MBA _IT

: The value of assets gradually reduces on account of use. Such reduction in value is known asdepreciation. Different authors have given different definitions of depreciation, such as:"Depreciation may be defined as the permanent continuous diminution in the quality, quantity or value on an asset."  (By Pickles)"Depreciation is the gradual permanent decrease in the value of an asset from any cause."  (By Carter)"Depreciation may be defined as a measure of the exhaustion of the effective life of an asset from any cause during a given period." (By Spicer & Pegler)Depreciation is the diminution in intrinsic value of an asset due to use and/or the lapse of time."  (By Institute of Cost and Management Accountants, England)

"Depreciation is the reduction in the value of a fixed asset occasioned by physical wear and tear, obsolescence or the passage of time."  (Northcott & Forsyth)"Depreciation is the diminution in the value of assets owing to wear and tear, effluscion of time, obsolescence or similar causes."  (Cropper)From the above definitions, it follows that an asset gradually declines on account of use and passage of time and this causes permanent reduction in the value and utility of asset. Such reduction in the value or utility of asset is called depreciation. In other words, expired cost or utility of asset is depreciation.

The main causes of depreciation may be divided into two categories, namely:

1.        Internal Cause and

2.        External Causes

Internal Causes:

Depreciation which occurs for certain inherent normal causes, is known as internal depreciation. The main causes of internal depreciation are:

Wear and Tear:

Some assets physically deteriorate due to wear and tear in use. More and more use of an asset, the greater would be the wear and tear. Physical deterioration of an asset is caused from movement, strain, friction, erasion etc. An obvious example of this is motor car which rapidly wears out. Other assets like this are building, plant, machinery, furniture, etc. The wear and tear is general but primary cause of depreciation.

Depletion:

Some assets declines in value proportionate to the quantum of production, e.g. mine, quarry etc. With the raising of coal from coal mine the total deposit reduces gradually and after sometime it will be fully exhausted. Then its value will be reduced to nil.

External Causes:

Depreciation caused by some external reasons is called external depreciation. The main external causes are as follows:

Obsolescence:

Some assets, although in proper working order, may become obsolete. For example, old machine becomes obsolete with the invention of more economical and sophisticated machine whose productive capacity is generally larger and cost of production is therefore less. In order to survive in the competitive market the manufacturers must must install new machines replacing the old ones. Again, it may happen that the articles produced by old machine are no longer saleable in the market on account of change of habit and taste of the people. In such a case the old machine, although in good working condition, must be discarded and the new one purchased.

Efflux of Time:

Some assets diminish in value on account of sheer passage of time, even though they are not used e.g., leasehold property, patent right, copyright etc. Suppose we take a lease of a house for 10 years for $10,000. Its annual depreciation will be $1,000 (10,000/10), irrespective of the the whether the house has been used or not. Because with the end of lease after 10 years, the house will go out of possession.

Accident:

Assets may be destroyed by abnormal reasons such as fire, earthquake, flood etc. In such a case the destroyed asset must be written off as loss and a new one purchased.

Ans2: Front office quantitative analyst

In trading and sales operations, quantitative analysts work to determine prices, manage risk, and identify profitable opportunities. strategic level. Although highly skilled programmers, FOQs are often bound by time constraints, and hacking complex tasks together

Quantitative investment management

Quantitative analysis is used extensively by asset managers. Some, such as AQR or Barclays, rely almost exclusively on quantitative strategies while others, such as Pimco, Blackrock or Citadel use a mix of quantitative and fundamental methods. Virtually all large asset managers and hedge funds rely to some degree on quantitative methods.Library quantitative analysis Major firms invest large sums in an attempt to produce standard methods of evaluating prices and risk. These differ from front office tools in that Excel is very rare, with most development being in C++, though Java and C# are sometimes used in non-performance critical tasks. LQs spend more time modelling ensuring the analytics are both efficient and correct, though there is tension between LQs and FOQs on the validity of their results. LQs are required to understand techniques such as Monte Carlo methods and finite difference methods, as well as the nature of the products being modelled.

