Why I Chose My Major Business Administration Essay

One day in high school, I was called down to the office. The assistant principal called me into her personal office, and when I entered, my mother was sitting before her waiting for me. Mrs. Cimino, the assistant principal, informed me that I had been slacking and my GPA was down to a 1.9. That short meeting was a much needed wakeup call and in just a year and a half, I increased my GPA to a 3.8. This was just enough to earn The American Dream Scholarship for Miami Dade College and have my first sixty credits paid for in full. I aspire to become an efficacious businessman. The reasons behind why I chose my major, Business Administration, is because there are career opportunities in a variety of fields and a range of different workplaces to choose from. For instance, marketing for a corporation or being a financial manager at a bank. My major is perfect for someone like myself who comes into college undecided on what they would want to pursue. I’m looking to become a human resource manager for a company, where I would determine the staff needs, supervise the work place, and even deal with performance issues. To be hired in human resource management, I need at least eight years of management experience, which I would want to complete at a bank and learn the financial side of business after I earn my bachelor’s degree. I would love to start my own business one day. I have countless ideas on what I feel would make me a successful entrepreneur, like owning a movie theater, orShow MoreRelatedWhy I Am A Lawyer Essay1385 Words   |  6 PagesWhen I was growing up I spent most of my time in a lawyer’s office with my grandparents to try to free my father from the terrible crimes he committed. Every case we had we lost and I felt like I could set him free if I became a lawyer. While I continued to grow up I figured out why every case was lost and my father should stay in prison, but that did not change my mind about being a lawyer. I learned more about becoming a lawyer and the hard work I had to put into it; I was very excited. When IRead MoreThree Types of Jobs in which I Would Like to Work684 Words   |  3 Pagesjobs I would like to work: Soccer coach, business administration, and doctor. One of the three jobs I would like to work is soccer coach. I chose this because I love soccer. To be honest, since I was a child, I have wanted to be a soccer player. I had that dream on my mind, but unfortunately, I had a serious injury in my knee and I could not play anymore. The reason why I want to be a soccer coach is because I want to be involved in the soccer world, even if I have an injury in my knee. I wantRead MoreI Would Like For Introduce Myself1196 Words   |  5 PagesI would like to introduce myself. My name are Olufemi Temitope Johnson Adekoya, am 35years old, born and grown-up in Nigerian, now based and settled in United Kingdom. A graduate and major in Accounting, a registered member of Association of Chartered Certified Accountants (ACCA), London. Currently an employee of Avery Group Homes as a Fixed Assets / Management Accountant, in Birmingham, West Midland, United Kingdom. I have a brother who is only two years younger, he graduated from University ofRead M oreThe Decisions Behind My Career as an Advertising Manager Essays530 Words   |  3 Pagesâ€Å"campaigns.† So why did I choose this career? I chose it because of several reasons. First off, I’ve always like the idea with being involved with advertising, but I wanted to be more that just the one to create the graphic designs. I wanted to do something bigger and then these tests came in and guided me to this career. The tests I took were the â€Å"COPS,† and the â€Å"strong interest inventory,† both had similar results. Both of them said that my top â€Å"themes,† were â€Å"artistic†¦business [and] serviceRead MoreThe Importance Of Investment In The Stock Market Game862 Words   |  4 Pagescompanies I chose to invest in for the Stock Market Game the time has come to see if I made the right choice in investing in these three companies. The companies I chose were Facebook (FB), Exxon Mobil (XOM) and Home Depot (HD). I first invested a total of $24,977.54 and at the end of the twelve weeks I was left with $26,898. 55. In this paper I am going to talk about how I ended up with a profit of $1,921.01 and the factors that may have contributed to this gain. The first company I invested inRead MoreBusiness Entrepreneurship Is The Career1098 Words   |  5 Pages Business entrepreneurship is the career that I am researching about. Entrepreneurs are business owners or mangers of a corporation, enterprise or small companies. Studies show that the industry usually grows about two percent to three percent a year while the average length in business is only twelve years (5). However, I feel like the pay outweighs the negative. Standard pay for a starting businessman is $75,030 and it can reach as high as $171, 610 or more for experienced entrepreneurs (4). IRead MoreUnited States Dollar and Foreign Currency Information1014 Words   |  5 Pagestutoring business, or something else. This can be the same type of company you chose in assignment 8 or 9, or it can be different. a. Describe the type of business you chose. (1-2 sentences. 0.5 points) * The type of business I would start would be for family or friends gatherings. This business would be place people come to eat and social, a nice, warm environment. b. Describe at least two ways in which the local, state, or federal government would have an impact on your business. (2-4Read MoreThe Problem Of The Trading Bloc1398 Words   |  6 Pages Common Market Key Term and Why You Are Interested in It I chose the key concept of the â€Å"Common Market† because it is a component of the five trading blocs of regional economic integration. Also, the Common Market can vary depending on the nation and the agreements that have been established in that country (Satterlee, 2014). Since the text gives a brief overview of the importance of the Common Market in relation to its functioning within the trading bloc, I decided that it would be of immenseRead MoreWhy I Want A Career1124 Words   |  5 PagesWhy I want a career in health care My passion for healthcare cultivated because of my family. Throughout my childhood and adolescent years, I got an opportunity to volunteer helping around the nursing home where my mother worked as a licensed practical nurse. Looking back, on those experiences influenced my entire career in so many diverse ways. Learning ample amounts of wisdom from various honorable people. As a child I was always trying to help my mother, grandmother, aunts, my church take careRead MoreLetter : Letter From A Graduate Program1646 Words   |  7 PagesFriend in Australia: In this paper I will address my major, potential minor, rule of chemistry in my future endeavors. A year ago I started conducting a research when I started applying to colleges. I did this research to figure out what universities were my top choices and what majors I was interesting in. I looked up Spanish majors, Engineering, Business, and I found this cool major, Food Science and Technology. I have to tell you that this is one of the coolest majors I have heard of. Not many universities

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Moores Ford Lynching Essay - 1010 Words

Moores Ford Lynching On July 25, 1946, two young black couples- Roger and Dorothy Malcom, George and Mae Murray Dorsey-were killed by a lynch mob at the Moores Ford Bridge over the Appalachee River connecting Walton and Oconee Counties (Brooks, 1). The four victims were tied up and shot hundreds of times in broad daylight by a mob of unmasked men; murder weapons included rifles, shotguns, pistols, and a machine gun. Shooting a black person was like shooting a deer, George Dorseys nephew, George Washington Dorsey said (Suggs C1). It has been over fifty years and this case is still unsolved by police investigators. It is known that there were atleast a dozen men involved in these killings. Included in the four that were†¦show more content†¦On the morning before the lynchings, Harrison drove to the house of Dorothy Malcoms parents, who had begged with him to get Roger Malcom out of jail since the stabbing occurred. Harrison refused to pick him up at first, but suddenly changed his mind. Harri son took along with him Dorothy Malcom , who was pregnant at the time, and George Mae Murray Dorsey to Monroe. Their Harrison signed a $600 bond to bail Roger Malcom out of jail. Harrison, with the two black couples in his car, left the county jail at about 5:30 p.m. on July 25, 1946, and headed back along the Athens Highway toward his farm. Authorities said the route he chose was the longest way home, along a winding dirt road (Suggs,C4). According to Harrison, when he reached the bridge at Moores Ford, a car blocked his way (Rivers,1). A mob of twenty to twenty-five unmasked men stopped him at gunpoint (Suggs, C1). Then they took the two couples into the woods, tied them to the trees and shot them. They were so savagely beaten and overwhelmed with bullets that their bodies were ripped to shreds. The only way to tell the bodies apart was by their lips. Investigator Bobby Howard said. When questioning Harrison he told the local authorities and the FBI he could not identify any members of the mob or explain how they knew which way he was coming home. No one was ever prosecuted for the slayings of the African Americans and why it happened isShow MoreRelatedAfrican Americans in American Society 1920s2619 Words   |  11 Pagesracial tensions only grew during the 1920s. Starting from the 1910s, a phenomenon had been occurring known as the Great Migration – the movement of African Americans from Southern cities to Northern ones as a result of extreme racism, the threat of lynching and the general aggression from whites. The African American population grew from 44 000 in 1920 to 234 000 in 1930 in Chicago, and Black Chicagoans gained access to city jobs, expanded their professional class and even won elective office in localRead MoreEvolution of the Imperial Presidency from Fdr to Obama2895 Words   |  12 Pageshe still stuck to the Constitution when it clearly states, â€Å"All men are