Million Dollar Invention Scholarship Essay Example | Topics and Well Written Essays - 500 words

Million Dollar Invention - Scholarship Essay Example I have this belief that each DNA strand in human beings eventually spin off into various functions and develop certain intricacies which dictate if that particular DNA chain will result in a future illness for a person. By following the DNA strands development rather than manipulating it for specific scientific purposes, I believe I will be able to unlock the reasons as to why certain people are predisposed to certain illnesses. I realize that my dream of unlocking the secrets that the human DNA holds in relation to our illnesses may seem laughable at the moment. But take a step back and just think about it. The human DNA is the basis of human life and yet are still merely discovering the tip of the iceberg when it comes to the nitty gritty of how it functions and how it affects our health and well being. Therefore, studying its evolution until it produces an illness is something that will definitely have a positive effect in the development of future health care solutions. After successfully analyzing and segregating the DNA chains by the resulting illnesses, I will then concentrate on developing a medical test that shall successfully identify the DNA markers that each person carries which can tell the medical professional exactly what kind of illnesses the person he is treating shall be prone to. This should effectively eliminate or lessen the existence of certain illnesses since the development of the DNA chain into that particular strand can now be retarded, prevented, or cured. Such a medical discovery shall definitely be far ahead of its time and would definitely result in my names addition to the roster of noted names in the scientific field that have discovered and/or prevented illnesses from happening. More so when the public finds out that I managed to accomplish all of those things with only a million dollars backing my scientific and medical

Character Study of Kevin Clash in Constance Mark's Being Elmo Essay

Character Study of Kevin Clash in Constance Mark's Being Elmo - Essay Example Determined and resourceful He was not always around while his little girl was growing up though he really wanted to but the demand for his appearance is necessary Dedicated with his work Torn between family time and work time but faced the adversaries of his work professionally There was a point in time that his daughter messaged him asking him to spend some time with her for she will be moving to college in a few years time and so he did manage to spend time wisely with work and his daughter A loving father He did realize Elmo’s importance to kids, and his too, when a young girl wanted to see Elmo as a dying wish Sympathetic Trains and inspires aspiring puppeteers An inspiration Being Elmo is a story of how a man is in the likelihood of acquiring success if he pursues his dreams and aspirations in life with all passion and dedication. It is a story of how a person was able to succeed despite challenges along the way as long as determination and focus is set on a sturdy will t hat no matter how hard the road to success may be aspiration will always get it into something great. It tells a story of how so much passion is put into something that pays really well especially when the person takes people into consideration aside from his own. A story of childhood in every person and how a simple childish dream was set into the biggest reality of having a dream come true that brings every aspiring child in every viewer. Kevin Clash is a strong willed character who knows where to put his dreams to eventually become a reality. An ambitious hardworking and dedicated person with what he loves to do even when other people thinks that his passion for puppets will not get him anywhere. This is a tear-jerker documentary of connivance between passionate individuals when Kevin Clash clashes into an almost losing red puppet that changed both of their worlds into a dream come true. Kevin is an ambitious boy that even at an early age he knew what he wants to do and would mak e people around him know how much he is into it. His ambition made him do his first puppet out of his father’ trench coat without even thinking what his folks would say but nevertheless he did it to show how much his conviction for his dream is. The same ambition blinded him of the obstacles along the way that made him stay focused despite negativities around his passion for puppets (‘Being Elmo’). Kevin is an optimistic person. He always sees the bright side in everything that keeps him more focused and dedicated. He wanted to prove that he will not fail. Take for instance when Elmo was thrown in his palm and was asked to find a voice for it. He knew how experienced and great Richard Hunt is, but nevertheless he took the challenge and stood up for it. Kevin went home to Baltimore and put dedication into the voice of Elmo. His childhood and loving character was transpired into the red puppet and so Elmo was born to spread love the way he was created for (‘B eing Elmo’). He does not care much if he works behind the cam and that everybody knows Elmo but only a few know

The Role Of Ethics In Education

The Role Of Ethics In Education The lifestyle of a human being is closely bound with ethical values unlike other organisms living on this planet. This highlights the importance of embracing ethics on our day today activities. According to the New Oxford Advanced Learners Dictionary ethics is defined as the moral principles that control or influence a persons behaviour. In other words as mentioned in an article appeared originally in Issues in ethics IIE V1 N1 (Fall 1987), ethics is two things. First ethics refers to well-founded standards of right and wrong that prescribe what humans ought to do, usually in terms of rights, obligations, benefits to society, fairness or specific virtues. Secondly, ethics refers to the study and development of ones ethical standards. As a person moulding the younger generation, a teacher has to act as a role model to protect the honour, culture and the discipline of the school while achieving educational goals with success due to sheer dedicated service to the teaching profession. Th erefore it is quite obvious that ethics play a major role in the teaching career. There are several ethical rules to be followed for a good moral conduct. To elaborate more on this topic, I have chosen two standards taken from the teaching of ethics of Graduate School at Penn State. At first, I wish to discuss about fairness or impartiality which is one of the most challenging codes of ethics a teacher can possess. It is extremely important to act neutral while judging the performance of a student because being biased towards some students may hurt and lower the self-esteem of other students. Fairness: Recognizing the inherent subjectivity involved in grading, instructors ought to ensure that their grading practices are as objective as possible by creating and adhering to unambiguous criteria.(From the teaching ethics of Graduate School at Penn State). An outstanding teacher understands that all students require equal love and attention. A teacher trying to be fair among the students will not even bother to look at the name on the top of the paper when awarding a grade for a student. Next, let me discuss about showing respect to the others. Respect can be defined as the consideration of self and of others. Teachers and the whole department of academic and non-academic staff work as a team no matter where they come from. Hence being respectful to each other makes a well-oiled team which in turn strengthens the unity of the school. Further, respecting the views and ideas of the learners may help them build their confidence in learning and sharing knowledge. Respect for Persons: Teachers ought to encourage mutual respect among students. Additionally, instructors ought to show respect and common courtesy for students both during interpersonal interactions and in responding promptly to students need for guidance and feedback. (From the teaching ethics of Graduate School at Penn State). Thus it is clear that following ethical rules is a key factor in achieving excellence not only for ones own self but also in the teaching profession as well.. B) As a potential teacher, I see myself as a valuable person capable of delivering a mammoth service to the humankind. My roles include not only teaching but several other aspects as well. Meeting the needs of the learners through effective teaching strategy is my topmost priority. But on several occasions my roles differ from time to time according to the given situation. Sometimes I will have to be a planner with a suitable teaching plan to make the learners understand the lessons better. Sometimes as an assessor ,monitoring and evaluating the students providing appropriate feedback. Next a facilitator supporting and guiding the students to learn on their own, an information provider, conveying knowledge, a resource developer, managing the available resources and a role model capable of influencing a learners attitudes and behaviours. To compare my roles with two other professionals in my organization, I would like to choose a sports coach and a professional school counsellor in th is regard. A sports coach is a professional who works in the school. He/she is responsible for training athletes while understanding the different skills of each individual separately. These