastructure, the government is hoping to have a largest refinery in the world but prior to this no exploration has been taken place from their own side. Though they are not claiming any share till 5 years, there is no fixed government. The new government may apply new rules after coming into practice. This project is risky and even high investment is required.
The oil drilling and exploratory are the key projects in boosting a country's economy. Though oil refineries play an important role in export business, it is not an easy task to get political approval. There are various factors which restrict drilling part. If a company which is involved in drilling business knows that a particular place has oil under it then also it can't just start drilling and exploring. Each thing has to be documented and approved.
While choosing which project is profitable, the company needs to consider costing, area and approval. The political constraints involved in the project choice are as follows:
Negative impact on environment : Drilling and exploration use a series of equipment in the process. It increases the pollution level. This can't be done in a residential area. The areas with high density can't be used. The area should lie far away from the residential complexes so that the people living over there should not face any problem.
Drilling new wells : The companies doing drilling are supposed to complete a lot of documentation before starting drilling at a new place. Advance notification requirements sometimes create problem just before initiating the project which proves a total loss for the company.
Health and Safety Standards : It is yet another thing which is to be taken care of. The employees working with the company have to be very sure about their safety measures. Fire explosions and chemical exposures are quite common while drilling oil wells. The areas where already drilling has been taken place are less risky to work with.
All above constraints are considered while choosing the projects. That is why the projects which are already under continuation is kept on the top. The projects which required approval and percentage demand in profit are kept at the bottom.
The senior executive in-charge of a company looks for planning and directing the projects. They are liable to take correct decisions which can improve company's profit. They consider each aspect before investing in any of the project. Be it weather constraints or political restrictions, everything must be analysed.
If one project is to be chosen from 6 given projects, the most preferable one would be project 1 which is in Gulf of Mexico. The recommended drilling area lies adjacent to a deep-water drilling platform which is already producing its maximum capacity. Though there is not a hundred percentage surety of getting oil after drilling, it shows a high probability. Since adjacent field is producing oil at its full capacity, the area when drilled is supposed to produce even more oil which in turn produces more profit. The investment cost is also going to be low as the infrastructure is already in favour of the refinery. There is no need to give any extra share to anyone as no new area is been drilled. Currently only 10% of the production is going on in Mexico. If the refinery will produce more profit even the percentage can be increased.
All above reasons make project 1 to be the perfect choice of investment. It is cost-effective. It has high probability of providing more profit. It can increase the percentage production in Mexico making it the new developing destination for drilling purpose. The more diverse regions the company has, the more means of earning and development is there.
While choosing projects for the oil company, many factors are to be considered. First priority being the location. If the company is sure about the location means if the company is sure that a specific location has crude oil inside and can be refined, that location would be perfect for investment. It sounds so easy, but it is not enough, after selecting the location, the approval of the government is needed. Afterwards, equipment to carry out the drilling process are required. The importance of cost of investment can't be denied.
Out of the given 6 projects, if three would be chosen, one should go for Project 1, Project 2 and Project 3. The reasons for choosing these three projects are as follows:
Project 1: The project is lying adjacent to one of the projects which is already under progress. The Gulf of Mexico is the perfect location as well. There is a high chance of getting good profits if the wells will be drilled as per planning. This site is tried and tested. The company is making a good profit from its existing field in this area.
Project 2 : This project is offered by Brazilian government that too just 500 miles away from an existing oil refinery. It shows the percentage of getting good oil refinery in the unexplored tract is very high. Since, the government itself is approaching the company, there will be no political restriction which an advantage would be. Besides this, geographically also it would expand the company's exploration.
Project 3 : This project requires investment in one of the existing projects in Saudi Arabia. This is one of the old oil refineries which has provided much profit to the company. Still it is source of profit and can even improve if small investment is done on high pressure secondary recovery procedures.
The above choice has been based both on the existing production and geographical expansion. The first and third projects are chosen on the basis of existing production which can further be improved. The second project has been chosen on the grounds of geographical expansion. Brazil is a country lying in South America region which till now has not been explored by the company and hence this will help the company in its expansion.

Question 2

Describe the various types of marketable securities.