created equal†. Truman spoke out against lynching, became the first president to address representatives of the National Association for the Advancement of Colored People (NAACP), and took many of these cases to court. Truman’s advances to help African Americans, for instance, by putting an end to Southern lynching practices, changed the way society viewed blacks and changed the way that blacks viewed themselves. By allowing blacksRead MoreCase Analysis : The Last Innocent Year 2355 Words   |  10 Pagesorganized, grassroots style of protest would become the model for student protests across the country. For the first time young people began to become more political and demand a say in politics. The year also saw the introduction of a new car, the Ford Mustang. The Film 1964 explained the year in great detail. The film explains the biggest and controversial events of the year. Such as Berkeley, Freedom Summer and the missing men, the Feminine Mystique, and Civil Rights. Although the film coveredRead MoreOne Significant Change That Has Occurred in the World Between 1900 and 2005. Explain the Impact This Change Has Made on Our Lives and Why It Is an Important Change.163893 Words   |  656 Pagesthought of arming African American soldiers for combat rather than assigning them to labor duties aroused the fear and ire of Southern politicians because of its threat to the racist status quo, particularly in the South. Vicious race riots and lynchings dotted the wartime and postwar American landscape, as white Americans stymied with violence any aspirations that African Americans had toward equality as a result of their participation in the â€Å"war for democracy.† In this context of the rampant

Genesis We See God Is At Work, And We Learn How God

Genesis 1:1-2:3 In the book Genesis we see God is at work, and we learn how God intends us to work. Within the created universe, God is present in relationship with his creatures and especially with people. Laboring in God’s image, we work in creation, on creation, with creation and if we work as God’s intends for creation. When bringing this into the life of a nurse we see that all nurses learn to serve their patients to their best of their ability. They learned to created an environment in which the patients feel at peace and know that when we enter their room it is a sacred place for them and for the nurses. As a Catholic I have to say that the book of Genesis is my favorite book in the Old Testament because we are learning about how our Lord created the universe in a way that he thought was good. Although I may not be in the nursing program, yet I know that a life of a nurse has its ups and downs, but it always viewed as a good job I the fact that we are ale to care for patients. J ust the way God views creation at the end of each day. In Genesis 1:1-2:3 the influence of God s work is unquestionable. God speaks worlds into existence, and step by step we see the earliest example of the right use of power. It is in the first chapter genesis that we learn that GOD (the divine one) is the only one that created this universe. As Vern S. Poythress said â€Å"Genesis 1 proclaims that God is the only sovereign Lord and Creator of all† (Poythress 2015). God speaks and things comeShow MoreRelatedComparison of Genesis 1 21479 Words   |  6 PagesHONORS Section September 18, 2013 Comparison between Genesis 1 Genesis 2 The story of creation begins with Genesis 1 and 2, it explains how the world and it’s living inhabitants were created from God’s touch. From Genesis 1 we see how the sky, seas, land, animals, and mankind were created. However Genesis 2 focuses more on the first of mankind, known as Adam and Eve and how they are made to be. In this paper I will compare Genesis 1 and Genesis 2 and what the main idea for creation is in each oneRead MoreNotes On Genesis And The Days Of Creation Begin With Sunset ``1193 Words   |  5 PagesGenesis 1:1-11, are very important scriptures that demand that we take a look back at our history when we begin to discuss human origin, relationships and civilization. It is here that we find answers to what has been a debate for many. Author, Lim (2013) states that, â€Å"In Genesis the days of creation begin with sunset because God is not bound by and does not emanate from natural forces such as the sun†. This is shown true in the verses simply explaining the creation of everything including theRead MoreWhat Makes A Man And What The Lord Expects Of Us?893 Words   |  4 PagesSo where do we begin to learn what makes a man and what the Lord expects of us? We begin our lesson with the story of creation. It is here that we get a glimpse into the creative realms of our Heavenly Father. With delightful purpose and majestic power, Our Lord spoke things into existence. Among these things was man (Adam). â€Å"Then God said, ‘Let us make man in our image, after our likeness. And let them have dominion over the fish of the sea and over the birds of the heavens and over the livestockRead MoreWorldview Is What You Think About The World975 Words   |  4 Pageswhat you see and think about the world. So it would depend on the person on what they think about the world since everyone is different. It is what you believe of what you have heard and would take it to heart of what you believe. For example in the book called Finding Your Worldview: Thinking Christianly about the World, it gives an example of different color lens. When you give others a different color lens each of them is going to be seeing it differently and that is how Worldview works and it wouldRead MoreThe World And Human Beings1663 Words   |  7 Pages Scripture: The event of creation stands as the first time God shows His existence even though He existed before creation took place. We also see that Christ was a being who lived with God and without Him there could be nothing (1 John 1:1-3). During the actual event of creation (Gen 1), God took six complete days to finish it. He created everything from the heavens to the earth and all that lives within them. He created light and darkness, land and water and separated them, and animals that roamRead MoreThe Lord s Will Help Shaping The Worldview Of Christian And People1324 Words   |  6 Pagesof God; then the volume of the Creatures, which express His power† (qtd. in H. M. Morris 22). Indeed, the Bible reveals to man the answers to the questions in life, especially regarding the important ones that shape a person’s worldview. Within the Scriptures, notably in Genesis, one can find the explanation concerning the natural world, human identity, human relationships, and ci vilization. Chapter 1 to 11 of the Genesis described the way God created the world, and through these chapters we learnRead MoreEssay on Two Perspectives of Viewing the World around Us1412 Words   |  6 Pagesreviewing the works of St.Bonaventure, through Step one in the Ascent to God and the Consideration of Him through His Footsteps in the Universe, and from Step two, we learn of to opposing opinions that St. Bonaventure had about different perspectives of the world around us, for different purposes, and with different results. By reading these two pieces I am able to understand them, and how their opposing perspectives differ. I also chose Harmony with Nature by Matthew Arnold, and Gods Grandeur byRead MoreEssay on Four Functions of Myths in Genesis1440 Words   |  6 PagesFour Functions of Myths in Genesis The sin stories in the Book of Genesis address theological, cosmic, social, and ethical questions. These sin stories, The Fall of Man, Cain and Abel, and Noah and the Flood, and The Tower of Babel show the functions of myths and demonstrate mans likeliness to sin. These myths let the readers learn of the culture, beliefs, and foundation of the time. A myth is a symbolic way of expressing truths and beliefs that are accepted by society. Myths, whichRead MoreAnimals : Humans And Animals1724 Words   |  7 PagesAnimals play an important yet unique role in human culture. We use animals for our own benefit, and sometimes forget that they are also living things. Humans have established themselves as the greater species, therefore placing animals below them, causing us to lose sight of the fact that animals play a vital role in our society. We take advantage of animals and think nothing of it. Understanding this relationship between humans and animals comes from understanding the differences between humansRead MoreAbraham And The Early Journey Of The Formation Of Israel951 Words   |  4 Pagestoward God, involving commitment to His will for one’s life and that His plans are for our best and flow from His love for us. As we read through the Old and New Testament of the bible we see how the men of God are described living by their faith. 1 Corinthians 13:13 (NKJV) ... 13 And now abide faith, hope, love, these three; but the greatest of these is love. Body Though we could look at many of the Bible accounts from Adam to Noah, Noah to Abraham, Abraham to David or David to Jesus, we will primarily

Police Brutality Has Changed Over The Years - 1291 Words