include diet plans, training sessions, physical examinations etc. My role as a teacher shows some similarities with the roles of a sports coach such as being a mentor, adviser, supporter and motivator, dissimilarity being that it is done in a more academical context. Examination of the calorie intake and physical fitness do not necessarily include in my roles as a teacher. A professional school counsellor is someone who counsels the students with a genuine heart to solve the problems of them, be it academic or personal. A teacher also plays a role as a counsellor looking into the affairs of the students when they confide in them, dissimilarity being that the teacher might not have a professional training on counseling whereas a professional counsellor must have had. Hence a teacher relies on logical analysis and personal experience in solving problems during counselling. In some instance they may require help from others too. Its important to note that although different professionals work together in a school, everyone should understand their professional roles and invest their maximum effort in succeeding them. C) Teams comprising individuals working together towards a common goal while holding themselves accountable for the team output is known as teamwork. The most valued advantage of teamwork is its efficiency. In team, the work often gets done faster thus saving a lot of time. This is because large tasks are organized into smaller assignments and divided among the team members equally while sorting out the individuals best suited for the job. While working in a team, each individuals unique skills and ideas gets combined effectively and put to usage to produce the desired outcome. These combined skills lead to an increase in creativity. Hence this helps in strengthening the team unity and the team spirit. The team members will also develop a sense of responsibility since they depend on each other for success. Sharing ideas with one another and relying on others feedback gives a better team output close to perfection. While responsible team members invest sufficient time and effort, the low productivity of some members due to lack of commitment and dedication is a setback to the whole team. In some instances, this may cause resentment and a rift between the teammates. Hence a better output is not expected. Some members delay their portion of work. This will not help in finishing the task on time. Contrasting personal styles and difficulty in accepting ideas which differ from their own can result in clashes between the team members thus reducing the efficiency of teamwork. To understand team work better, Bruce Tuckman first came up with a theory called forming, storming, norming and performing in 1965. Later, he added a fifth stage called adjourning. Working individually is completing the given tasks on your own without the help of the others. When working individually, we get to think independently and incorporate our ideas into the task. Hence it develops our hidden potentials. Since there are no intruders, conflicts may not arise. Hence the speed and clarity could be an added advantage. Even the laziest person is put to work here thus giving an opportunity to shoulder responsibilities. The disadvantages of working individually include possible chances of having errors since the task is not checked by the others, no room for variations and a combination of creative thoughts, occurence of some doubts regarding the accuracy of the task and the possible chance of socialization getting hampered. Its important to understand that some activities in the school like the sports meet, prize giving and shramadana campaigns are best done in teams while maintenance of registers, library book keeping system and lab experiments are best done individually. D) Interpersonal relationships are social associations or connections between two or more people. In an organization such as the school, basically there are three types of interpersonal relationships. They are: student-teacher, teacher-parent and teacher-teacher relationships. It is vital to maintain a healthy interpersonal relationship with the others. The student-teacher relationship is a very special one. The teacher should be able to understand the learners and help them out. This is only possible if there was a healthy relationship among the students and the teacher. The teacher-teacher relationship is also equally important because the teacher might decide on lesson plans and strategies according to the feedback and the advice given by their colleagues. Further, planning on several occasions which are to be held at school could be done if the teacher-teacher relationship is healthy. To advice and talk about the short commings of a student, a healthy teacher-parent relationship is required. These types of positive interpersonal relationships can further develop the roles of a teacher while magnifying its effects several times. Sometimes the above mentioned interpersonal relationships end up in conflicts if there was no understanding between the two parties. Due to the uneasiness prevailing among the two parties, the activities meant to be carried out together may not be completed to perfection thus affecting the school as well. The teachers might also not be able to concentrate on their work and may feel restless. This will have a great impact on their professional role. Hence a teacher should be wise and tactful in handling different types of interpersonal relationships so that it may only bring out a positive improvement in their professional role.

Technology in Education with DynaVox Systems :: essays papers

Technology in Education with DynaVox Systems There have always been implications in the way a teacher can teach a student. You have your perfect students who seem to know more than you, the bad student who doesn’t want to learn, and then you have your student with a disability. These students try hard to succeed, but without the proper equipment, are unable to do so. This comes into play especially with students who are unable to speak. There were many ways in the past to help people who couldn’t talk by either writing the words down all the way, to using sign language. Using these methods to convey a message to a person or group of people can take a long time. This could be, and is, very discouraging for someone who just wants to tell you the answer, or ask a question; however there isn’t an easy way to get it out. Luckily a company over in Europe developed a system that enables teaching and learning to come easier to a person with a disability. This system is called DynaVox. DynaVox was an educational computer system that came about in 1983 through Sentient Systems Technology. This system was developed to help children and adults with speech, language, learning, and physical disabilities. This tool can be used in the classroom, workplace, and community to enable people with disabilities to learn and communicate. The company and system have grown dramatically over the past few years, and have improved the lives of many children who didn’t have the means to communicate before. DynaVox System Software, or DSS, is designed to be something that is easy to use, no matter what disability you have. The DynaVox has a rubber edge with a 12 inch color touch screen. On the touch screen and as part of the system, you are able to have seventy-seven buttons that have different fonts and graphics. You press a button and it says to whomever you are talking to, what you want or need. In each system they give you a total of thirty-three hundred different symbols called the DynaSyms. These are pictures of things like humans, animals, nature, food, and everyday lingo. If there isn’t a symbol in the system that you need to use to communicate with, you can connect your DynaVox to Windows or Macintosh.

Microeconomics/Macroeconomics Chapter 1 Questions and Answers

Chapter 1 The Art and Science of Economic Analysis INTRODUCTION THIS CHAPTER HAS TWO PURPOSES: TO INTRODUCE STUDENTS TO SOME OF THE BASIC LANGUAGE OF ECONOMICS AND TO STIMULATE STUDENT INTEREST IN THE SUBJECT. IT CONVEYS TO STUDENTS THAT ECONOMICS IS NOT ONLY FOUND IN THE FINANCIAL SECTION OF THE NEWSPAPER, BUT ALSO IS VERY MUCH A PART OF THEIR EVERYDAY LIVES. BEGINNING WITH THE ECONOMIC PROBLEM OF SCARCE RESOURCES BUT UNLIMITED WANTS, THIS CHAPTER PROVIDES AN OVERVIEW OF THE FIELD AND THE ANALYTICAL TECHNIQUES USED. CONCEPTS INTRODUCED INCLUDE: RESOURCES, GOODS AND SERVICES, THE ECONOMIC ACTORS IN THE ECONOMY, AND MARGINAL ANALYSIS.TWO MODELS FOR ANALYSIS, THE CIRCULAR FLOW MODEL AND STEPS OF THE SCIENTIFIC METHOD, ARE INTRODUCED. THE APPENDIX INTRODUCES THE USE OF GRAPHS. CHAPTER OUTLINE THE ECONOMIC PROBLEM: SCARCE RESOURCES, UNLIMITED WANTS Use PowerPoint slide 3 for the following section Economics is about making choices. The problem is that wants or desires are virtually unlimi ted while the resources available to satisfy these wants are scarce. A resource is scarce when it is not freely available, when its price exceeds zero. Economics studies how people use their scarce resources in an attempt to satisfy their unlimited wants.Use PowerPoint slides 4-9 for the following sections Resources: The inputs, or factors of production, used to produce the goods and services that humans want. Resources are divided into four categories: 1. Labor: Human effort, both physical and mental 2. Capital: †¢ Physical capital: Manufactured items (tools, buildings) used to produce goods and services. †¢ Human capital: Knowledge and skills people acquire to increase their labor productivity. 