Answer 2

Marketable Securities are the financial instruments that one can easily buy or sell in the market. The maturities of these financial instruments are usually less than a year. Since they have high liquidity, these investments are good for businesses that need quick cash. Some examples of these financial instruments are government bonds, common stock or certificates of deposit.
There are 3 types of Marketable Securities that are Treasury Bill which are short-term debt obligations the U.S. government sells to raise money. Second is Commercial Certificates of Deposit which is the certificate of deposit issued by commercial banks and brokerage companies, available in minimum amounts of $100,000 which may be traded prior to maturity. Third is Commercial Paper which is a written promise one company to another to pay a specific amount of money.
To conclude, there are securities that are not liquid assets and liquid assets that are not securities. For a security to qualify as marketable security, it must fulfill the requirement of being a financial security - give a right to ownership, carry a price, represent interest as an owner, and allow an opportunity to the buyer to profit from the investment.

Question 3

JPMorgan Struggles to Repair Reputation
The London Whale scandal is making waves for JPMorgan. A trader known as the London Whale (because of his large portfolio and extensive trading) became the center of a trading loss that cost the bank more than $6 billion. Two traders in JPMorgan's London offices face charges from the U.S. and U.K. governments for allegedly trying to cover up the losses. While investigations have shown that top executives were not involved in a cover-up and were unaware of the bad trades, JPMorgan could face civil charges for lacking the oversight needed to prevent this kind of misconduct in its organization. Reports have indicated that one employee was in charge of ensuring proper conduct over these trades, but that the standards for oversight were so broad that they were ineffective.
As a result, the bank has paid more than $920 million in fines to several U.S. and U.K. regulators plus an additional $100 million to the Commodity Futures Trading Commission (CFTC). In addition, JPMorgan is battling this scandal while trying to come to terms with regulators on faulty mortgage securities that contributed to the 2008 financial crisis. JPMorgan paid record fines of about $13 billion, in addition to the $1 billion it paid to resolve U.K. and U.S. investigations into the Whale scandal. 6
What are some of the ethical issues involved with the JPMorgan trading scandal?

Answer 3

The company JP founded in 1799 which is primarily concerned with finance related activities which includes commercial banking, market services and investment banking.
The company went through an issue wherein the CIO of the company made a number of high risk transactions involving credit default swaps. The company was charged guilty for lacking the vision required to stop this type of misconduct in the company. As a result, it paid a huge fine to resolve U.K. and U.S. investigation.
Some of the ethical issues involved with the company trading scandal were the subsequent increase of media wherein the information easily flows out of the company in the form of media, a significant exposure to the public leading made the loss in honesty of the corporate behavior which ultimately ends up failure of the market in which the public are more interested in knowing about the companies ethical concerns.
However, when these endeavours are contrasted with the continuous moral issues recorded in the main area, it shows up the enhancements are not adequate to forestall deceptive and harming conduct inside the foundation itself. This recommends more and possibly various kinds of activities are required.

Question 4

Finance Executives Recognize the Benefits of Method's Green Efficiencies
Method is a green company in more ways than one. Not only does it sell eco-friendly household supplies, but it also generates more than $100 million in annual revenues. Thanks to companies like Method, finance executives are beginning to realize the financial benefits of going green. At a time when the prices of commodities are rapidly fluctuating, finance executives are looking for ways to cut costs. Eco-friendly options such as decreasing energy use, using recycled materials, and reducing packaging are becoming viable methods for saving money and improving efficiency. A recent poll found that 40 percent of finance executives are increasing their facilities' efficiency through better energy management, while one-third are undertaking initiatives to increase the efficiency of their shipping, including the adoption of more fuel-efficient vehicles. Method, for instance, has significantly increased its use of biodiesel trucks, which emit 20 percent less carbon and air pollutants than traditional trucks.
Method aligns its environmental objectives with its cost-saving goals. The operations and finance departments routinely work together to look at what ingredients and processes would save money while also reducing Method's environmental impact. Sometimes, this requires the company to adopt additional costs in the short run in order to save money over the long term. Method's long-term perspective, efficient operations, and popularity with customers are catching on with competitors. It is estimated that eco-friendly household supplies consist of 30 percent of household cleaning products. And as green products and operational processes increase, Method already has a head start. 2
Do you think other household supply companies are beginning to realize how green products can improve their financial conditions?

Question 5

Define working capital management.

Question 6

What can credit rating agencies do to ensure that their ratings remain objective?