Police Brutality Police brutality has a long history in which citizens and police have been victims and in recent years it has became a major issue. Many people claim that the citizens are the ones to blame and others claim that the police officers are the ones who should take the blame. The history of police brutality goes way back, even into the 1800’s. Back then it was said to be aimed at the poor labor workers. Workers would go on strike, such as the Great Railroad strike of 1877, the Pullman Strike of 1894, or the Lawrence Textile strike of 1912. Police would brutally beat the strikers to get them to stop. As a part of their revolt, labor workers that were participating in the strike would beat the police officers(â€Å"Law†). Many statistics show the way police brutality has changed over the years. Police claim that brutality has risen 35% since September 11th 2001. Statistics show the in 1982, out of twelve thousand randomly selected citizens 13% had been victims of police brutality. Approximately 422 people that were sixteen years old or older claimed to have had contact with police in which force or threat was used on either side in 1999. In the years 2002 and 2003, 90% of the citizens shot by police were either African American or of Hispanic background(â€Å"Law†). The number of police officers killed by brutality from citizens jumped up 13% from 2010 to 2011(Bond).Show MoreRelatedThe Invisible Man By Ellison862 Words   |  4 PagesIn response to police brutality, The Invisible Man was written by Ellison demonstrated that through his life racism was entirely present. Ellison, in fact, was faced with police brutality throughout the novel. Ellison wrote a scene in which his narrator dealt wit h police brutality after giving a speech at an eviction. The police threatened to shoot him and beat all of them. Ellison wrote that his character had known it was due to the racism during the time period. Even so, the rest of the novel involvedRead MorePolice brutality1678 Words   |  7 Pages Police Brutality, Have Times Really Changed The history of Police Brutality for minorities; especially people of color has left America wondering have times changed. Police brutality has deemed the opportunity for socioeconomic advancement or access to good and services for many Black/African Americans dating back as far as 1955. The system of Police brutality has affected many realms of society for minorities’ employment and family life. After some scholarly research, police brutality isRead MorePolice Brutality And Its Effect On Citizens1378 Words   |  6 PagesPolice brutality has always been an issue in American society; however recently police brutality as become a more prominent issue in the media as well as among concerned citizens. The current display of brutality towards citizens has changed the views of the current generation’s outlook towards the police’s misuse of authority. Citizens claim to feel less protected by the police department, I had a friend tell me that one of her best friends is terrified by the police and the authority they holdRead MoreAnalysis Of The Article Racism And Brutality By Cassandra Chaney1226 Words   |  5 PagesIn the article, Racism and Brutality in America, author Cassandra Chaney presented the case of Rodney King, a forty-seven year old African-American taxi driver, who was brutally attacked four LAPD police officers. According to her novel, the aim of her study was â€Å"to examine how the public generally perceive police and how race and racism shape this discourse.† Unfortunately, the public was left clueless. Rodney King’s case was left unfinished as the media never released any studies of implicationsRead MorePolice Brutality And The Great Railroad Strike Of 19121596 Words   |  7 Pageshave certainly changed because police departments have increased the size of their force and tactics have switched and have become less about protect and serve, and more of a militaristic approach. Police officers have abused their p ower for too long because they have access to so many different types of weapons and there’s been so many cases involving police brutality that it needs to come to an end and they need to be held accountable for what they’ve done. Police brutality has had a long historyRead MoreBlack Lives Matter Is An International Activist Movement1693 Words   |  7 Pagesextrajudicial killings of Blacks by policemen and vigilantes. It all started year 2013, after a white/hispanic male, â€Å" George Zimmermanâ€Å" was found not guilty of the fatal murder of african american teenager Trayvon Martin. The movement grew even stronger after the brutal death of two unarmed African American victims Michael Brown (Ferguson), and Eric Garner (New York City) which captured social media s attention causing a media riot all over social web. Its unique empowerment impacted the world by bringingRead MoreThe Acts: Police Brutality Essay1690 Words   |  7 PagesRacism and police brutality goes hand in hand, and causes a major concern in todays society, in the United States. On March 3, 1991 in California, Rodney King an African American, was pulled over after a high-speed chase, and after stopping was beaten by four white police of ficers (Worsnop 635). Tracy Brock also an African American was arrested in Manhattan in November of 1986. An officer smashed his head through a plate glass window, when Brock refused to go into the officer’s lunchroom (Police BrutalityRead MoreHip Hop : A Cultural And Artistic Phenomenon868 Words   |  4 PagesOver the past years, According to Aldridge Derrick Hip Hop has developed as a cultural and artistic phenomenon affecting youth culture around the world. For many youth, Hip Hop reflects the social, economic, political and cultural realities and conditions of their lives, speaking to them in a language and manner they understand. Defining the Hip Hop trend is not an easy task, trends are in essence very complex mechanisms that mirror changes in the economic and political landscapes. The Hip-Hop newRead MorePolice Brutality And The Police1281 Words   |  6 Pages Police brutality is a very controversial topic in America. Some people think that the police are protectin g their community and are doing whatever it takes to keep them safe. On the other hand, a lot of Americans feel that the police are choosy, prejudice, and overall just unfair. Personally, I think it depends on the situation at hand. I have read up on some cases that I felt that the police took advantage of their powers. I have also read a couple of situations where I felt that their actionsRead MoreRion Amalcar Scotts The Etiquette Of Police Brutality1389 Words   |  6 Pagesonly use force in response to the situation they are in. Day to day Police men and women have to make difficult choices. The decisions they make often lead to controversy. Two sides are then created. On one side, there are people that believe police are bullies that do as they wish; the other side believes officers act as they see fit and do the best they can to keep the public out of harms way. â€Å"The Etiquette of Police Brutality† by Rion Amalcar Scott represents the first view and David G. Bolgian o’s

Essay on Singapore Airlines - Leaps and Bounds Briefly Explained

Question: Write an essay onSingapore Airlines. Answer: Singapore Airlines is the national airlines of the country Singapore. It also has international presence. Their main markets outside Singapore is Asia and Australia. This company was started in the year 1972, and since then the company has grown by leaps and bounds and have been successful in making a strong presence in the airline industry. It has proved to one of the worlds largest and one of the most successful airlines in the world. It is one of the first choice of the customers while choosing their airlines for any travel purposes. It has achieved so much because they follow a very clear mission statement: Singapore Airlines is a global company dedicated to providing air transportation services of the highest quality and to maximizing returns for the benefit of its shareholders and employees." (Singapore airlines, 2014). On the other in this paper, we will evaluate how effective are its human resource management and how do they manage their processes and their employees (Clarke, 2014). Are the processes followed by the company are robust and effective enough to sustain in the long run? For this analysis different model will be used such as PESTEL analysis, Porters five force model, strategic recommendation to the company, etc. PESTEL analysis for Singapore Airlines PESTEL analysis is basically used with the motive of understanding the political, economic, social, technological, environmental and legal effects in the company and the market as a whole. It is also used to understand how the company should react to such situations (LIU, 2015). Political: We know that the Singapore Airlines operates in multiple countries and hence it is very important that the political system of different countries should support the company. It is known that every country has their own national airlines and those airlines as they are the national airlines and also carry the national flag along with them get the maximum support from the government. So in such situation, it is difficult for the company to mark its presence in different countries. Also, in the home country, it is very important for the airlines to get full support from the government otherwise it can have disastrous results (Dombrowski, 2014). Economic: Also, as we know that the Singapore Airlines operate in different countries and they have their resource team with people from different countries they are affected by the variation in the national and international economy. Another important economic aspect which the airlines has to take care about is the increase in the fuel prices. For example, the political instability in the Middle East, in 2011 also called as Arab Spring has resulted into unprecedented levels of fuel pricing. This has a direct impact on the airlines fuel cost (Prajapati, 2014). Social: Social customs and beliefs also has an impact on the airlines company. Earlier travelling to the exotic locations of tropical destinations were considered to be meant for only the rich and filthy people. But as the disposable income for people started increasing since 1980, people who earlier did not consider such trips also started engaging in planning such trips and make use of the airlines (Nguyen, 2014). These airlines trips became more affordable to the common people. Also, in some way it has also observed that the preferences of the people have changed. Earlier who only used to choose the premium packages and flights are not shifting towards the low cost airlines as and when the services for them are increasing and getting better (Whyte, 2012). Technological: In a market like airlines where the market is almost saturated, it has become very important for the companies to be on their forefront in terms of the advanced technology they use as this becomes the differentiating factor for them. The company spends a bomb over research and development to make sure that what they offer to the customer is of best quality and customer enjoy the new technology used by the airlines company (Shah, 2015). The Singapore airlines had used the technology to the best possible manner, they have the youngest crew in their company, they are the company who has proudly