3. Natural resources: gifts of nature, bodies of water, trees, oil reserves, minerals and animals. These can be renewable or exhaustible. . Entrepreneurial ability: The imagination required to develop a new product or process, the skill needed to organize production, and the willi ngness to take the risk of profit or loss. Payments for resources: Labor–wage; capital–interest; natural resources–rent; entrepreneurial ability–profit. Use PowerPoint slides 10-12 for the following section Goods and Services: Resources are combined to produce goods and services. †¢ A good is something we can see, feel, and touch (i. e. , corn). It requires scarce resources to produce and is used to satisfy human wants. A service is not tangible but requires scarce resources to produce and satisfies human wants (i. e. , haircut). †¢ A good or service is scarce if the amount people demand exceeds the amount available at a price of zero. Goods and services that are truly free are not the subject matter of economics. Without scarcity, there would be no economic problem and no need for prices. Use PowerPoint slide 13 for the following section Economic Decision Makers: There are four types of decision makers: 1. Households 2. Firms 3. Governments 4. The rest of the worldTheir interaction determines how an economy’s resources are allocated. Use PowerPoint slide 14 for the following section Markets: †¢ Buyers and sellers carry out exchanges in markets. †¢ Goods and services are exchanged in product markets. †¢ Labor, capital, natural resources, and entrepreneurial ability are exchanged in resource markets. Use PowerPoint slides 15-16 for the following section A Simple Circular Flow Model: A simple circular flow model in Exhibit 1 describes the flow of resources, products, income and revenue among economic decision makers. The Art of Economic AnalysisUse PowerPoint slide 17 for the following section Rational Self-Interest †¢ Economics assumes that individuals, in making choices, rationally select alternatives they perceive to be in their best interests. †¢ Rational refers to people trying to make the best choices they can, given the available information. †¢ Each individual tries to minimize th e expected cost of achieving a given benefit or to maximize the expected benefit achieved with a given cost. Use PowerPoint slide 18 for the following section Choice Requires Time and Information: Time and information are scarce and therefore valuable.Rational decision makers acquire information as long as the expected additional benefit from the information is greater than its expected additional cost. Use PowerPoint slide 19 for the following section Economic Analysis Is Marginal Analysis †¢ Economic choice is based on a comparison of the expected marginal cost and the expected marginal benefit of the action under consideration. †¢ Marginal means incremental, additional, or extra. †¢ A rational decision maker changes the status quo if the expected marginal benefit is greater than the expected marginal cost.Use PowerPoint slides 20-21 for the following section Microeconomics and Macroeconomics †¢ Microeconomics: The study of individual economic choices (e. g. , your economic behavior). †¢ Macroeconomics: The study of the performance of the economy as a whole, as measured, for example, by total production and employment. †¢ Economic fluctuations: The rise and fall of economic activity relative to the long-term growth trend of the economy; also called business cycles. Use PowerPoint slide 22 for the following section The Science of Economic AnalysisThe Role of Theory: An economic theory is a simplification of economic reality that is used to make predictions about the real world. An economic theory captures the important elements of the problem under study. Use PowerPoint slides 23-26 for the following section The Scientific Method: A four-step process of theoretical investigation: 1. Identify the question and define relevant variables. 2. Specify assumptions: †¢ Other-things-constant assumption: Focuses on the relationships between the variables of interest, assuming that nothing else important changes (i. e. , ceteris paribu s). Behavioral assumptions: Focus on how people will behave (i. e. , in their rational self-interest). 3. Formulate a hypothesis, a theory about how key variables relate to each other. 4. Test the hypothesis. Compare its predictions with evidence. The theory is then either rejected, accepted, or modified and retested. Use PowerPoint slide 27 for the following section Normative vs. Positive †¢ A positive economic statement concerns what is; it can be supported or rejected by reference to facts. †¢ A normative economic statement concerns what should be; it reflects an opinion and cannot be shown to be true or false by reference to the facts.Economists Tell Stories Use PowerPoint slide 28 for the following section CaseStudy: A Yen for Vending Machines Use PowerPoint slide 29 for the following section Predicting Average Behavior: The task of an economic theory is to predict the impact of an economic event on economic choices and, in turn, the effect of these choices on particu lar markets or on the economy as a whole. Economists focus on the average, or typical, behavior of people in groups. Use PowerPoint slides 30-31 for the following section Some Pitfalls of Faulty Economic Analysis The fallacy that association is causation: The fact that one event precedes another or that two events occur simultaneously does not mean that one caused the other. †¢ The fallacy of composition: The incorrect belief that what is true for the individual, or the part, is true for the group, or the whole. †¢ The mistake of ignoring secondary effects: (unintended consequences of policy) If Economist Are So Smart, Why Aren’t They Rich? Use PowerPoint slides 32-33 for the following section CaseStudy: College Major and Annual Earnings Appendix: Understanding GraphsUse PowerPoint slides 34-39 for the following section Drawing Graphs †¢ Origin: The point of departure, the point from which all variables are measured. †¢ Horizontal axis: The value of the x variable increases as you move along this axis to the right of the origin; a straight line to the right of the origin. †¢ Vertical axis: The value of the y variable increases as you move upward and away from the origin; a straight line extending above the origin. †¢ Within the space framed by the axes, you can plot possible combinations of the variables measured along each axis. †¢ Graph: A picture showing how variables relate. Time-series graph: Shows the value of one or more variables over time. †¢ Functional relation: Exists between two variables when the value of one variable depends on the other variable (e. g. , the value of the independent variable determines the value of the dependent variable). †¢ Types of relationships between variables: – Positive, or direct, relation: As one variable increases, the other variable increases. – Negative, or inverse, relation: As one variable increases, the other variable decreases. – Independen t, or unrelated relation: As one variable increases, the other variable remains unchanged or unrelated.Use PowerPoint slides 40-46 for the following section The Slopes of Straight Lines †¢ The slope of a line measures how much the vertical variable (y) changes for each 1-unit change in the horizontal variable (x). †¢ The slope of a line is a convenient device for measuring marginal effects. Slope reflects the change in y for each one unit change in x. †¢ The slope of a line does not imply causality but indicates a relation between the variables. †¢ The slope of a line is the change in the vertical distance divided by the increase in the horizontal distance. The slope of a line depends on how units are measured; the mathematical value of the slope depends on the units of measurement in the graph. †¢ The slope of a straight line is the same everywhere along the line. †¢ The slope of a curved line varies from one point to another along the curve. †¢ I f the slope is: – Positive: There is a positive or direct relation between the variables. – Negative: There is a negative or inverse relation between the variables. – Zero or assumed infinite: There is no relation between the variables; they are independent or unrelated.Use PowerPoint slides 47-48 for the following section The Slope, Units of Measurement, and Marginal Analysis The Slopes of Curved Lines Curve Shifts: A change in an underlying assumption is expressed by a shift in the curve. Chapter SUMMARY ECONOMICS IS THE STUDY OF HOW PEOPLE CHOOSE TO USE THEIR SCARCE RESOURCES TO PRODUCE, EXCHANGE, AND CONSUME GOODS AND SERVICES IN AN ATTEMPT TO SATISFY UNLIMITED WANTS. THE ECONOMIC PROBLEM ARISES FROM THE CONFLICT BETWEEN SCARCE RESOURCES AND UNLIMITED WANTS. IF WANTS WERE LIMITED OR IF RESOURCES WERE NOT SCARCE, THERE WOULD BE NO NEED TO STUDY ECONOMICS.Economic resources are combined in a variety of ways to produce goods and services. Major categories of re sources include labor, capital, natural resources, and entrepreneurial ability. Because economic resources are scarce, only a limited number of goods and services can be produced with them. Therefore, goods and services are also scarce, so choices must be made. Microeconomics focuses on choices made in households, firms, and governments and how these choices affect particular markets, such as the market for used cars. Choice is guided by rational self-interest.Choice typically requires