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It is believed that when information has been passed into the market then there is a certain type of reaction. This can be viewed with contrast to the Eugene Fama's (1970) influential survey article, "Efficient Capital Markets." It is generally viewed that information has a great impact on the price of the stocks of the companies and stock market as a whole. The accepted view is that when information is introduced it is incorporated in the prices of the individual securities that are in the market without any delay. Efficient Market Hypotheses can be explained as 'â€¦an "efficient" market for securities, that is, a market where, given the available information, actualÂ pricesÂ at every point in time represent very good estimates of intrinsic values.' The model suggests that there are three types of hypotheses: weak, semi-strong and strong. Weak form indicates that securities prices which reflect all information enclosed in chronological prices. Semi-strong tells us that the prices of the stock depend on the information that is shared publicly for example by looking at the financial statements of the company, whereas strong form highlights the insider information and all the information that the investor can incorporate.
London Stock Exchange is one of the biggest stock market which is the home to one of the most successful and dynamic businesses in the world. British Petroleum is an oil and gas company which came into existence in 1901, and ever since it is making history. The aim of the company is to provide its customers with energy for heat and light, fuel for transportation and lubricants and petrochemicals products used for making everyday products for example plastic bottles. Exploration and Production and Refining and Marketing are the two main segments that the company is working on. In this piece of writing I will be discussing the share price of British Petroleum in the past two years starting from January 2011 to December 2012. The graph below represents the upward and downward trends of the shares in LSE which supports Random Walk Theory. On the other hand, the second graph also indicates the over-reaction and under-reaction of investors and policy makers on the level of information that was passed to them.
The graph below shows the share price of British Petroleum Plc for the year 2011 to 2012:
In 2011 the stock market bounced off on economic optimism, In January 2011 the closing price of share of BP Plc was £465.55 until the news broke that BP Plc's rival Shell thought to move out of the bid. When this news hit the market it had a positive impact on the share price of BP Plc. The rise showed a £ 27.35 increase in share price, upto 6 %. The price rose upto 492.90 showing a promising year ahead despite the huge disaster the organisation faced in 2010. Since then the company share price has recovered on a slow pace showing a 63 % gradual increase. The news can be seen as "Good News" and it can be said that investors showed an "Over-reaction" towards the news, as they heard that the company has reached £30 billion of disposable assets. The "Over-reaction" can be seen that the price of the share came to its original price with shows a 1.4% decrease in share price.
The second trend can be seen that in September 2011 I can state that the share price of BP Plc has hit its lowest point. It can be clearly observed in the above graph that the share price has touched its lowest point. The reason for this is that "The Telegraph" reported that BP Plc lost their one of the most important agreement with big Russian Oil Explorer Rosneft who made the agreement with American Oil major ExxonMobil. This was a major blow for Oil giants BP Plc as news hit the market investors take this news as "Bad News". The share price was already on the downward trend and there was big drop from £ 402.45 to £375.50. This shows a 7% decrease in the share price with £26.95. This can also be observed by the huge drop in share prices that investors lost hope and there was a large amount of BP Plc shares being sold. And it can be easily said that when there is panic selling of shares the price of that particular share drops. After the major drop in September 2011, now the above graph shows that in March 2012 the price of the share went up again touching the £504.60 mark. The Telegraph reported that the Oil Giants BP Plc made a settlement with Plaintiff's Steering Committee (PSC). The committee represents property owners, hoteliers and others affected by the disaster. The price of share rose from 488.95 to 504.60. The difference is £15.65 and a 3% increase. The settlement had a positive impact for BP Plc as its share prices rose. The news of the settlement showed a positive image of BP Plc as the settlement showed a positive image for the company. The settlement showed that the company is willing to pay $7.8 billion. This showed the potential of the company which was the main reason why investors were interested.