participated in new innovations, such as headsets, reclining sets, best entertainment systems. Environmental: This is one of the most important factors considered by the customers before making their travel plans. They always expect to have a very environment friendly behavior from the crew members and a comfortable experience with any airlines they choose. This expectation is also expected to increase in the coming future due to increase in energy prices and carbon reduction targets set by different countries (Schmidt, 2013). So it is very important that the company has a strong initiative to support the green initiatives and try to keep the environment as clean as possible (Kankaew, 2015). Legal: Any Company is most affected by the changes in the legal framework or with introduction to new legal laws. As the company operates in different countries so different countries will have different laws and the company has to follow all of them. For example, the terror attack on the WTC in US was a major setback and after that lot of regulatory changes were done which hampered the aviation industry as a whole (Chen, 2015). Porters five force model applied on Singapore Airlines Porters five force model was basically introduced by Michal Porter in 1985 to understand the impact of 5 different external factors which have a huge impact on any company. These factors as listed below: Threat of new entrants in the market Threat of substitutes in the market Bargaining power of the suppliers Bargaining power of the customers Competition level in the market. If these factor has an impact in the company then it is very obvious that any company has to consider all these factors before formulating their strategies and future planning (Roy, 2015). Same goes for the Singapore Airlines as they also have to react to these factors and take decisions accordingly. Threat of new entrants in the airlines industry: Here, it is needed to be understood that how new entrants in the airline industry will affect the revenue of the Singapore Airlines and how should they react to such situations. For Singapore airlines, threat of new entrants is really weak as it is very comfortably leading the choice of the long-haul passengers which is leading the Singapore Airlines market activity (Delbari, 2016). This is because the long-haul airline industry is pretty much saturated and there are only one or two dominant players in such market which includes the national carrier. There is ample amount of support from the government for such airlines. Competition level: There is of course serious competition available in the airline industry as well but it are dependent on the route by route basis. There are different route which there are different airlines operating very well and hence on such routes, the competition is fierce (Thomas, 2013). For example the route from London to New York or from Frankfurt to Paris. The only way to win such routes is to cut down the prices for the customers with better services. Also, there are several routes which are dominated by one or two airlines. For example the route between Southeast Asia, New Zealand and Australia have very few carriers and hence have low competition. Threat of Substitutes: This means what is the probability that any product of service in the market can be replace by any of its substitutes. Again, this analysis can be done by distinguishing between the long- haul and short-haul arms of the Singapore airlines operations. Singapore Airlines do face some moderate threat in the short- haul section as there are several substitutes present which may provide better services than Singapore Airlines and lower cost. As Globalization has been introduced in several sectors, there has been a lot of investment in the in the routes which have been served by Singapore Airlines (Clarke, 2014). Bargaining power of the customers: The bargaining power of the airline customers is average. The cost that the customer has to bear to switch from one airline to another airline is very low. These cost comprise of the emotions, cost, time, opportunity and cost to be borne by the customers. The passenger flights has to face this fear of switching cost as this has become very less over the last one or two decades. This is because of the increase in the internet presence and decrease of the travel agents and street airline offices where customers blindly trusted few airlines. Bargaining power of the suppliers. For the airline industry, the bargaining power of the suppliers are too high which is quite unusual as compared to other industries. The planes are being supplied to the airline companies by 2 major suppliers: Boeing and Airbus. So it is in the hands of the suppliers to set negotiation terms. Strategic recommendation to Singapore Airlines There are several recommendations which can be proposed to the Singapore Airlines for their betterment. Some of them are as follows: The Singapore airlines has to maintain its dominance over other airlines in their region and has to deal with the lows in the international economy. They have to fight the strategies formulated by their competitors. They have to study the strategies being followed by their competitors like British Airlines, Cathay Pacific, Virgin airlines if they want to be ahead in the race of competition. They has to develop new strategies after studying the strengths and weaknesses of its competitors and have to differentiate them from others in an effective way. By doing this, they will open the gates of opportunities for more investment, which will further help them to sustain their quality services and their efforts will be put to best use. They have to provide better services as compared to its competitors and better comfort to its customers. It is very clear that in the long term the market will grow and hence the company has to make efforts to capture the maximum part of the market growth. They should plan to install more space beds in 45 of their aircrafts which will cost them around $100 million but this will pay off very well and very soon. Singapore Airlines should also differentiate themselves by marketing themselves in a better way by improving the communication channels they use. They should include new communication feature to its Raffles class facilities. In addition, they should provide better facilities for their customers to connect their laptops. They should also include latest technology electronics to the customers so that they get delighted with the facilities provided. This basically means that the communication system has to improve, with more movies, better technology, access to the latest music, etc. They also need to get into more geographical locations and increase their global presence. For being in the competition they need to operate in more countries every year. They should focus more on developing their cargo area (Hammond, 2013). Conclusion The paper has very well analyzed the business environment of Singapore Airlines and how different factors affect the business of Singapore Airlines. Also, we have seen how the company plans to tackle these external factors. This analysis also shows that the company is in a very good situation in the marker and is expected to perform very well in the coming time as well. There are several threats available in the market which the company has to take care of but otherwise the companys performance is commendable. It is in a way leader in its segment and has proved to be constantly chosen as the best airlines by their customers. Also, at the same time, the company need to develop new market as well like they are doing right now in the markets of India and North America. It also has plans to develop low cost airlines so that they can meet the changing demands of the customers and to be on the forefront to fight the tough competition available in the market. References Clarke, A. P. (2014). Strategic analysis, valuation and market mechanisms: the 2012 Initial Public O ering and subsequent trading of Japan Airlines. LIU, Q. (2015).Analysis of high end tourism market in China-Targeting bespoke tour-New high end tourism(Doctoral dissertation). Dombrowski, J. (2014). Business Model Changes of an Incumbent Player in the European Airline Industry: A Case of the Lufthansa Group. Prajapati, K. B., Jadeja, S., Goswami, M. (2014). PEST Analysis for Indian Luxurious Hotel Market.Asian Journal of Research in Business Economics and Management,4(3), 205. Nguyen, G. (2014). Air Freight Service Development Plan: Case: CMA CGM Logistics Vietnam. Whyte, R., Prideaux, B., Sakata, H. (2012). The evolution of Virgin Australia from a low-cost carrier to a full-service airlineimplications for the tourism industry.Advances in hospitality and leisure,8, 215-231. Shah, S. T. H., Jamil, R. A., Shah, T. A., Kazmi, A. (2015). Critical Exploration of Prescriptive and Emergent approaches to Strategic management: A review paper.International Journal of Information, Business and Management,7(3), 91. Schmidt, F. (2013).Supply Chain Trends impacting the Air Cargo Industry: Assessing Trends and their Impacts in three Industry Sectors(Doctoral dissertation, TU Delft, Delft University of Technology). Kankaew, K., Nok, U. T. (2015). Thai Airways International: the World economy Crisis Resolutions.ACTUAL ECONOMY: LOCAL SOLUTIONS, 3. Chen, L., Pawlikowski, H. (2015). The expansion of low cost carriers into the long-haul market: a strategic analysis of Norwegian Air Shuttle ASA. Roy, A. (2015). What determines airline profitability: industry conditions or firm level capabilities?.Academy of Taiwan business management review,11(2), 17-23. Delbari, S. A., Ng, S. I., Aziz, Y. A., Ho, J. A. (2016). An investigation of key competitiveness indicators and drivers of full-service airlines using Delphi and AHP techniques.Journal of Air Transport Management,52, 23-34. Thomas, H., Smith, R. R., Diez, F. (2013).Human capital and global business strategy. Cambridge University Press. Clarke, A. P. (2014). Strategic analysis, valuation and market mechanisms: the 2012 Initial Public O ering and subsequent trading of Japan Airlines. Dombrowski, J. (2014). Business Model Changes of an Incumbent Player in the European Airline Industry: A Case of the Lufthansa Group.