time and information, both of which are scarce and valuable. Whereas microeconomics examines the individual pieces of the puzzle, macroeconomics steps back to consider the big picture—the performance of the economy as a whole as reflected by such measures as total production, employment, the price level, and economic growth. The 2008-2009 recession illustrates economic fluctuations, the rise and fall of economic activity relative to the long-term growth trend of the economy. Economic fluctuatio ns are also called business cycles. These cycles will be a major topic in the macroeconomics course.Economists use theories, or models, to help understand the effects of an economic change, such as a change in price or income, on individual choices and how these choices affect particular markets and the economy as a whole. Economists employ the scientific method to study an economic problem by (a) formulating the question and isolating relevant variables, (b) specifying the assumptions under which the theory operates, (c) developing a theory, or hypothesis, about how the variables relate, and (d) testing that theory by comparing its predictions with the evidence.A theory might not work perfectly, but it is useful as long as it predicts better than competing theories do. Positive economics aims to discover how the economy works. Normative economics is concerned more with how, in someone’s opinion, the economy should work. Those who are not careful can fall victim to the fallac y that association is causation, to the fallacy of composition, and to the mistake of ignoring secondary effects. The appendix to this chapter deals with the construction and interpretation of graphs. TEACHING POINTS 1.THIS COURSE WILL PROVIDE THE FIRST EXPOSURE TO THE ECONOMIC WAY OF THINKING FOR MANY OF YOUR STUDENTS. ALTHOUGH IT SEEMS NATURAL TO YOU, ECONOMIC ANALYSIS PRESENTS A FORMIDABLE CHALLENGE TO MANY STUDENTS. YOU MAY WISH TO CONSIDER PRESENTING ECONOMICS AS ONE OF MANY APPROACHES TO DESCRIBING HUMAN BEHAVIOR RATHER THAN AS A BODY OF ESTABLISHED DOCTRINES. INTRODUCING A TOPIC WITH RELEVANT QUESTIONS TO WHICH ECONOMICS PROVIDES AN ANSWER GENERALLY ENHANCES STUDENT INTEREST IN ECONOMICS. SUCH QUESTIONS APPEAR AT THE BEGINNING OF EACH CHAPTER. 2. Students are generally eager and very fresh at the beginning of the semester.Chapters 1 and 2 can be assigned during the first week, and you can move almost immediately into discussions of production possibilities, the idea of opport unity cost, the use of marginal analysis, and comparative advantage (see Chapter 2). It should also be easy to meld a discussion of the points contained in the Chapter 1 Appendix with the analytics of Chapter 2. 3. One point to stress in discussing the role and importance of economic analysis is that, while individual responses to changes in an economic environment are not always predictable, the aggregate response often is.The use of such knowledge is valuable in virtually any context in which individuals, households, firms, resource owners, and so on, are faced with changing opportunities and costs. You might use some examples to illustrate this, such as what is the predicted response to a tax on gasoline and who ends up paying for the tax or the impact of a tax refund on consumer behavior. 4. From a purely analytical perspective, the most important concept introduced in this chapter is the idea that decisions are made on the basis of marginal analysis.You might stress that margin al analysis is a cornerstone of economics. 5. Some terminology in the text may deviate from your own lecture notes. If you intend to use any of the Test Banks, try to mention deviations between the text’s usage and the terms you use in your lectures. For example, the text uses the word resources whereas you might use factors of production in your lecture notes. 6. Some students think that economics is synonymous with business. You may wish to explain the difference, because many of your students will be studying business administration. . Many students will be apprehensive about the mathematics used in the course. A good way for students to master the few mathematical tools needed in class is by through application and by using the Study Guides and the online materials. It is essential for students to become comfortable with reading and shifting graphs as well as dividing fractions. The appendix to Chapter 1 provides a good foundation for the tools needed. 8. Many beginning s tudents do not understand what economists mean by the statement â€Å"consumers are rational. It is helpful to emphasize that rationality does not imply that all consumers must be identical or that all consumers make â€Å"good† decisions all the time. Individuals can have dramatically different tastes for goods and service and yet all can be considered rational. ANSWERS TO End-of-Chapter Questions and exercises ANSWERS TO QUESTIONS FOR REVIEW 1. (Definition of Economics) What determines whether or not a resource is scarce? Why is the concept of scarcity important to the definition of economics? A resource is scarce when the amount people desire exceeds the amount available at a price of zero.The concept of scarcity is important to the definition of economics because scarcity forces people to choose how they will use their resources in an attempt to satisfy their unlimited wants and desires. Economics is about making choices. Without scarcity there would be no economic probl em, and therefore no need to choose between competing wants and desires. 2. (Resources) To which category of resources does each of the following belong? a. A taxi b. Computer software c. One hour of legal counsel d. A parking lot e. A forest f. The Mississippi River g.An individual introducing a new way to market products on the Internet. a. capital; a manufactured item employed to produce a service. b. capital; a manufactured item employed to produce a good. c. labor; human effort. d. capital and natural resources; the parking lot is on a natural resource (land), but the land has undergone capital improvement in the form of leveling and paving. e. natural resource. f. natural resource. g. entrepreneurial ability. 3. (Goods and Services) Explain why each of the following would not be considered â€Å"free† for the economy as a whole: a.Food vouchers b. U. S. aid to developing countries c. Corporate charitable contributions d. Noncable television programs e. Public high schoo l education aEven if food vouchers allow individuals to â€Å"purchase† food at no cost, producing the food in the first place uses resources and hence has a cost. b. U. S. aid, while free to the recipient country, involves costs to the United States because the aid requires the use of U. S. resources to assist developing countries. c. The corporation (and its owners) pays for these gifts. d. This is perhaps the most interesting example. Free† TV is paid for by consumers through the higher prices of the products advertised there. The cost of advertising is passed along to consumers. e. Public high school education is paid for by citizens, either through taxes or borrowing. 4. (Economic Decision Makers) Which group of economic decision makers plays the leading role in the economic system? Which groups play supporting roles? In what sense are they supporting actors? The main decision makers are households, with firms, governments, and the rest of the world serving as supp orting actors.Households are considered to be the lead actors since they supply resources used in production, and demand goods and services produced by other actors. Firms, governments, and the rest of the world are supporting actors because they demand the resources that households supply and use them to produce and supply the goods that households demand. 5. (Micro versus Macro) Determine whether each of the following is primarily a microeconomic or a macroeconomic issue: a. What price to charge for an automobile b. Measuring the impact of tax policies on total consumer spending in the economy c.A household’s decisions about what to buy d. A worker’s decision regarding how much to work each week e. Designing a government policy to increase total employment Microeconomics is the study of the individual economic behavior of decision-making units in the economy, whereas macroeconomics studies the performance of the economy as a whole. a. Microeconomic issue; it refers t o the price of an individual good. b. Macroeconomic issue; it refers to the economy as a whole. c. Microeconomic issue; it refers to the decision of one individual household. . Microeconomic issue; it refers to the decisions of one worker. e. Macroeconomic issue; it refers to the economy as a whole. 6. (Micro versus Macro) Some economists believe that in order to really understand macroeconomics, you must first understand microeconomics. How does microeconomics relate to macroeconomics? Microeconomics studies the behavior and choices made by individuals. The behavior and choices made by these individuals is added together to determine the economy–wide(or macroeconomic(measures, such as total production and unemployment.Microeconomics studies the individual pieces of the economic puzzle; macroeconomics fits those pieces together. 7. (Normative versus Positive Analysis) Determine whether each of the following statements is normative or positive: a. The U. S. unemployment rate w as below 10. 