Algorithmic trading quantitative analyst

Often the highest paid form of Quant, ATQs make use of methods taken from signal processing, game theory, gambling Kelly criterion, market micro structure, econometrics, and time series analysis.Algorithmic trading includes statistical arbitrage, but includes techniques largely based upon speed of response, to the extent that some ATQs modify hardware and Linux

Risk management

This has grown in importance in recent years, as the credit crisis exposed holes in the mechanisms used to ensure that positions were correctly hedged, though in no bank does the pay in risk approach that in front office. A core technique is value at risk, and this is backed up with various forms of stress testing and direct analysis of the positions and models used by

Innovation

In the aftermath of the financial crisis, there surfaced the recognition that quantitative valuation methods were generally too narrow in their approach. An agreed upon fix adopted by numerous financial institutions has been to improve collaboration through continuous improvement and thought leadership. This has led to the creation of collaborative environments in order to produce the most robust statistical models available. Through working with a large pool of some of the world's most talented quantitative analysts, economists and mathematicians from the financial industry and academia, transparency continues to be improved, leading to constant improvement.^{[weasel words]}

Model validation

MV takes the models and methods developed by front office, library, and modelling quants and determines their validity and correctness. The MV group might well be seen as a superset of the quant operations in a financial institution, since it must deal with new and advanced new models and trading techniques from across the firm. However, the pay structure in all firms is such that MV groups struggle to attract and retain adequate staff, often with talented quantitative analysts leaving at the first opportunity. This gravely impacts corporate ability to manage model risk, or to ensure that the positions being held are correctly valued. An MV quantitative analyst will typically earn a fraction of quantitative analysts in other groups with similar length of experience.

Quantitative developer

Quant developers are computer specialists that assist, implement and maintain the quant models. They tend to be highly specialised language technicians that bridge the gap between IT and quantitative analysts.

Techniques

A typical problem for a numerically oriented quantitative analyst would be to develop a model for pricing, hedging, and risk-managing a complex derivative product. Mathematically-oriented quantitative analysts tend to have more of a reliance on numerical analysis, and less of a reliance on statistics and econometrics. These quantitative analysts tend to be of the psychology that prefers a deterministically "correct" answer, as once there is agreement on input values and market variable dynamics, there is only one correct price for any given security (which can be demonstrated, albeit often inefficiently, through a large volume of Monte Carlo simulations).

A typical problem for a statistically oriented quantitative analyst would be to develop a model for deciding which stocks are relatively expensive and which stocks are relatively cheap. The model might include a company's book value to price ratio, its trailing earnings to price ratio, and other accounting factors. An investment manager might implement this analysis by buying the underpriced stocks, selling the overpriced stocks, or both. Statistically-oriented quantitative analysts tend to have more of a reliance on statistics and econometrics, and less of a reliance on sophisticated numerical techniques and object-oriented programming. These quantitative analysts tend to be of the psychology that enjoys trying to find the best approach to modeling data, and can accept that there is no "right answer" until time has passed and we can retrospectively see how the model performed. Both types of quantitative analysts demand a strong knowledge of sophisticated mathematics and computer programming proficiency.

One of the principal mathematical tools of quantitative finance is stochastic calculus.

Ans3 The Dividend Decision is a decision made by the directors of a company. It relates to the amount and timing of any cash payments made to the company's stockholders. The decision is an important one for the firm as it may influence its capital structure and stock price. In addition, the decision may determine the amount of taxation that stockholders pay.

There are three main factors that may influence a firm's dividend decision:

§                    Free-cash flow

§                    Dividend clienteles

§                    Information signalling

The free cash flow theory of dividends

Under this theory, the dividend decision is very simple. The firm simply pays out, as dividends, any cash that is surplus after it invests in all available positive net present value projects.

A key criticism of this theory is that it does not explain the observed dividend policies of real-world companies. Most companies pay relatively consistent dividends from one year to the next and managers tend to prefer to pay a steadily increasing dividend rather than paying a dividend that fluctuates dramatically from one year to the next. These criticisms have led to the development of other models that seek to explain the dividend decision.

Dividend clienteles

A particular pattern of dividend payments may suit one type of stock holder more than another; this is sometimes called the clientele effect. A retiree may prefer to invest in a firm that provides a consistently high dividend yield, whereas a person with a high income from employment may prefer to avoid dividends due to their high marginal tax rate on income. If clienteles exist for particular patterns of dividend payments, a firm may be able to maximise its stock price and minimise its cost of capital by catering to a particular clientele. This model may help to explain the relatively consistent dividend policies followed by most listed companies.