Question 7

Finance Executives Recognize the Benefits of Method's Green Efficiencies
Method is a green company in more ways than one. Not only does it sell eco-friendly household supplies, but it also generates more than $100 million in annual revenues. Thanks to companies like Method, finance executives are beginning to realize the financial benefits of going green. At a time when the prices of commodities are rapidly fluctuating, finance executives are looking for ways to cut costs. Eco-friendly options such as decreasing energy use, using recycled materials, and reducing packaging are becoming viable methods for saving money and improving efficiency. A recent poll found that 40 percent of finance executives are increasing their facilities' efficiency through better energy management, while one-third are undertaking initiatives to increase the efficiency of their shipping, including the adoption of more fuel-efficient vehicles. Method, for instance, has significantly increased its use of biodiesel trucks, which emit 20 percent less carbon and air pollutants than traditional trucks.
Method aligns its environmental objectives with its cost-saving goals. The operations and finance departments routinely work together to look at what ingredients and processes would save money while also reducing Method's environmental impact. Sometimes, this requires the company to adopt additional costs in the short run in order to save money over the long term. Method's long-term perspective, efficient operations, and popularity with customers are catching on with competitors. It is estimated that eco-friendly household supplies consist of 30 percent of household cleaning products. And as green products and operational processes increase, Method already has a head start. 2
If greener operations cut company costs, how will this affect a company's current assets and liabilities?

Question 8

Surviving Rapid Growth
Glasspray Corporation is a small firm that makes industrial fiberglass spray equipment. Despite its size, the company supplies a range of firms from small mom-and-pop boatmakers to major industrial giants, both overseas and here at home. Indeed, just about every molded fiberglass resin product, from bathroom sinks and counters to portable spas and racing yachts, is constructed with the help of one or more of the company's machines.
Despite global acceptance of its products, Glasspray has repeatedly run into trouble with regard to the management of its current assets and liabilities as a result of extremely rapid and consistent increases in year-to-year sales. The firm's president and founder, Stephen T. Rose, recently lamented the sad state of his firm's working capital position: "Our current assets aren't, and our current liabilities are!" Rose shouted in a recent meeting of the firm's top officers. "We can't afford any more increases in sales! We're selling our way into bankruptcy! Frankly, our working capital doesn't!"
What are some management techniques applied to current liabilities that Glasspray might use to improve its working capital position?

Question 9

Using your local newspaper or The Wall Street Journal, find the current rates of interest on the following marketable securities. If you were a financial manager for a large corporation, which would you invest extra cash in? Which would you invest in if you worked for a small business?
a. Three-month T-bills
b. Six-month T-bills
c. Commercial certificates of deposit
d. Commercial paper
e. Eurodollar deposits
f. Money market deposits

Question 10

Morningstar Inc. Makes Investing Easier
Many individuals find stocks and bonds to be confusing, but Joe Mansueto has begun to change that by making investing easier to understand. In 1984, Mansueto founded Morningstar Inc., which provides independent investment research to individuals, financial advisors, and institutional advisors. The company's top asset is that it is independent and its assessments are based on impartial research. Although it works with advisors, its main focus is on individuals. From the beginning, Mansueto, a former stock analyst, aimed to take the chaos of the investment world and create tools that would help individuals make sense of it. With so much investment information and opportunities available, it is easy for the average person to feel lost.
The idea for Morningstar began when Mansueto realized that in order to compare funds and get enough information to begin investing effectively he would have to order prospectuses from each individual fund. The amount of information needed was overwhelming. Mansueto thought that if he could create a compendium of information for the different funds out there, it would make it much easier for the average person to invest intelligently. In 1984, Mansueto founded Morningstar Inc. and began by focusing on mutual funds. He created the Mutual Fund Sourcebook, a compilation of information on roughly 400 different mutual funds. More than two decades later, Morningstar assists more than 8.9 million individual investors with mutual funds, stocks, bonds, and more. The company employs more than 3,600 global employees, who research, write up, and rate investments along with guiding individuals toward making wise business decisions. Morningstar is dedicated to serving investors. It does not charge the companies that it rates and prides itself on maintaining an independent view. Analysts regularly compile data on more than 456,000 global investment offerings.
Morningstar uses a five star rating system to inform investors about the financial strength of investment choices. High stars, such as 4 and 5, mean that the investment choices have the highest value and are expected to have a high level of return. Lower stars, such as 1 and 2, have lower perceived value compared to their cost and are perceived to be riskier investments.
The company focuses on offering information for three different types of investment choices: mutual funds, stocks, and bonds. Mutual funds are pools of investments (often called portfolios) selected by fund managers. A mutual fund can be good for someone wanting less risk. The idea is to offset the high-risk investments by investing in multiple securities. Mutual funds are also well suited for investors who do not want to take the time or who lack the expertise to invest in individual securities. Morningstar also works with stocks and bonds. Stocks are ownerships, or stakes, in a particular company, whereas a bond is like a company IOU. A bond investor basically loans a company money with the understanding that the company will pay back the money with interest. Bonds generally carry less risk than stocks do.
Multiply all this information by the thousands of mutual funds, stocks, and bonds out there, and it is easy to see why someone might become confused when deciding where to invest. Morningstar has even geared its website toward new investors, with features such as the investing classroom, analyst picks, data tools, and articles. In a post-Enron, post-recession world, it is more critical than ever that people understand how to manage their finances and keep their debt in check. Mansueto believes firmly that investing is a key component to financial solvency. He recommends investing early, even suggesting that high school students take the plunge. According to him, it is not the amount of money a person invests that matters; it is getting started early, being consistent, and patiently waiting for initial investments to grow. 8
Why does Mansueto recommend investing early in life, even in high school?