0 percent in 2010. b. The inflation rate in the United States is too high. c. The U. S. government should increase the minimum wage. d. U. S. trade restrictions cost consumers $40 billion annually. A positive statement is a statement about what is. It can be supported or rejected by reference to facts.A normative statement concerns what someone thinks ought to be. It is an opinion and can't be shown to be true or false by reference to facts. a. Positive. Either the unemployment rate was below 10. 0 percent or it was not. The validity of the statement can be checked with appropriate data. b. Normative. There is no objective measure of when the inflation rate is high and when it is not. The statement reflects someone’s opinion of what rate is too high. c. Normative. The word â€Å"should† is usually an indication of an opinion–a normative statement. d. Positive.In principle, the cost of trade restrictions could be measured. Measurement does not involv e opinions 8. (Role of Theory) What good is economic theory if it can’t predict the behavior of a specific individual? This question highlights the fact that economics, like all social sciences, attempts to describe and explain human behavior. In doing so, it cannot measure and control for all factors influencing behavior. The result is that the behavior of a specific individual cannot be explained or predicted, but the behavior of groups of individuals can be.We cannot, for example, predict any particular individual’s buying response to a sale. We can, however, predict what kind of total selling volume will occur because of a sale. Answers to Problems and Exercises 9. (Rational Self-Interest) Discuss the impact of rational self-interest on each of the following decisions: a. Whether to attend college full time or enter the workforce full time b. Whether to buy a new textbook or a used one c. Whether to attend a local college or an out-of-town college a. Individuals wi ll compare the expected benefits of attending college full time with the expected costs.One benefit might be that the individual’s stock of knowledge and productivity will grow, and so will his or her wage. Costs include not only tuition, but also the wages that could have been earned by working instead of attending college full time. If the expected benefits outweigh the costs, then the rational person will choose to go to college full time. b. Individuals will compare the expected benefits of a new textbook with the higher costs of purchasing a new textbook. Benefits include not being confused by other students’ markings in the book and a higher resale value.However, the out-of-pocket cost of a new book will be higher than the cost of a used book. If the expected benefits outweigh the costs, then a rational person will purchase the new textbook. c. Individuals will compare the expected benefits and costs associated with both colleges under consideration and will choo se the college at which the difference between benefits and costs is greater. The costs of attending an out-of-town college may include greater travel costs and phone bills and benefits such as learning about a different region. 10. Rational Self-Interest) If behavior is governed by rational self-interest, why do people make charitable contributions of time and money? Rational self-interest is not blind materialism, pure selfishness, or greed. Rational self-interest means we choose the option that maximizes expected benefits with a given cost. People will give more to charities when the contribution is tax deductible. The lower the personal cost of helping others the more we are willing to help and contribute.. 11. (Marginal Analysis) The owner of a small pizzeria is deciding whether to increase the radius of delivery area by one mile.What considerations must be taken into account if such a decision is to increase profitability? By increasing its delivery radius, the store will have greater sales. However, these marginal revenues must be balanced against the additional costs incurred, such as greater consumption of pizza ingredients, more gasoline for the delivery truck, and possibly the need to hire additional labor and increase advertising. 12. (Time and Information) It is often costly to obtain the information necessary to make good decisions. Yet your own interests can best be served by rationally weighing all options available to you.This requires informed decision making. Does this mean that making uninformed decisions is irrational? How do you determine how much information is the right amount? Rational decision makers will continue to acquire information as long as the benefit of the additional information exceeds the additional costs. Oftentimes we are willing to pay others to gather and digest the information for us. 13. (CaseStudy: A Yen for Vending Machines) Do vending machines conserve any resources other than labor? Does your answer offer any add itional insight into the widespread use of vending machines in Japan?Vending machines, in addition to being labor saving, also conserve space and time. Given the population density of Japan and the limited â€Å"free time† of the typical Japanese worker, vending machines can be expected to be popular among both sellers and buyers in Japan. 14. (CaseStudy: A Yen for Vending Machines) Suppose you had the choice of purchasing identically priced lunches from a vending machine or at a cafeteria. Which would you choose? Why? Different students will answer this question in different ways, but the key point is that non-monetary factors affect decision making.For example, students who opt for the cafeteria instead of the vending machine may, for example, do so because of the impersonal nature of the machine and the desire to â€Å"socialize† the eating experience. 15. (Pitfalls of Economic Analysis) Review the discussion of pitfalls in economic thinking in this chapter. Then id entify the fallacy, or mistake in thinking, in each of the following statements: a. Raising taxes always increases government revenues. b. Whenever there is a recession, imports decrease. Therefore, to stop a recession, we should increase imports. . Raising the tariff on imported steel helps the U. S. steel industry. Therefore, the entire economy is helped. d. Gold sells for about $1,000 per ounce. Therefore, the U. S. government could sell all the gold in Fort Knox at $1,000 per ounce and reduce the national debt. a. This assertion is a mistake because the secondary effects of taxes on production and the labor supply are ignored. If the tax rate were raised to 100 percent, for example, no one would want to work or produce. b. This is the fallacy that association implies causation.It is more likely that recession causes a change in imports than the other way round. c. This is a fallacy of composition. True, the tariff may help the steel industry. But it hurts purchasers of steel, in cluding the automobile and construction industries. The overall effect on the economy is unclear. d. This is the fallacy of composition, because attempts to sell so much gold at once would push down the price of gold. 16. (Association Versus Causation) Suppose I observe that communities with lots of doctors tend to have relatively high rates of illness. I conclude that doctors cause illness.What’s wrong with this reasoning? The causality is undoubtedly in the other direction; that is, doctors will tend to locate where there is a lot of disease and therefore a greater need for medical care. 17. (CaseStudy: College Major and Annual Earnings) Because some college majors pay nearly twice as much as others, why would students pursuing their rational self-interest choose a lower paying major? Students select college majors for a variety of reasons, and the expected pay is only one of them. Some students may have a special interest in lower-paying fields, such as philosophy, religio n, or social work.Some students may not have the aptitude to succeed in the higher-paying majors, such as engineering, mathematics, or computer science. And many students, when they select a major, may simply be unaware of the pay differences based on college major. 18. (Global Economic Watch) Select Global Issues in Context and in the Basic Search box at the top of the page, enter the phrase â€Å"selfish. † On the Results page, scroll down to the Magazines section. Choose the red link to View All. Scroll down to click on the link for the December 8, 2008, article â€Å"Going Green for Selfish Reasons. Are the companies described acting out of rational self-interest? The article indicates that, although the companies' actions may help the environment, the companies are primarily motivated to save costs, an example of rational self-interest. 19. (Global Economic Watch) Select Global Issues in Context and in the Basic Search box at the top of the page, enter either the term à ¢â‚¬Å"microeconomic† or the term â€Å"macroeconomic. † Choose one of the resources and write a summary in your own words. Especially emphasize how the resource is an example of microeconomics or macroeconomics.Student answers will vary, but should demonstrate understanding of the definitions of microeconomics and macroeconomics. Answers to Appendix Questions 1. (Understanding Graphs) Look at Exhibit 5 and answer the following questions: a. In what year (approximately) was the unemployment rate the highest? In what year was it the lowest? b. In what decade, on average, was the unemployment rate highest? In what decade was it lowest? c. Between 1950 and 1980, did the unemployment rate generally increase, decrease, or remain about the same? a. In 1931 the unemployment rate reached its highest point, 25 percent.In 1942 it reached its lowest, approximately 1 percent. b. Unemployment was the highest in the decade of the 1930s and lowest in the decade of the 1900s. c. Between 1950 and 1980, unemployment generally increased. 