Damodaran on Capital and Operating Leases free essay sample

Dealing with Operating Leases in Valuation Aswath Damodaran Stern School of Business 44 West Fourth Street New York, NY 10012 [emailprotected] nyu. edu Abstract Most firm valuation models start with the after-tax operating income as a measure of the operating income on a firm and reduce it by the reinvestment rate to arrive at the free cash flow to the firm. Implicitly, we assume that the operating expenses do not include any financing expenses (such as interest expense on debt). While this assumption, for the most part, is true, there is a significant exception. When a firm leases an asset, the accounting treatment of the expense depends upon whether it is categorized as an operating or a capital lease. Operating lease expenses are treated as part of the operating expenses, but we will argue that they really represent financing expenses. Consequently, the operating income, capital, profitability and cash flow measures for firms with operating leases have to be adjusted when operating lease expenses get categorized as financing expenses. This can have significant effects not just on valuation model inputs, but also on some multiples such as Value/EBITDA ratios that are widely used in valuation. The operating income is a key input into every firm valuation model, and it is often obtained from an accounting income statement. In using this measure of earnings, we implicitly assume that operating expenses include only those expenses designed to create revenue in the current period, and that they do not include any financing expenses. For the most part, accounting statements separate out financing expenses such as interest expense and show them after operating income. There is one significant exception to this rule, and that is created by the accounting treatment of operating lease expenses, which are categorized as operating expenses to arrive at operating income. We will make the argument in this paper that these expenses are really financing expenses, and that ignoring this misclassification can create significant problems in measuring and comparing profitability. We also suggest two ways in which we can recategorize operating lease expenses as financing expenses. The Accounting Treatment of Leases Firms often have a choice between buying assets and leasing them. When, in fact, assets are leased, the treatment of the lease expenses can vary depending upon how leases are categorized and this can have a significant effect on measures of operating income and book value of capital. In this part of the paper, we will begin by looking at the accounting treatment of leases and how it affects operating earnings, capital and profitability. Operating versus Financial Leases: Basis for Categorization An operating or service lease is usually signed for a period much shorter than the actual life of the asset, and the present value of lease payments are generally much lower than the actual price of the asset. At the end of the life of the lease, the equipment reverts back to the lessor, who will either offer to sell it to the lessee or lease it to somebody else. The lessee usually has the option to cancel the lease and return equipment to the lessor. Thus, the ownership of the asset in an operating lease clearly resides with the lessor, with the lessee bearing little or no risk if the asset becomes obsolete. An example of operating leases would be the store spaces that are leased out by specialty retailing firms like the Gap. A financial or capital lease generally lasts for the life of the asset, with the present value of lease payments covering the price of the asset. A financial lease generally cannot be canceled, and the lease can be renewed at the end of its life at a reduced rate or the asset acquired at a favorable price. In many cases, the lessor is not obligated to pay insurance and taxes on the asset, leaving these obligations up to the lessee; the lessee consequently reduces the lease payments, leading to what are called net leases. In summary, a financial lease imposes substantial risk on the shoulders of the lessee. While the differences between operating and financial leases are obvious, some lease arrangements do not fit neatly into one or another of these extremes; rather, they share some features of both types of leases. These leases are called combination leases. Accounting For Leases The effects of leasing an asset on accounting statements will depend on how the lease is categorized by the Internal Revenue Service (for tax purposes) and by generally accepted accounting standards (for measurement purposes). Since leasing an asset rather than buying it substitutes lease payments as a tax deduction for the payments that would have been claimed as tax deductions by the firm if had owned the asset (depreciation and interest expenses on debt), the IRS is wary of lease rrangements designed purely to speed up tax deductions. Some of the issues the IRS considers in deciding whether lease payments are tax deductible include the following: †¢ Are the lease payments on the asset spread out over the life of the asset or are they accelerated over a much shorter period? †¢ Can the lessee continue to use the asset after the life of the lease at preferential rates or nominal amounts? †¢ Can the lesse e buy the asset at the end of the life of the lease at a price well below market? If lease payments are made over a period much shorter than the asset’s life and the lessee is allowed either to continue leasing the asset at a nominal amount or to buy the asset at a price below market, the IRS may view the lease as a loan and prohibit the lessee from deducting the lease payments in the year(s) in which they are made. Lease arrangements also allow firms to take assets off the balance sheet and reduce their leverage, at least in cosmetic terms; in other words, leases are sometimes a source of off-balance sheet financing. Consequently, the Financial Accounting Standards Board (FASB) has specified that firms must treat leases as capital leases if any one of the following four conditions hold: 1. The life of the lease is at least 75% of the asset’s life. 2. The ownership of the asset is transferred to the lessee at the end of the life of the lease. 3. There is a â€Å"bargain purchase† option, whereby the purchase price is below expected market value, increasing the likelihood that ownership in the asset will be transferred to the lessee at the end of the lease. 4. The present value of the lease payments exceeds 90% of the initial value of the asset. All other leases are treated as operating leases. Effect on Expenses, Income and Taxes If, under the above criteria, a lease qualifies as an operating lease, the lease payments are operating expenses which are tax deductible. Thus, although lease payments reduce income, they also provide a tax benefit. The after-tax impact of the lease payment on income can be written as: After-tax Effect of Lease on Net Income = Lease Payment (1 t) where t is the marginal tax rate on income. Note the similarity in the impact, on after-tax income, of lease payments and interest payments. Both create a cash outflow while creating a concurrent tax benefit, which is proportional to the marginal tax rate. The effect of a capital lease on operating and net income is different than that of an operating lease because capital leases are treated similarly to assets that are bought by the firm; that is, the firm is allowed to claim depreciation on the asset and an imputed interest payment on the lease as tax deductions rather than the lease payment itself. The imputed interest payment is computed by assuming that the lease payment is a debt payment and by apportioning it between interest and principal repaid. Thus, a five-year capital lease with lease payments of $ 1 million a year for a firm with a cost of debt of 10% will have the interest payments and depreciation imputed to it shown in Table 1. Table 1: Lease Payments, Imputed Interest and Depreciation Year Lease Payment 1 2 3 4 5 $ $ $ $ $ $ 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 3,790,787 Interest Expense $ 379,079 $ 316,987 $ 248,685 $ 173,554 $ 90,909 Imputed Reduction in Lease Liability Lease Liability Depreciation $ 620,921 $ 3,169,865 $ 758,157 $ 683,013 $ 2,486,852 $ 758,157 $ 751,315 $ 1,735,537 $ 758,157 $ 826,446 $ 909,091 $ 758,157 $ 909,091 $ (0) $ 758,157 Total Tax Deduction $ 1,137,236 $ 1,075,144 $ 1,006,843 $ 931,711 $ 849,066 The lease liability is estimated by taking the present value of $ 1 million a year for five years at a discount rate of 10% (the pre-tax cost of debt), assuming that the payments are made at the end of each year. Present Value of Lease Liabilities = $ 1 million (PV of Annuity, 10%, 5 years) = $ 3,790,787 The imputed interest expense each year is computed by calculating the interest on the remaining lease liability: In year 1, the lease liability = $ 3,790,787 * . 