A key criticism of the idea of dividend clienteles is that investors do not need to rely upon the firm to provide the pattern of cash flows that they desire. An investor who would like to receive some cash from their investment always has the option of selling a portion of their holding. This argument is even more cogent in recent times, with the advent of very low-cost discount stockbrokers. It remains possible that there are taxation-based clienteles for certain types of dividend policies.

Information signalling

A model developed by Merton Miller and Kevin Rock in 1985 suggests that dividend announcements convey information to investors regarding the firm's future prospects. Many earlier studies had shown that stock prices tend to increase when an increase in dividends is announced and tend to decrease when a decrease or omission is announced. Miller and Rock pointed out that this is likely due to the information content of dividends.

When investors have incomplete information about the firm (perhaps due to opaque accounting practices) they will look for other information that may provide a clue as to the firm's future prospects. Managers have more information than investors about the firm, and such information may inform their dividend decisions. When managers lack confidence in the firm's ability to generate cash flows in the future they may keep dividends constant, or possibly even reduce the amount of dividends paid out. Conversely, managers that have access to information that indicates very good future prospects for the firm (e.g. a full order book) are more likely to increase dividends. According to Grullon (2002) the information value lies in the fact that a dividend increase signals a decrease in systematic risk (a decrease in discount rate), the correlation between dividend changes and earnings changes has not been proofed.

Investors can use this knowledge about managers' behaviour to inform their decision to buy or sell the firm's stock, bidding the price up in the case of a positive dividend surprise, or selling it down when dividends do not meet expectations. This, in turn, may influence the dividend decision as managers know that stock holders closely watch dividend announcements looking for good or bad news. As managers tend to avoid sending a negative signal to the market about the future prospects of their firm, this also tends to lead to a dividend policy of a steady, gradually increasing payment.

Conclusion

In a fully informed, efficient market with no taxes and no transaction costs, the free cash flow model of the dividend decision would prevail and firms would simply pay as a dividend any excess cash available. The observed behaviours of firm differs markedly from such a pattern. Most firms pay a dividend that is relatively constant over time. This pattern of behavior is likely explained by the existence of clienteles for certain dividend policies and the information effects of announcements of changes to dividends.

The dividend decision is usually taken by considering at least the three questions of: how much excess cash is available? What do our investors prefer? and What will be the effect on our stock price of announcing the amount of the dividend?

Ans4 There are many tasks every business needs to do if it is going to succeed. Each of these tasks is described as being a function of a business. The following is a brief introduction to each of these functions:

·                                 Human Resources - ensures the business has the best staff for the job and that they are able to work effectively in a safe environment;

·                                 Finance - will keep a record of all money coming in and going out of the business. They have responsibility for securing finances for future expansion and paying staff and suppliers;

·                                 Administration and ICT support - ensure the smooth running of the business on a day-to-day basis. They have responsibility for clerical duties, cleaning, computer and software support, security and health and safety;

·                                 Operations - have the task of producing the goods or service in the most efficient way. This is done by making best use of the business's staff, machinery, building and raw materials;

·                                 marketing and sales - will try and maximize the level of sales by carrying out market research and promoting the goods or service through a motivated sales team;

·                                 Customer Service - will help the customer before and after a sale has been made by providing information, giving advice, providing credit facilities, delivering goods and providing after-sales support;.

The proper role of government provides a starting point for the analysis of public finance. In theory, under certain circumstances, private markets will allocate goods and services among individuals efficiently (in the sense that no waste occurs and that individual tastes are matching with the economy's productive abilities). If private markets were able to provide efficient outcomes and if the distribution of income were socially acceptable, then there would be little or no scope for government. In many cases, however, conditions for private market efficiency are violated. For example, if many people can enjoy the same good at the same time (non-rival, non-excludable consumption), then private markets may supply too little of that good. National defense is one example of non-rival consumption, or of apublic good.

"Market failure" occurs when private markets do not allocate goods or services efficiently. The existence of market failure provides an efficiency-based rationale for collective or governmental provision of goods and services. Externalities, public goods, informational advantages, strong economies of scale, and network effects can cause market failures. Public provision via a government or a voluntary association, however, is subject to other inefficiencies, termed "government failure."