2. (Drawing Graphs) Sketch a graph to illustrate your idea of each of the following relationships. Be sure to label each axis appropriately. For each relationship, explain under what circumstances, if any, the curve could shift: a. The relationship between a person’s age and height b. Average monthly temperature in your home town over the course of a year c.A person’s income and the number of hamburgers consumed per month d. The amount of fertilizer added to an acre of land and the amount of corn grown on that land in one growing season e. An automobile’s horsepower and its gasoline mileage (in miles per gallon) a. In the years between birth and 15, you would expect a person’s height to increase as his or her age increased. After age 15 or so, height would remain constant. [pic] b. The average monthly temperature in your home town over the course of a year varies with the seasons. [pic]Seasons c.In the fol lowing example drawn, the number of hamburgers consumed per month will rise at first as a person's income increases. (The curve is steeply upward sloping from the origin to an income of $10,000). However, after a certain income level, there will be less and less of a rise in the number of hamburgers consumed per month. (The curve is still upward sloping but is flattening between an income of $10,000 and $20,000. ) Then, as income rises further, this consumer will decide to try other foods and actually buys fewer hamburgers per month. (The curve begins to slope downward after an income of $20,000 is reached. ) pic] d. As you add more fertilizer, you expect to produce more corn per acre up to a point of saturation. An acre of land will have some finite limit on what it can produce in one growing season, no matter how much fertilizer is added! [pic] e. As a car is engineered to be more powerful with more horsepower, you would expect it to use more gasoline and to get lower mileage per gallon of gasoline. [pic] 3. (Slope) suppose you are given the following data on wage rates and number of hours worked: | | |Hours Worked | | |Hourly | | |Point |Wage |Per Week | a |$0 |0 | |b |5 |0 | |c |10 |30 | |d |15 |35 | |e |20 |45 | |f |25 |50 | a. Construct and label a set of axes and plot these six points. Label each point a, b, c, and so on. Which variable do you think should be measured on the vertical axis, and which variable should be measured on the horizontal axis? b. Connect the points. Describe the resulting curve. Does it make sense to you? c. Compute the slope of the curve between points a and b.Between points b and c. Between points c and d. Between points d and e. Between points e and f. What happens to the slope as you move from point a to point f? a. It is conventional in economics to measure prices on the vertical axis. Here the wage rate is the price of an hour of labor, so it goes on the vertical axis. Hours worked is measured on the horizontal axis. B. THE GRAPH SHOWS THAT AT VERY LOW WAGE RATES, THE PERSON CHOOSES NOT TO WORK AT ALL. IT’S JUST NOT WORTH HER WHILE. HOWEVER, ONCE THE WAGE REACHES $10 PER HOUR, SHE BEGINS TO OFFER HER TIME IN THE LABOR MARKET BY BEING WILLING TO WORK 30 HOURS PER WEEK.AT HIGHER AND HIGHER WAGE RATES, SHE IS WILLING TO WORK MORE AND MORE HOURS. c. THE SLOPE IS MEASURED BY THE VERTICAL CHANGE THAT RESULTS FROM A GIVEN CHANGE ALONG THE HORIZONTAL AXIS. From point a to point b, the vertical change (wage) is 5, and the horizontal change (hours worked) is zero. Slope is 5/0 = assumed infinity. From point b to point c, the vertical change (wage) is 5, and the horizontal change (hours worked) is 30. Slope is 5/30 = +1/6. From point c to point d, the vertical change (wage) is 5, and the horizontal change (hours worked) is 5. Slope is 5/5 = +1.From point d to point e, the vertical change (wage) is 5, and the horizontal change (hours worked) is 10. Slope is 5/10 = +1/2. From point e to point f, the vertica l change (wage) is 5, and the horizontal change (hours worked) is 5. Slope is 5/5 = +1. A change in the steepness of the curve indicates a change in slope. As the curve becomes steeper, the rate of increase in hours of work (slope) is increasing. The shape of the curve indicates that as the curve flattens, the rate of increase in hours of work (slope) is decreasing. ———————– d a b c e f

Belgacom Case Study

Belgacom Case Question 1 a) Why did the share price of Belgacom increase following the announcement of the acquisition? b) Why did the ratings of Belgacom drop (S&P) or put on negative watch (Moody’s)? a) As Belgacom secured the purchase of the remaining 25% share of Proximus it did not own yet, the share price of the Belgian company increased by 0. 92 % the same day and 9. 8% over the following month. An announcement can lead to pre-event abnormal returns as markets react to this information to get a premium.Investors will try to assess the increase in expected earnings and dividends. The impact of this assessment will depend on how the merger is done, how the transaction is paid, the sector it concerns, etc. However, according to market efficiency theories, overreaction on stock prices tend to disappear in the long-run and the price reflects the present value of expected returns. (FAMA, 1998) That being said, several reasons may explain this jump.First, we can underline the fact that this operation enables Belgacom to collect all the benefits of Proximus. Before the purchase, 25% of the earnings of Proximus were placed in minority interests, these were payable to Vodafone. After the operation, Belgacom owns 100% of the shares and can enter all the cash of its subsidiary in its accounts. It represents an increase of the future cash flow not only for the firm but also for its current shareholders, which will be comforted to receive more in the future or that their shares represent more cash.This is due to the decision of Belgacom to finance its acquisition by debt which doesn’t give ownership rights to the bond owners. Fig. 1: Evolution of Belgacom Share Price (2005-2008) Second, Belgacom was familiar with Proximus business as Belgacom (75%) founded the company with Airtouch (25%) in 1994, creating by this way the first mobile phone operator in Belgium. b) Unlike the market, rating agencies did not welcome positively this transaction: Moodyâ€℠¢s changed its outlook to negative and Standard&Poors downgraded Belgacom rating to A from A+. Moody’s xplained that it keeps Belgacom’s rating unchanged because according its methodology designed for GRI (Government-Related Issues), there is no change in Belgacom solvability. Moody’s GRI methodology use three inputs: the rating and the outlook of Belgium, the low level of default dependence and the medium level of support from the Belgian government. While there is no change in those inputs, there should be no change in Belgacom rating. That being said, several indicators lead the agency to wonder about the ability of the Belgian company to deal with its creditors.First, Belgacom announced a bunch of outflows for the months to come: just at the same time, Belgacom decided to sell its 5,8% stake in Neuf Cegestel to SFR: the outcome of the operation was EUR 187 million plus a share buyback (maximum 200 million) and a dividend in 2006 for EUR 100 million. Futhermo re, Belgacom decision to use its current financial stability and therefore weaken its debt ratios. As for Standard&Poors, the agency decided to downgrade the rating of the Belgian firm from A+ to A.S&P said this decision lies on the fact that the Belgacom debt will rise of about EUR 2 billion, making notably increase the debt/Ebitda ratio from 0,8 to 1,9. Moreover, its business in a competitive and liberalized market, as well as the decline of fixed lines market make fear for future results of the company. However, the outlook remains stable, that can be explained by the strong position of the company on the Belgian telecom market and its huge ability to generate cash. Question 2 a) Why was the acquisition financed by a bridge loan? ) What were the alternative financing sources? a) Bridge loans are short-term financial instruments usually used to lock-in a settled price( (frequent in Real Estate Market). This practice buys time for the deal maker to sort things out and to better str ucture its financing scheme. This seems to be the main rationale for Belgacom in this case. The management wanted to lock-in the price agreed on with Vodafone and as the deal was subordinated to the Belgian Authorities approval, it was more cautious to make it happen right away.Yet there is another way to see a bridge loan as a temporary expensive loan serving the purpose of being an intermediate financing mean for the company that benefits from it (Fabozzi, 1991). Later on, this bridge loan is reimbursed with more advantageous types of loans. was in fact a syndicated loan underwritten in order to finance an acquisition. As a matter of facts, the loan was made by several lending institutions called the mandated lead arrangers i. In the case of Belgacom, the company took a bridge loan for several reasons that are detailed below.The bridge loan e. BNP Paribas, Citi, Fortis, ING and JP Morgan. For the investment banks that underwrite the syndicated loan, the main interest resides in th e fact that they gain a fee. In this specific case, the bridge loan was arranged as a revolving credit instrument type. This meant Belgacom