0 = $ 379,079 The balance of the lease payment in that year is considered a reduction in the lease liability: In year 1, reduction in lease liability = $ 1,000,000 $379,079 = $ 620,921 The lease liability is also depreciated over the life of the asset, using straight line depreciation in this example. If the imputed interest expenses and depreciation, which comprise the tax deductible flows arising from the lease, are aggregated over the five years, the total tax deductions amount to $ 5 million, which is also the sum of the lease payments. The only difference is in timing –– the capital lease leads to greater deductions earlier and less later on. Effect on Balance Sheet The effect of leased assets on the balance sheet will depend on whether the lease is classified as an operating lease or a capital lease. In an operating lease, the leased asset is not shown on the balance sheet; in such cases, leases are a source of off-balance sheet financing. In a capital lease, the leased asset is shown as an asset on the balance sheet, with a corresponding liability capturing the present value of the expected lease payments. Given the discretion, many firms prefer the first approach, since it hides the potential liability to the firm and understates its effective financial leverage. What prevents firms from constructing lease arrangements to evade these requirements? The lessor and the lessee have very different incentives, since the arrangements that would provide the favorable â€Å"operating lease† definition to the lessee are the same ones under which the lessor cannot claim depreciation, interest, or other tax benefits on the lease. In spite of this conflict of interest, the line between operating and capital leases remains a thin one, and firms constantly figure out ways to cross the line. These conditions for classifying operating and capital leases apply in most countries; France and Japan are major exceptions –– in these countries, all leases are treated as operating leases. Effect on Financial Ratios The effect of leases on the financial ratios of a firm depends on whether the lease is classified as an operating or a capital lease. Table 2 summarizes types of profitability, solvency, and leverage ratios and the effects of operating and capital leases on each. The effects are misleading, in a way, because they do not consider what would have happened if the firm had bought the asset rather than lease it. ) Table 2: Effects of Operating and Capitalized Leases Ratio Return on Capital Effect of Capitalized Lease †¢ †¢ Decreases EBIT through depreciation †¢ †¢ Capital increases through †¢ present value of operating lease †¢ ROC is lower Return on Equity †¢ Net income lowered by after-tax †¢ Net income lowered by lease expense after-tax interest expense †¢ BV of Equity Unaffected epreciation †¢ ROE effect depends on whether †¢ BV of Equity unaffected lease expense (imputed interest †¢ ROE effect depends on + depreciation) whether lease expense (imputed interest + depreciation) Interest Coverage †¢ EBIT(1-t) decreases †¢ EBIT(1-t) decreases †¢ Interest Exp. unaffected †¢ Interest Exp. ncreases †¢ Coverage ratio generally higher †¢ Coverage Ratio generally lower Debt Ratio †¢ Debt is unaffected †¢ Debt increases (to †¢ Debt Ratio is lower account for capitalized leases) †¢ Debt Ratio is higher Since the level of financial ratios, and subsequent predictions, can vary depending on whether leases are treated as operating or capital leases, it may make sense to convert op erating leases into capitalized leases when comparing these ratios across firms. In Summary †¦ When a lease arrangement qualifies as an operating lease, there are profound consequences for the reported earnings, book value of debt and capital, and return ratios of that firm. In general, †¢ †¢ †¢ both the operating and net income of the firm will be lowered the debt and capital for the firm will be understated the return on equity and capital will be much higher Effect of Operating Lease Decreases EBIT through lease expense Capital does not reflect leases ROC is higher when a lease is treated as an operating lease rather than a capital lease. The Financial View of Operating Lease In finance, our view of all leases, operating as well as capital, is colored by whether the lease payment represents a commitment similar to interest payments on debt. If the answer is in the affirmative, leasing becomes an alternative to borrowing and buying the assets, and lease payments becomes financial expenses rather than operating expenses. This can have significant implications for the measurements of income, debt and overall profitability. In this section, we will explore two ways of adjusting valuation inputs for operating leases. The Capital Adjustment If operating lease expenses are to be considered financing expenses, it stands to reason that the present value of commitments to make such payments in the future has to be treated as debt. Accounting standards in the United States require that operating lease commitments for the next five years be reported as part of the footnotes to financial statements, and that any commitments beyond that period be umulated and reported with the commitments five years from now. To convert operating lease commitments into an equivalent debt amount requires that we discount these commitments back to the present. Again, consistency requires that we use a pre-tax cost of debt for the discounting, since the commitments are pre-tax and the lease expenses are being treated as financing expenses. The cost of debt can, however, vary depending upon whether debt is secured or unsecured. Since the claims of lessees are similar to the claims of unsecured debt holders, as opposed to secured debt holders, the firms cost of unsecured debt should be used in discounting lease commitments. To compute the â€Å"debt† value of operating leases, the present value of actual lease commitments is computed over time. The cumulation of all lease commitments after the fifth year into that years amount does create a discounting problem. One simple approximation that works is to use the average lease commitment over the first four years as an approximate annuity in converting the final cumulated amount into annual amounts. Thus, a firm that has average lease commitments of $ 2 million for the next 4 years, and shows a cumulated commitment of $ 12 million in year 5, can be considered to have annual lease payments of $ 2 million a year for 6 years starting in year 5 for present value purposes. The book value of equity should be unaffected by either adjustment, but the book value of capital will then be the sum of the debt, including converted operating leases, and the book value of equity. Illustration 1: The Home Depot Capital Estimation with Operating Income Recategorized The Home Depot, as a retail firm which leases most of its store spaces, has considerable lease commitments outstanding. We begin by reporting the operating lease commitments that the Home Depot reports in its last annual report (February 28, 1998), and computing the capitalized value of these operating lease commitments: To compute the present value of the operating lease expenses, we use the pre-tax cost of borrowing for the Home Depot of 6. 25%. Year Operating Lease Expense Present Value at 6. 