Question 11

Do you think that credit rating agencies had the incentive to rate securities highly even if they were risky?

Question 12

What does it mean to have a line of credit at a bank?

Question 13

Surviving Rapid Growth
Glasspray Corporation is a small firm that makes industrial fiberglass spray equipment. Despite its size, the company supplies a range of firms from small mom-and-pop boatmakers to major industrial giants, both overseas and here at home. Indeed, just about every molded fiberglass resin product, from bathroom sinks and counters to portable spas and racing yachts, is constructed with the help of one or more of the company's machines.
Despite global acceptance of its products, Glasspray has repeatedly run into trouble with regard to the management of its current assets and liabilities as a result of extremely rapid and consistent increases in year-to-year sales. The firm's president and founder, Stephen T. Rose, recently lamented the sad state of his firm's working capital position: "Our current assets aren't, and our current liabilities are!" Rose shouted in a recent meeting of the firm's top officers. "We can't afford any more increases in sales! We're selling our way into bankruptcy! Frankly, our working capital doesn't!"
Normally, rapidly increasing sales are a good thing. What seems to be the problem here?

Question 14

What are fixed assets? Why is assessing risk important in capital budgeting?

Question 15

Morningstar Inc. Makes Investing Easier
Many individuals find stocks and bonds to be confusing, but Joe Mansueto has begun to change that by making investing easier to understand. In 1984, Mansueto founded Morningstar Inc., which provides independent investment research to individuals, financial advisors, and institutional advisors. The company's top asset is that it is independent and its assessments are based on impartial research. Although it works with advisors, its main focus is on individuals. From the beginning, Mansueto, a former stock analyst, aimed to take the chaos of the investment world and create tools that would help individuals make sense of it. With so much investment information and opportunities available, it is easy for the average person to feel lost.
The idea for Morningstar began when Mansueto realized that in order to compare funds and get enough information to begin investing effectively he would have to order prospectuses from each individual fund. The amount of information needed was overwhelming. Mansueto thought that if he could create a compendium of information for the different funds out there, it would make it much easier for the average person to invest intelligently. In 1984, Mansueto founded Morningstar Inc. and began by focusing on mutual funds. He created the Mutual Fund Sourcebook, a compilation of information on roughly 400 different mutual funds. More than two decades later, Morningstar assists more than 8.9 million individual investors with mutual funds, stocks, bonds, and more. The company employs more than 3,600 global employees, who research, write up, and rate investments along with guiding individuals toward making wise business decisions. Morningstar is dedicated to serving investors. It does not charge the companies that it rates and prides itself on maintaining an independent view. Analysts regularly compile data on more than 456,000 global investment offerings.
Morningstar uses a five star rating system to inform investors about the financial strength of investment choices. High stars, such as 4 and 5, mean that the investment choices have the highest value and are expected to have a high level of return. Lower stars, such as 1 and 2, have lower perceived value compared to their cost and are perceived to be riskier investments.
The company focuses on offering information for three different types of investment choices: mutual funds, stocks, and bonds. Mutual funds are pools of investments (often called portfolios) selected by fund managers. A mutual fund can be good for someone wanting less risk. The idea is to offset the high-risk investments by investing in multiple securities. Mutual funds are also well suited for investors who do not want to take the time or who lack the expertise to invest in individual securities. Morningstar also works with stocks and bonds. Stocks are ownerships, or stakes, in a particular company, whereas a bond is like a company IOU. A bond investor basically loans a company money with the understanding that the company will pay back the money with interest. Bonds generally carry less risk than stocks do.
Multiply all this information by the thousands of mutual funds, stocks, and bonds out there, and it is easy to see why someone might become confused when deciding where to invest. Morningstar has even geared its website toward new investors, with features such as the investing classroom, analyst picks, data tools, and articles. In a post-Enron, post-recession world, it is more critical than ever that people understand how to manage their finances and keep their debt in check. Mansueto believes firmly that investing is a key component to financial solvency. He recommends investing early, even suggesting that high school students take the plunge. According to him, it is not the amount of money a person invests that matters; it is getting started early, being consistent, and patiently waiting for initial investments to grow. 8
What is it about investing that Mansueto discovered is so confusing for the average investor?