In the second quarter of the year in 2012 the price of shares decreased again and the change is quite significant. The graph shows a downward trend. The prices showed a 4% decrease in share prices. The price fell from £444.0 till £425.05. The news from The Telegraph reported that the profit of BP Plc drop sharply because the Oil Giants decided to cut the value of its US Shale Gas and the number of refineries. This news showed that the company decided to suspend its Liberty offshore oil project in Alaska. This shows that the future growth of the company was unsustainable. This news for investors was "Bad News" and they showed "Over-reaction" to the news as prices fell sharply and then they started to come to their normal price. This can be evident that in July price went to £441.35 and it was almost the same in September £443.75. After this we can clearly observe that price comes to its normal price in the coming years.
In my opinion, Efficient Market Hypotheses states that financial markets does not allow investors to earn above average return without accepting above average returns. It suggests that whenever there is new information in the market that information can be reflected into the prices of the securities. The logic that favors EMH states that markets are so efficient that they incorporate the given information, which minimizes the edge over all other investors no matter how much analysis is done. It is also said that markets are always not rational or they are price assets accurately. In the case of British Petroleum Plc, we can identify that the market trend is uncertain and the price of securities not only depends on the information but also depends on the reaction of the investors, academics and practitioners. Information today has a radical impact on the market and information can be used to save oneself from looses. Hence it is stated that the market is unpredictable and no matter how much analysis you perform that's why it is related to "Random Walk" model.
The table shows the share price of British Petroleum Plc for the last two years.
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Part - B
"Practical Application of Costs & Budgeting Practices in a Company".
Table of Contents
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Golden Group of Companies is one of the most famous companies in Pakistan. It is a Private Limited Company. The company is responsible for manufacturing different goods and services. The main area of my study would be Standard Fruits (Pvt Ltd) which is responsible for manufacturing of fruit juices. This is one of the main branches of all the other goods and services the company produces or provides. The main focus of study will be on the background of the organisation, organizational structure, products/services portfolio, different types of costs and budgeting practices.
Nature of the Business & Product Mix
The brand has been in the market for a long time and has been competing with its rivals for more Standard Fruits Pvt Ltd is considered one of the best locally produced juice among other brands. than a decade now. The brand is producingÂ Fruit JuicesÂ packed in Tetra pack of 250 ml and 1 liter Mango, Orange, Apple & mix flavours, also producing Tomato & Mango Pulps which is supplied in local market and exporting to various foreign countries as well. The brand has a significant share in the market. Once the product is made and ready for use it is distributed to different parts of Pakistan. The unit includes packing and drinking setup with most modern unit of cold storage for the storage of pulps and other items for self-consumption and we also sale the same to other Juice andÂ ketchup producers. Standard Fruits Pvt Ltd is a product of masses hence satisfying different levels of earning groups. The business has made many loyal customers and suppliers along its journey towards success. The brand makes different flavoured juice for its customers ranging from different age groups. The main area of focus for sales team could be local suppliers that have direct access to the market or whole sale dealers who buy the company's product in bulk and then later sell it to different small convenience stores.
The organisational structure is very complex for a company like Standard Fruits Pvt Ltd. The company comprises of 500 employees working in the manufacturing unit along with 35 employees working in office. The structure can explained using the following diagram:C:\Users\MASH\Downloads\Manufacturing graph.jpg
The diagram above shows the key players of the organisation who make sure that everything goes accordingly. It should be kept in mind that the factory workers can't be ignored who work day and night to make the product. The major trend in this type of organisation is upward communication. It can be explained using the example like if a manager is asked to submit a report to the Director then when the task is completed this is called upward communication. Upon my survey I came to know that upward communication is beneficial for the organisation as by implementing it there is a flow of new ideas, suggestions and complaints. This also helps in motivating the stuff as they can approach the manager and discuss anything they want. The table below shows the organisation structure:
Different types of Costs
There are different types of costs that are incurred by the organisation. Cost is a resource sacrificed or forgone to achieve a specific objective. There are different types of costs for example: Actual, Budgeted, Direct, Indirect, Fixed and Variable costs.