25% 1 2 3 4 5 Yr 6 -15 $ $ $ $ $ $ 294 $ 291 $ 264 $ 245 $ 236 $ 270 $ $ 277 258 220 192 174 1,450 2,571 PV of Operating Lease Expenses The operating lease expenses after year 5 are treated as an annuity. The present value of operating leases can be treated as the equivalent of debt. The following table summarizes the book value of capital, when operating lease expenses are capitalized, at the Home Depot: Home Depot Book Value of Capital + Present Value of Operating Leases = Adjusted Book Value of Capital $8,513 $2,571 $11,084 The capitalization of operating leases increases the book value of capital substantially. There is no effect on the book value of equity. The Income Adjustment If operating lease expenses represent fixed commitments for the future, then they have to be treated as financing expenses rather than operating expenses. This will have a significant impact on operating income, since it is defined to be net of just operating expenses. Thus, the operating income for a firm will always increase when operating lease expenses are re-categorized as financing expenses. To obtain the adjusted operating ncome, the operating income will be increased by the imputed interest expense on the capitalized debt. Adjusted Pre-tax Operating Income = EBIT + Imputed Interest Expense on Capitalized Lease Moving operating leases from the operating expense to the financing expense column, by itself, should have no effect on the net income. If we decide to treat operating leases as capital leases, and estimate imput ed interest and depreciation on it, there can be timing effects on net income, with the net income in earlier years being lower and in later years being higher as a result of the recategorization. Net Income comples = Net Income + Operating Lease Expenses – Imputed Interest Expense on Capitalized Lease – Depreciation on Capitalized Lease Asset If we make the simplifying assumption that the operating lease expense is equal to the sum of the imputed interest expense and the depreciation, then the net income will be unaffected by this categorization. Illustration 2: The Home Depot Income Estimation with Operating Leases Recategorized We will estimate the adjusted operating and net income for the Home Depot, using the information on operating leases provided in illustration 1. We use the apitalized value of operating leases of $2,571 million computed in the previous illustration to adjust the operating income. We compute the inputed interest expense, using Home Depot’s pre-tax cost of debt of 6. 25% and debt value of operating leases: Imputed Interest Expense = $2,571 million * . 0625 = $ 161 million In the following table, we adjust the operating income, aft er-tax operating income and net income at Home Depot for operating lease expenses. Adjusted Operating Income Home Depot Operating Income + Imputed Interest Expense on Operating Leases = Adjusted Operating Income $2,016 $161 $2,177 Note that the adjusted operating income is higher than the reported operating income. The after-tax adjusted operating income is computed in the table below for the Home Depot. Adjusted After-tax Operating Income Operating Income (1-t) + Imputed Interest Expense (1- t) = Adjusted After-tax Operating Income $1,311 $104 $1,415 The imputed interest expense added back here is the after-tax expense, obtained by multiplying the pre-tax interest expense by (1- marginal tax rate). Alternatively, the adjusted operating income could have been multiplied by (1-t) to arrive at the same estimate of after-tax operating income. The net income of $1,228 million of the Home Depot is unaffected by the capitalization of operating lease expenses, because we assume that the operating lease expense is equal to the sum of depreciation and imputed interest expenses. The Profitability Adjustment The conversion of operating lease expenses into financing expenses increases operating income and capital, and thus affects any profitability measure using one or both of these numbers. The most directly affected estimate is the return on capital, which is the operating income divided by the book value of capital. Return on Capital = (EBIT + Operating Lease Expense) (1 -tax rate) Operating Lease Expense (Book Value of Debt + + Book Value of Equity) kd The effect on return on capital will be determined by the present value of operating lease commitments over time (PVOL) and the method used to compute depreciation on the asset created. The return on capital can then be estimated as follows: (EBIT + Operating Lease Expense Depreciation ) (1 tax rate) PVOL (Book Value of Debt + PVOL + Book Value of Equity) Return on Capital = If we assume that the difference between operating lease expenses and the imputed interest expense is equal to the depreciation on the asset created by operating leases, this computation can be simplified further: Return on Capital = (EBIT + Imputed Interest Expense on Capitalized Leases) (1 tax rate) (Book Value of Debt + PVOL + Book Value of Equity) Whether return on capital will increase or decrease in this case will depend upon whether the unadjusted pre-tax return on capital is greater than the pre-tax cost of debt. Thus, If Unadjusted Pre-tax ROC Pre-tax cost of debt Unadjusted Pre-tax ROC Pre-tax cost of debt ROC will decrease ROC will increase The comparison can also be made entirely in after-tax terms. With our assumption that the operating lease expense is equal to the sum of the imputed interest expense and the depreciation on the capitalized lease asset, the return on equity should be unaffected by whether we capitalize operating leases or not. Illustration 3: The Home Depot Profitability Estimation with Operating Income recategorized The following table summarizes the adjusted operating income and capital at the Home Depot. Home Depot After-tax Operating Income BV of Capital Beginning BV of Capital Ending BV of Capital Average ROC (based on average) ROC (based on beginning) $1,311 $7,205 $8,513 $7,864 16. 67% 18. 20% Home Depot (Adjusted) $1,415 $9,776 $11,084 $10,430 13. 56% 14. 47% Note that the return on capital drops when operating leases are capitalized because the return on capital is well in excess of the cost of debt of 6. 5%. The return on equity will be unaffected since neither the net income nor the book value of equity will be affected by the recategorization of operating lease expenses. The Free Cash Flow Adjustment In valuation, it is the free cash flows to the firm, defined as the cash flows left over after reinvestment needs have been met, that are discounted at the cost of capital to arrive at firm val ue. When operating lease expenses are treated as financing expenses, not only is operating income affected but so is the net capital expenditure. To be consistent with our treatment of operating leases as financing expenses in the course of acquiring an asset, we need to consider changes in the present value of operating lease expenses over time as the equivalent of capital expenditures. The net capital expenditures on operating leases is determined by the increase in the present value of the operating lease commitments over time. Net Cap Ext = (PVOLt PVOLt-1) Thus, firms with increasing operating lease expenses over time will have a net capital expenditure reflecting this growth. The final effect on free cash flow to firm of treating operating lease expenses as financing expenses will depend upon two factors – †¢ The reclassification of operating expense as financing expenses will increase the free cash flow to the firm because the imputed interest expense on the capitalized operating leases has to be added back to the operating income. †¢ Any increase in the present value of operating lease expenses over time will have a negative effect on cash flows because it will be treated as an additional capital expenditures. There is no effect on free cash flow to equity of reclassifying operating lease expenses as financing expenses. This is because the increase in capital expenditures created by the change in the present value of operating lease expenses will be exactly offset by the increase in net debt created by this reclassification. Illustration 4: The Home Depot Free Cash Flow Estimation with Operating Income recategorized The following table summarizes free cash flows to the firm at the Home Depot with operating leases reclassified as financing expenses: Home Depot Operating Income (1-t) $1,311 Home Depot (with Operating Lease Adjustment) $1,415 Depreciation Capital Expenditures Change in Working Capital FCFF 283 1,396 474 ($277) $ 283 1,453 474 ($230) The adjusted operating income is computed in illustration 2. The present value of operating leases at the Home Depot increased from $2,514 million to $2,571 million ove the year. The difference of $ 57 million is added on to the net capital exp enditures. The free cash flows to the firm are more positive (less negative) if operating lease expenses are treated as financing expenses, because the imputed interest expense is now treated as a financing expense. The table below summarizes the effect of capitalizing the operating lease expenses on the free cash flow to equity: Home Depot Net Income + Depreciation Capital Expenditures Change in Working Capital + Net Debt Issued = FCFE $1,228 $283 $1,396 $474 -25 ($384) Home Depot with adjustment $1,228 $283 $1,453 $474 $32 ($384) The increase in capital expenditures of $57 million, attributable to the increase in the present value of operating leases, also shows up as an increase to net debt issued, leaving the ultimate FCFE unaffected. Intuitively, this makes sense, since reclassifying an operating expense as a financing expense should not affect the FCFE, which is after financing expenses. The Effect on Discounted Cash Flow