had to pay a fee plus interest expenses and can draw-repay-redraw as many times as needed. As said before, a first valid reason would be that the cash was needed quickly (maybe) and bridge loans are arranged more quickly.In any case it is in the best interest of the company (Belgacom here) to reimburse the bridge loan as quickly as possible because it is very expensive and the interest rate generally increases with the maturity. Moreover issuing corporate bonds takes time. In fact, there are four main steps to issue a bond in the bond market. First, there is the pre-mandate phase which aims to determine the funding needs or whether it is the right time to tap the bond market. Additionally, the currency has to be determined, the market as well plus the targeted investors.After that, comes the book building process which is one of the most importa nt tasks that consists of taking the orders from the investors. Then, a range for the coupon rate has to be determined and the amounts have to be allocated to the investors. Those steps could typically take weeks. Helping companies with short term funding is thus a major need for the client. Another reason may be that it gives Belgacom time to wait for more favourable economic conditions for issuing the bonds. Depending on investor’s appetite, timing is in fact crucial in such deals.Now, from the investment bank’s perspective, there is possibly a conflict of interest as the investment bank is at the same time creditor (through the bridge loan) and the entity that prices the securities that will be used to reimburse this loan. One could argue the investment bank could lack objectivity (Glazer, 1989). However, this constitutes an additional incentive for the book runners to successfully carry the deal to its end. Additionally, four of the five banks that granted the brid ge loan became the joint book runners. To that extent, there are clearly business interests which are involved.This can be interesting for the investment bank in order to get closer to the client. Moreover, this form of short term financing is more expensive for the company because it bears higher risks. Alternatively, it means that it is more lucrative for the investment bank as well. To sum up, bridge loans seem to be a lucrative source of profits for investment banks. First, they place themselves in a comfortable position to issue bonds for the company later on. Second, they can diversify their revenues and be a good candidate for the bond issuance.As a matter of facts, four of the five banks providing the bridge loan took care of bond issuance. b) Alternatives to bridge loans were traditionally letters of comfort written by the investment bank stating that the bank was ‘highly confident’ that the additional financing needed by the company could be obtained. This imp lies no bridge funding at all. Hence the alternative would be to wait for the bonds to be issued. The risk here however would consist of being too late for acquiring the target. Another alternative would be to use your own capital to fund the acquisition in the short run.This depends, of course, on the ability of Belgacom to generate such a large amount of cash. Yet another option would have been to raise more capital by issuing shares with the agreement of its existing shareholders. However, this option could have been detrimental to existing shareholders: the Belgian state which had a major stake in Belgacom with 50. 1% of the shares. Here is a summary of all the plausible alternatives: * Pay with retained cash: Belgacom could put 2Bnâ‚ ¬ on the table for Vodafone’s stake (assuming that the amount was available at the time).Although, this is known as the worst case scenario for current shareholders. Putting the cash in an acquisition would also have constrained Belgacom to lower (even cancel) its expansion investments. * Go straight to the Market: Belgacom could issue the bonds without taking the bridge loan but since the company had no prior bonds outstanding in the secondary market, the pricing would have been necessary anyway and it takes time and money to process it. The risk in that case is the agreement with Vodafone; other players could profit from the info and buy the stake in order to sell it back to Belgacom at a premium.Question 3 Assuming the 5-year swap rate was 3. 922% and the 10-year swap rate was 3. 977% at the time of pricing the deal (primary market), could you calculate: a) The yield for investors The yield is composed of the risk-free interest rate and the risk premium. The risk-free rate is usually defined as the rate of a government bond or the interbank rates (ex: Euribor) for the same maturity. However, the swap rate is used for maturities beyond 12 months. Here, the explanatory statement assumes that the 5-year and the 10-y ear swap rate were respectively 3,922% and 3,977%.The credit spread or risk premium depends on the maturity and the quality of the issuer. After comparing the coupon offered by companies with the same risk profile from the telecom peer group in the secondary market, the explanatory note explains banks’ position which suggested to issue the 5Y bond and the 10 Y bond with a spread guidance of respectively 30-35 bp and 60-65 bp. Bonds 5 and 10 years| Years to| 2006| | | Maturity| 5 years| 10 years| | | Swap Rate (rf)| 3,92%| 3,98%| | | | Min| Max| Min| Max| | | Risk Premium| 0,30%| 0,35%| 0,60%| 0,65%| | |Face Value| â‚ ¬ -100,00| â‚ ¬ -100,00| â‚ ¬ -100,00| â‚ ¬ -100,00| | | Yield to Maturity| 4,222%| 4,272%| 4,577%| 4,627%| | | Coupon Rate| 4,125%| 4,250%| 4,500%| 4,625%| | | Price â‚ ¬| â‚ ¬ 99,57| â‚ ¬ 99,90| â‚ ¬ 99,39| â‚ ¬ 99,98| | | Price %| 99,57%| 99,90%| 99,39%| 99,98%| | | Fees| 0,15%| 0,15%| 0,25%| 0,25%| | | Proceeds| 99,42%| 99,75%| 99,1 4%| 99,73%| | | Cost %| 4,256%| 4,306%| 4,609%| 4,659%| | | Table 1: Results for the Bond Issuance Thus, the yield for investors should be the sum of the risk-free and the risk premium rate: * Min. 4,222% and max. 4,272% for the 5-year bond * Min. 4,577% and max. 4,627% for the 10-year bond ) The coupon rate The coupon rate is the amount of interest payable on the bond. It is important to keep in mind that the market practices want the yield to vary by steps of 0,125%. Therefore, according to table 1, the yield for the investor varies between 4,125 and 4,250 for a 5-year maturity bond and 4,5% and 4,625% for a 10-year maturity bond. c) The issue price The issue price is the price at which investors buy the bonds in the primary market. The bond issue price is the present value of the bond’s cash flow. To obtain this price, we have to use the coupon rate, the face value and the yield for investor as described in this formula:Issue Price = Coupon 1(1+y)+ Coupon 2(1+y)? +†¦ +Coupon n1+yn+ Face value1+yn At issuance, the subscriber will pay: * Min. 99,57%, Max 99,90% for a maturity of 5-year * Min. 99,39%, Max 99,98% for a maturity of 10-year d) The cost for Belgacom The cost to maturity for the issuer y is defined as: Issue Price – Fees of the bookrunners = Coupon 1(1+y)+ Coupon 2(1+y)? +†¦ +Coupon n1+yn+ Face value1+yn The rate y solving (cost to maturity) this equation is: * Min. 4,256%, Max 4,306% for a maturity of 5-year * Min. 4,609%, Max 4,659% for a maturity of 10-year e) Cash Flows Here are the cash flows for the issuer. For a maturity of 5 years: At inception (time 0), the issuer receives (99,57%-0,15%)=99,42% multiplied by the total face value. Every year for 5 years, the issuer pays the coupons of 4,125% * face value of the bonds At maturity, the issuer has to repay the whole face value plus the last coupon. | | | | | | | | | | | | Cash Flows as % of Face Value| 5y-Bond| 0| 1| 2| 3| 4| 5| | | | | | Bottom| 99,42| -4,125| -4,125| -4,125| -4,125| -104,125| | | | | | Up| 99,75| -4,25| -4,25| -4,25| -4,25| -104,25| | | | | | | | | | | | | | | | | | 10y-Bond| 0| 1| 2| 3| 4| 5| 6| 7| 8| 9| 10|Bottom| 99,14| -4,50| -4,50| -4,50| -4,50| -4,50| -4,50| -4,50| -4,50| -4,50| -104,50| Up| 99,73| -4,63| -4,63| -4,63| -4,63| -4,63| -4,63| -4,63| -4,63| -4,63| -104,63| | | | | | | | | | | | | Question 4 Consider an outstanding corporate bond in the secondary market (issued a few months ago). All else being equal, the market suddenly perceives a more important credit risk associated with the considered issuer. What impact should it have on: a) The credit spread The credit risk is the risk that the issuer may default and not pay back the full amount he owes to bondholders (the total face value of the bonds).The credit spread translates the uncertainty about potential future stock price movements†. (Berk, 2011) If the market suddenly perceives more important credit risk associated with the issuer, the credit spread will widen as the market is perceived has being relatively safer. The payoff associated to extra credit risk is a higher yield. Therefore, the credit spread represents a bonus for investors when supporting extra risks. Fig 2: Yield curves Source: CFA b) The yield There are two components in the yield: the risk free rate and the credit spread. All else being equal, if the credit spread widens, the yield increases. ) The price Investors want to pay less for a risky bond having the same pay-offs as a risk-free bond. By taking more risk, the final amount the investor expects to receive may be less than what he will get as there is a credit default risk. (Berk et al. , 2011) The variable on which the market has a direct influence on in order to adjust for a higher yield is the market price. Due to the negative relation between the yield