The table below shows the main Cost drivers of the Company:
Raw and Packing materials consumed
Salaries, Wages and amenities
Salaries, Wages and amenities
Fuel and Power
Rent, Rate and Taxes
Repairs, Maintenance & Store Consumption
Rent, Rates and Taxes
Sales Promotion and Advertisement
Expenses on Information Technology
Legal and Professional Charges
Vehicle Running and Maintenance
Royalty and Technical Assistance Fee
While talking to the finance Manager of the company, I came to realize that the company has been keeping records on computer and they have been using Quick Books software for costing. Upon asking it was known to me that the company has been using "Absorption Costing" technique. This can be explained as when Standard Fruits are in production and they have a target to sell a particular amount of Juice and if the targets are not met in the given year then those costs are considered to be a overhead Cost and they only consider those costs that are directly used while making the product that is Fixed and Variable. Costs of the company are managed by performing proper budgeting. When performing proper Budgeting variance should be kept in mind and it is the difference between actual and budgeted figures. If talking about Standard Fruits they had "positive/favourable" variance. This indicates that costs are lower than expected in the budget for example if the company purchases recycled packs for juice hence making the costs lower and making more profit for the firm. During the time of recession, the company also faced "adverse/unfavorable" variance when the costs of raw materials was high and there was no sales or even salaries were paid with very less production.
The firm has always taken budgeting very seriously. Budgeting is just an estimate of what is going to happen in future. The company has been doing budgeting on a regular basis, doing it on yearly basis and then dividing it monthly. The company has been doing "Departmental Budgeting" technique. A budget ensures that the company can afford all its expenses and don't have to risk going into debt to keep the business running. A complete budget is where a company must know how to set aside finances for each department and understand how each department works together to make up the full-scale plan. A budget should typically cover one year within each department, broken down by each month. Budgeting also helps in cost management. It helps the business in planning and controlling the budget of the business. The firm calculates its expected expenses and all expenses are calculated and monitored to make sure they stay in line with the cost management plan. Variance is also an important factor but the complication is that variance is unexpected and it cannot be calculated. Given a situation variance will be dealt according to the situation and strategies will be made. One of the main variance that the company faced was when the company's main supplier has a land disaster and the production of mangos was interrupted. This made the company to buy fruits from the different supplier due to which price of the mangos was different from what the company used to purchase. Hence this is the reason why budgeting is done over time and on regular basis so that unforeseen problems can be tackled and the company should come up with better strategic tools. Budgeting helps the company in achieving strategic goals.
Conclusion and Recommendation
After looking at the insight of the company we can easily say that Standard Fruits face the same ups and down that any other manufacturing industry faces. There are good times and bad times and they are dealt accordingly. The company has a solid reputation in the market. It's known for its customer satisfaction and for quality products. It can be seen that the company has been working hard on its costs and budgeting. The main aim of the organisation is to lower their cost and plan for the short term and long term goals. The company has been doing careful budgeting to achieve strategic goals. While studying the company there was some areas that were not highlighted that much. My first recommendation is that the company has to work on their hierarchical structure right now there is only upward communication and I think they should be both ways delegating responsibility to its employees and tasks completed efficiently and updated to top management. The second recommendation to the company could be that the company performs budgeting on yearly basis and in this way it's hard for the company to control variance. If they perform Zero based Budgeting then this will help them in calculating the variance and the company can plan accordingly. The management should also do budgeting on quarterly basis, so that they should know what are the main costs associated with different departments. My final recommendation should be that the management should do "Overhead Apportion". This implies that they the company should divide different costs to different departments and then compare the revenues of the departments in this way the management can easily locate which department is doing well the most this will also help lower costs as it will be clearly evident that which department is taking extra costs and working less efficiently and vice versa.
I see a great potential in the company, with up to date management equipped with all the necessary tools to run an organisation efficiently and effectively. Staff is honest and sincere to its job and they are fully motivated. Just with little extra effort the organisation can perform above its potential, with greater market share and more satisfied consumers.
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Upward Communication | Reference.com Answers. 2013.Â Upward Communication | Reference.com Answers. [ONLINE] Available at: http://www.reference.com/motif/science/upward-communication. [Accessed 18 January 2013].