Value Looking back at the last three sections, converting operating lease expenses into financing expenses affects firm cash flows by changing both the operating income and the net capital expenditures, and the cost of capital by altering the debt ratio. It can also affect expected growth in the operating income to the extent that it has an impact on both the reinvestment rate and the expected return on capital. Once firm value has been estimated with the modified inputs, the debt that is netted out to arrive at the market value of equity should include the debt value of operating leases. Converting operating lease expenses into financing expenses should have no impact on equity valuation. The free cash flows to equity are after both operating and financing expenses, and are thus unaffected by recategorizing operating lease expenses, especially since there is no tax effect from the recategorization. The cost of equity is not affected by the treatment of the present value of operating lease expenses as debt. Illustration 5: The Home Depot DCF Value with Operating Income recategorized Converting operating lease expenses affects both cash flows and discount rates. In the following illustration, we will value Home Depot twice, once with the unadjusted operating income and cost of capital and one with the adjusted operating income and cost of capital. We will begin by summarizing the estimates for cost of capital and operating leases with and without the operating lease adjustments: Current Revenues Operating Income (1-t) $24,156 $1,310 Adjusted $24,156 $1,415 Depreciation Capital Expenditures Change in Working Capital FCFF $283 $1,396 $474 ($277) $283 $1,453 $474 ($230) Market Value of Equity = Debt Outstanding = Debt/Capital Ratio = Cost of Equity Cost of Debt Cost of Capital 51379 1205 2. 29% 9. 80% 4. 06% 9. 67% 51379 3776 6. 85% 9. 80% 4. 06% 9. 41% To do the valuation, we will assume that revenues, operating income and depreciation will grow at 15% a year for the next 5 years and 5% thereafter. Capital expenditures and capitalized leases are assumed to grow 5% a year for the next 5 years. After year 5, we will assume that capital expenditures (not counting capital leases) after year 5 will be 150% of depreciation, and that capitalized leases will continue to grow at 5% a year. In the following table, we summarize the expected cash flows to the firm on an annual basis for the next 5 years and the terminal year (year 6) with unadjusted operating income. We also compute the present value of the cash flows at the unadjusted cost of capital: Base 1 2 3 4 5 Terminal Year Revenues EBIT(1-t) + $24,156 $1,310 $283 $27,779 $1,507 $325 $31,946 $1,733 $374 $36,738 $1,993 $430 $42,249 $2,292 $495 $48,586 $2,636 $569 $51,016 $2,767 $598 Depreciation Cap Ex Change in WC FCFF Terminal Value PV $70 $195 $321 $449 ($277) $77 $235 $424 $649 $ $916 41,475 $26,722 $1,936 $1,396 $474 $ $1,466 290 $ $1,539 333 $ $1,616 383 $ $1,697 441 $ $1,782 507 $897 $532 Summing up the present values of the cash flows gives us an estimate for the value of the firm, and netting out the unadjusted debt gives us the value of equity: Value of Firm = Value of Debt = Value of Equity = $27,757 $1,205 $26,552 In the following table, we estimate the value of the firm using the adjusted cash flows to the firm and the adjusted cost of capital: Base Revenues EBIT(1-t) + Deprec’n Cap Ex ? WC FCFF Terminal Value PV Capitalized Leases $2,571 $62 $2,700 $199 $2,835 $337 $2,976 $477 $3,125 $24,156 $1,415 $283 $1,453 $474 ($230) 1 $27,779 $1,627 $325 $1,594 $290 $68 2 $31,946 $1,871 $374 $1,674 $333 $238 3 $36,738 $2,152 $430 $1,758 $383 $441 4 $42,249 $2,475 $495 $1,846 $441 $683 5 Terminal Year $48,586 $2,846 $569 $1,938 $507 $970 $45,218 $29,465 $3,281 $3,445 $51,016 $2,988 $598 $1,061 $532 $1,993 Change in Cap Leases $129 $135 $142 $149 $156 $164 The change in the capitalized leases from year to year is added on to capital expenditures each year. The value of the firm and the value of the equity can then be estimated, using the adjusted value of debt outstanding: Value of Firm = Value of Debt = Value of Equity = $30,540 $3,776 $26,764 Note that the value of the firm increases but so does the value of the debt. The value of equity is very close to the value of equity estimated using the unadjusted operating income and the unadjusted cost of capital. This should not be surprising. As long as the debt ratio stays stable, and the operating leases are fairly valued, treating operating leases as debt should have a neutral effect on the value of the equity in the firm. Under what conditions will the two values diverge significantly? If the present value of the operating leases increases at a rate different from other capital expenditures, the value of the firm computed using the adjusted cashflows and cost of capital will change because the debt ratio will change. Under those conditions, the value obtained using the adjusted estimates will be more precise. The value of the equity will be unaffected by the treatment of operating leases as debt, as long as the leverage is not expected to change over the valuation period. If it is, there will be an effect, because only because the cost of equity will change as the leverage changes. The Adjustment to Multiples Much the same analysis applies when we look at the impact of capitalizing operating lease expenses on widely used multiples. If the multiple is an equity multiple, such as price/earnings or price/book value, there should be no effect from recategorizing operating lease expenses. If the multiple, however, is a firm value multiple, there can be significant shifts in the value once operating lease expenses are recategorized, because of the effects on both operating income and capital. As an example, the Value/EBITDA multiple with operating lease expenses recategorized would be: Value MV of Equity + MV of Debt PV of Operating Leases + = EBITDA EBITDA + Operating Lease Expenses Whether the Value/EBITDA multiple will increase or decrease will depend, again, on whether the unadjusted Value/EBITDA is greater than or lesser than the ratio of the present value of operating lease expenses to the annual operating lease expense. With the value/sales multiple, converting operating leases to equivalent debt value will always increase the multiple, since the firm value will increase to include the present value of operating leases while the denominator will remain unchanged. The implications for analysis where firm value multiples are compared across companies can be profound in any of the following scenarios: †¢ When some firms lease assets and other firms buy them, converting operating leases to equivalent debt will make the firm value multiples more comparable. †¢ When some firms treat leases as capital leases, while other firms qualify for operating leases, there can be significant changes in how companies rank on firm value multiples after operating leases are converted into equivalent debt. †¢ Even if all firms treat all leases as operating leases, there can be significant differences across firms in how large these lease commitments are as a percent of operating expenses. In these cases, again, the conversion of operating lease expenses to debt will give more realistic assessments of where these firms stand. Illustration 6: The Home Depot Multiples with Operating Income recategorized In the following table, we summarize the firm value multiples for the Home Depot with and without the operating lease adjustments: Home Depot Market Value of Equity Value of Debt $51,379 $1,205 Home Depot (with adjustments) $51,379 $3,776 EBITDA EBIT EBIT(1-t) $2,299 $2,016 $1,310 $2,593 $2,177 $1,415 Value/EBITDA Value/EBIT Value/EBIT(1-t) 22. 87 26. 08 40. 13 21. 27 25. 34 38. 98 Note that the adjusted value multiples are consistently lower than the unadjusted multiples when operating leases are capitalized. Conclusion Firm valuation can be impacted by how we deal with operating leases. While the accounting distinction between capital and operating leases may seem reasonable, there seems to be no reason, from a financial standpoint, to maintain that distinction when it omes to estimating operating income, capital and profitability. Operating lease expenses need to be reclassified as financial expenses and this will affect our estimates of operating income. The present value of future operating lease expenses need to be treated like debt, and this will have an impact on assessments of capital and leverage for firms. Finally, in estimating free cash flows for valuation purposes, expected increases in operating lease c ommitments over time have to be shown as capital expenditures.