and the price and if the coupon payments and the principal repayment remain unchanged, the price must decrease in order to translate the surge in the yield.T his is particularly relevant when the issuer is the target of a leveraged buyout, which, in most cases, is leveraged by the issuance of new bonds. The increased debt used in order to make such financial actions often decrease the totality of the bonds of the issuer to a status of  «Ã‚  junk bonds  Ã‚ ». Question 5 How would you assess Belgacom’s position with regard to the qualitative factors enumerated to assess the pricing ? * Issue premia for recent transaction First of all, this is the first bond offering issued by Belgacom.Therefore, it cannot be referred to a previous premium offered in its own recent transactions. Therefore, the reference will be the telecom peer group having the same risk profile. * After market performance of recently launched deals The issue premia have widened for two main reasons. First, a trend towards more acquisition in the Telecom sector since 2005. Second, the Telecom sector suffers from the fact its services are more and more commoditize d which in turn may hurt the profitability of a Telecom company. At the time it was expected the bond could be split in three types.A floating rate note and two fixed rate notes. It was expected the 3-year FRN had a spread of 15bp to 20bp whereas the fixed 5-year note would have a 30bp to 35bp spread. Finally the 10-year note would have had a spread of 60bp to 65bp. With regards to recent transactions, Deutsche Telekom was offered a spread of 20bp for a 3-year floating note. 15-20bp is thus potentially better for Belgacom. As far as the fixed notes are concerned, Belgacom seems to benefit for a slightly better spread for 10-year notes but not for the 5-year ones as the one of Deutsche Telekom was only of 17bp in April 2006. Date| Swap 5-y| Swap 10-y| Coupon| Spread(bp)| Currency| Amount| Deutsche T| April 2006| 3. 83%| | 4%| 17| EUR| 750m| Deutsche T| May 2006| | 4. 13%| 4. 75%| 62| EUR| 500m| Telefonica| Feb 2006| 3. 42%| | 3. 75%| 33| EUR| 2250m| Telefonica| Feb 2006| | 3. 68%| 4. 37%| 69| EUR| 1750m| Vodafone| Jun 2006| | 4. 07%| 4. 75%| 68| EUR| 300m| * Are investors liquid? (hedge funds) However, according to the case, investor’s appetite remained high at that time. In fact, bond issuances remained low because corporates generated increasingly more cash flows and made use of cheaper ways of funding. Market sentiment? (world, Belgium, politics) There has been a lot of deleveraging followed by acquisitions in the past years. Moody’s says the economy of Belgium is only weakly correlated with Belgacom’s credit quality. However, for companies that are partly owned by the state, the credit quality of the Sovereign may play a greater role. At that time however, there was no political complications in Belgium yet. In 2006, the subprime crisis had not begun yet either. Hence one could argue the political setting was relatively clear.Moreover, there were strong liberalization policies pushed by the EC and investors were afraid that the Belgian state would disinvest in Belgacom after the following elections. The Belgian state had already to divest, keeping 50,1% of the share. Therefore, investors wanted an insurance against a change of control in case the Belgian State sold his participations but also to cover the risk against an LBO. As Belgacom could not introduce a step-up language, it could have had an impact on the credit spread by increasing it. * Credit Spread volatility Credit spread rose significantly more for telecom companies in 2005-2006.This was due to the fact the telecom companies ventured more in acquisition activities during that period. 5-year and 10-year credit spread for A-rated telecom companies respectively rose 10bp and 20bp during that period. * Saturation effect in investors portfolio? Are investors sick of telecom bond issuances? In principle, investors were not sick of telecom bond issuances as the one of Belgacom would add diversification to their portfolio. What is more, Belgacom was seen as a safe and relatively liquid company as they were previously weakly leveraged. * Amount raised in the pastAs far as Belgacom is concerned, the company has never issued any bond. Hence this was a premiere for the company. If we look at the issue amount of comparable transactions in the peer group of the same year, telecom issuers have issued in 2006 from three to 5 times with an issue amount from 500 million. For example, Telefonica issued in 2006 a total of 11. 750 million â‚ ¬ * Credit quality of issuer and peers In terms of credit quality, Belgacom is better than most competitors. This is mostly due to the fact that Belgacom was weakly leveraged before the issuance.For instance, EBITDA/Interest expenses of France Telecom, Telecom Italia and KPN was between 2. 4x and 7. 2% while Belgacom’s was 93x. However, Belgacom wasn’t the best according to credit rating agencies. The considered peer group is made of France Telecom, Telecom Italia, KPN and Belgacom. Moreover, Moo dy’s seems to give to Belgacom a better rating that Fitch. Therefore, we may suppose that Belgacom’s cost of issuance may be slightly lower than those of his peer group. Question 6 What is a change of control put provision? How would it have protected investors?Why did some investors think the step-up language would not be useful? Looking at the step-up language, what would be the coupon rate if the rating of Belgacom was downgraded a) to BBB- (S&P)/Ba1 (Moody's)? b) to BB+ (S;P)/Ba1 (Moody's)? A change of control put provision is an option given to the bondholder to get its bond repaid before maturity at par or above, in the event of change of control followed by a rating downgrade (e. g. after an LBO). Companies may be reluctant to issue bonds including this clause, because it can place more constraints on their finances as investors have the power to control repayments.Besides, it protects investors so they can have the opportunity to change their investment decisio n strategy if the issuer would happen to change its ownership. In case of a LBO, for example, the ownership of the company is transferred by using debt relying on the future cash flows of the company. According to (Rosenbaum et al. , 2007), â€Å"a target only represents an attractive LBO opportunity if it can be purchased at a price and utilizing a financing structure that provides sufficient returns with a viable exit strategy. In such a case, a former bondholder would see the credit risk he faces considerably increase, given the amount of additional debt supported by the company. This clause should then enable a bond investor to exit his position without bearing that increased risk because firstly, the change of control was likely, since the Belgian government was seeking to sell its stake in Belgacom and secondly because some argued that the inclusion of a step-up language taking the form of a +50bp in interest payment per downgrade below investment grade would be far from comp ensating the additional risk they would be bearing.In the case of Belgacom, there were some concerns about this possible withdrawal of Belgian state from its majority stake, intensified by the fact that the company could also be the target of a potential LBO operation as explained above. In order to reassure prospective investors and consequently lower interest rates for long term bonds (10 years), it has been considered to include such a clause in the deal. Therefore, Belgacom finally decided to add a step-up language despite the concerns emitted by some investors.The main benefit of the step-up language is that investors will usually get the initial coupon above the market and will also know what is to expect from their bond(s) over a longer-term period. However, bonds including a step-up language present the disadvantage of being callable by the issuer in order to issue it at lower rate to reduce their cost of borrowing which is the reason why some investors were reluctant concer ning the step-up. In the case of Belgacom, a downgrade in the rating would have had the following impact on the coupon rate: ) If the rating of Belgacom would have been downgraded to BBB- (S&P) / Ba1 (Moody's) and if the lowest rating is taken into account which is Ba1 (one grade below investment grade), the interest paid (coupon rate) would have increased by +50bp. b) In this scenario, both rating agencies consider a one notch downgrade below investment grade leading therefore to a +50bp increase in the interest rate paid. Bibliography BERK J. , DeMARZO P. (2011) â€Å"Corporate Finance – Global edition† Second edition, Pearson edition, pp. 001 FABOZZI F. (1991) â€Å"The handbook of Fixed Income Securities†, Mc Graw-Hill edition, Third edition, p. 224 FAMA E. (1998) â€Å"Market efficiency, long-term returns, and behavioral finance† Journal of Financial Economics, 49, pp. 283-306 GLAZER A. (1989) â€Å"Acquisition bridge financing by investment banks à ¢â‚¬â€œ bridge financing, as source of revenue for investment bankers, poses risk and conflict of interest† Business Horizons magazine, Sep-Oc 1989, Website: http://findarticles. om/p/articles/mi_m1038/is_n5_v32/ai_8120675/ (Seen in April 2012) ROSENBAUM J. , PEARL J. (2009)  «Ã‚  Investment Banking  : Valuation, Leveraged Buyouts and Mergers ; Acquisitions  Ã‚ » Wiley finance Vodafone Non Official Website  : www. vodafonews. com/belgique. html (Seen in April 2012) ——————————————– [ 1 ]. www. vodafonews. com/belgique. html [ 2 ]. Exhibit 13