Question 16

How can a company finance fixed assets?

Question 17

JPMorgan Struggles to Repair Reputation
The London Whale scandal is making waves for JPMorgan. A trader known as the London Whale (because of his large portfolio and extensive trading) became the center of a trading loss that cost the bank more than $6 billion. Two traders in JPMorgan's London offices face charges from the U.S. and U.K. governments for allegedly trying to cover up the losses. While investigations have shown that top executives were not involved in a cover-up and were unaware of the bad trades, JPMorgan could face civil charges for lacking the oversight needed to prevent this kind of misconduct in its organization. Reports have indicated that one employee was in charge of ensuring proper conduct over these trades, but that the standards for oversight were so broad that they were ineffective.
As a result, the bank has paid more than $920 million in fines to several U.S. and U.K. regulators plus an additional $100 million to the Commodity Futures Trading Commission (CFTC). In addition, JPMorgan is battling this scandal while trying to come to terms with regulators on faulty mortgage securities that contributed to the 2008 financial crisis. JPMorgan paid record fines of about $13 billion, in addition to the $1 billion it paid to resolve U.K. and U.S. investigations into the Whale scandal. 6
Why is JPMorgan facing a civil suit if executives did not have knowledge of the wrongdoing?

Question 18

What are bonds and what do companies do with them?

Question 19

How can a company speed up cash flow? Why should it?

Question 20

How can companies use equity to finance their operations and long-term growth?

Question 21

Finance Executives Recognize the Benefits of Method's Green Efficiencies
Method is a green company in more ways than one. Not only does it sell eco-friendly household supplies, but it also generates more than $100 million in annual revenues. Thanks to companies like Method, finance executives are beginning to realize the financial benefits of going green. At a time when the prices of commodities are rapidly fluctuating, finance executives are looking for ways to cut costs. Eco-friendly options such as decreasing energy use, using recycled materials, and reducing packaging are becoming viable methods for saving money and improving efficiency. A recent poll found that 40 percent of finance executives are increasing their facilities' efficiency through better energy management, while one-third are undertaking initiatives to increase the efficiency of their shipping, including the adoption of more fuel-efficient vehicles. Method, for instance, has significantly increased its use of biodiesel trucks, which emit 20 percent less carbon and air pollutants than traditional trucks.
Method aligns its environmental objectives with its cost-saving goals. The operations and finance departments routinely work together to look at what ingredients and processes would save money while also reducing Method's environmental impact. Sometimes, this requires the company to adopt additional costs in the short run in order to save money over the long term. Method's long-term perspective, efficient operations, and popularity with customers are catching on with competitors. It is estimated that eco-friendly household supplies consist of 30 percent of household cleaning products. And as green products and operational processes increase, Method already has a head start. 2
Why might Method decide to pursue greener business activities that are costly in the short run?

Question 22

What are the functions of securities markets?

Question 23

Select five of the Dow Jones Industrials from Table 16.5. Look up their earnings, dividends, and prices for the past five years. What kind of picture is presented by this information? Which stocks would you like to have owned over this past period? Do you think the next five years will present a similar picture?

Question 24

What were some of the principal causes of the most recent recession?

Question 25

Should credit rating agencies such as Standard Poor's be forced to pay for their erroneous ratings?

Question 26

Surviving Rapid Growth
Glasspray Corporation is a small firm that makes industrial fiberglass spray equipment. Despite its size, the company supplies a range of firms from small mom-and-pop boatmakers to major industrial giants, both overseas and here at home. Indeed, just about every molded fiberglass resin product, from bathroom sinks and counters to portable spas and racing yachts, is constructed with the help of one or more of the company's machines.
Despite global acceptance of its products, Glasspray has repeatedly run into trouble with regard to the management of its current assets and liabilities as a result of extremely rapid and consistent increases in year-to-year sales. The firm's president and founder, Stephen T. Rose, recently lamented the sad state of his firm's working capital position: "Our current assets aren't, and our current liabilities are!" Rose shouted in a recent meeting of the firm's top officers. "We can't afford any more increases in sales! We're selling our way into bankruptcy! Frankly, our working capital doesn't!"
List the important components of a firm's working capital. Include both current assets and current liabilities.

Question 27

Morningstar Inc. Makes Investing Easier
Many individuals find stocks and bonds to be confusing, but Joe Mansueto has begun to change that by making investing easier to understand. In 1984, Mansueto founded Morningstar Inc., which provides independent investment research to individuals, financial advisors, and institutional advisors. The company's top asset is that it is independent and its assessments are based on impartial research. Although it works with advisors, its main focus is on individuals. From the beginning, Mansueto, a former stock analyst, aimed to take the chaos of the investment world and create tools that would help individuals make sense of it. With so much investment information and opportunities available, it is easy for the average person to feel lost.
The idea for Morningstar began when Mansueto realized that in order to compare funds and get enough information to begin investing effectively he would have to order prospectuses from each individual fund. The amount of information needed was overwhelming. Mansueto thought that if he could create a compendium of information for the different funds out there, it would make it much easier for the average person to invest intelligently. In 1984, Mansueto founded Morningstar Inc. and began by focusing on mutual funds. He created the Mutual Fund Sourcebook, a compilation of information on roughly 400 different mutual funds. More than two decades later, Morningstar assists more than 8.9 million individual investors with mutual funds, stocks, bonds, and more. The company employs more than 3,600 global employees, who research, write up, and rate investments along with guiding individuals toward making wise business decisions. Morningstar is dedicated to serving investors. It does not charge the companies that it rates and prides itself on maintaining an independent view. Analysts regularly compile data on more than 456,000 global investment offerings.
Morningstar uses a five star rating system to inform investors about the financial strength of investment choices. High stars, such as 4 and 5, mean that the investment choices have the highest value and are expected to have a high level of return. Lower stars, such as 1 and 2, have lower perceived value compared to their cost and are perceived to be riskier investments.
The company focuses on offering information for three different types of investment choices: mutual funds, stocks, and bonds. Mutual funds are pools of investments (often called portfolios) selected by fund managers. A mutual fund can be good for someone wanting less risk. The idea is to offset the high-risk investments by investing in multiple securities. Mutual funds are also well suited for investors who do not want to take the time or who lack the expertise to invest in individual securities. Morningstar also works with stocks and bonds. Stocks are ownerships, or stakes, in a particular company, whereas a bond is like a company IOU. A bond investor basically loans a company money with the understanding that the company will pay back the money with interest. Bonds generally carry less risk than stocks do.
Multiply all this information by the thousands of mutual funds, stocks, and bonds out there, and it is easy to see why someone might become confused when deciding where to invest. Morningstar has even geared its website toward new investors, with features such as the investing classroom, analyst picks, data tools, and articles. In a post-Enron, post-recession world, it is more critical than ever that people understand how to manage their finances and keep their debt in check. Mansueto believes firmly that investing is a key component to financial solvency. He recommends investing early, even suggesting that high school students take the plunge. According to him, it is not the amount of money a person invests that matters; it is getting started early, being consistent, and patiently waiting for initial investments to grow. 8
How does Morningstar Inc. make investing easier for individuals?

Question 28

JPMorgan Struggles to Repair Reputation
The London Whale scandal is making waves for JPMorgan. A trader known as the London Whale (because of his large portfolio and extensive trading) became the center of a trading loss that cost the bank more than $6 billion. Two traders in JPMorgan's London offices face charges from the U.S. and U.K. governments for allegedly trying to cover up the losses. While investigations have shown that top executives were not involved in a cover-up and were unaware of the bad trades, JPMorgan could face civil charges for lacking the oversight needed to prevent this kind of misconduct in its organization. Reports have indicated that one employee was in charge of ensuring proper conduct over these trades, but that the standards for oversight were so broad that they were ineffective.
As a result, the bank has paid more than $920 million in fines to several U.S. and U.K. regulators plus an additional $100 million to the Commodity Futures Trading Commission (CFTC). In addition, JPMorgan is battling this scandal while trying to come to terms with regulators on faulty mortgage securities that contributed to the 2008 financial crisis. JPMorgan paid record fines of about $13 billion, in addition to the $1 billion it paid to resolve U.K. and U.S. investigations into the Whale scandal. 6
Describe some of the lapses in JPMorgan's oversight of its trades.