Under broad assumptions, government decisions about the efficient scope and level of activities can be efficiently separated from decisions about the design of taxation systems (Diamond-Mirlees separation). In this view, public sector programs should be designed to maximize social benefits minus costs (cost-benefit analysis), and then revenues needed to pay for those expenditures should be raised through a taxation system that creates the fewest efficiency losses caused by distortion of economic activity as possible. In practice, government budgeting or public budgeting is substantially more complicated and often results in inefficient practices.

Government can pay for spending by borrowing (for example, with government bonds), although borrowing is a method of distributing tax burdens through time rather than a replacement for taxes. Adeficit is the difference between government spending and revenues. The accumulation of deficits over time is the total public debt. Deficit finance allows governments to smooth tax burdens over time, and gives governments an important fiscal policy tool. Deficits can also narrow the options of successor governments.

Public finance is closely connected to issues of income distribution and social equity. Governments can reallocate income through transfer payments or by designing tax systems that treat high-income and low-income households differently.

The Public Choice approach to public finance seeks to explain how self-interested voters, politicians, and bureaucrats actually operate, rather than how they should operate.

Public finance management

Collection of sufficient resources from the economy in an appropriate manner along with allocating and use of these resources efficiently and effectively constitute good financial management. Resource generation, resource allocation and expenditure management (resource utilization) are the essential components of a public financial management system.

Public Finance Management (PFM) basically deals with all aspects of resource mobilization and expenditure management in government. Just as managing finances is a critical function of management in any organization, similarly public finance management is an essential part of the governance process. Public finance management includes resource mobilization, prioritization of programmes, the budgetary process, efficient management of resources and exercising controls. Rising aspirations of people are placing more demands on financial resources. At the same time, the emphasis of the citizenry is on value for money, thus making public finance management increasingly vital. Taxes

Taxation is the central part of modern public finance. Its significance arises not only from the fact that it is by far the most important of all revenues but also because of the gravity of the problems created by the present day heavy tax burden. The main objective of taxation is raising revenue. A high level of taxation is necessary in a welfare State to fulfill its obligations. Taxation is used as an instrument of attaining certain social objectives i.e. as a means of redistribution of wealth and thereby reducing inequalities. Taxation in a modern Government is thus needed not merely to raise the revenue required to meet its ever-growing expenditure on administration and social services but also to reduce the inequalities of income and wealth. Taxation is also needed to draw away money that would otherwise go into consumption and cause inflation to rise.^[5]

§                    A tax is a financial charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (for example, tribes, secessionist movements Debt

Foreign currency reserves and gold minus external debt based on 2010 data from CIA Factbook.

Governments, like any other legal entity, can take out loans, issue bonds and make financial investments. Government debt (also known as public debt or national debt) is money (or credit) owed by any level of government; either central or federal government,municipal government or local government. Some local governments issue bonds based on their taxing authority, such as tax increment bonds or revenue bonds.

As the government represents the people, government debt can be seen as an indirect debt of the taxpayers. Government debt can be categorized as internal debt, owed to lenders within the country, and external debt, owed to foreign lenders. Governments usually borrow by issuing securities such as government bonds and bills. Less creditworthy countries sometimes borrow directly fromcommercial banks or international institutions such as the International Monetary Fund or the World Bank.

Most government budgets are calculated on a cash basis, meaning that revenues are recognized when collected and outlays are recognized when paid. Some consider all government liabilities, including future pension payments and payments for goods and services the government has contracted for but not yet paid, as government debt. This approach is called accrual accounting, meaning that obligations are recognized when they are acquired, or accrued, rather than when they are paid.

Ans5 Economic growth is the increase in the amount of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP. Growth is usually calculated in real terms, i.e.inflation-adjusted terms, in order to net out the effect of inflation on the price of the goods and services produced. In economics, "economic growth" or "economic growth theory" typically refers to growth of potential output, i.e., production at "full employment," which is caused by growth in aggregate demand or observed output.

As an area of study, economic growth is generally distinguished from development economics. The former is primarily the study of how countries can advance their economies. The latter is the study of the economic aspects of the development process in low-income countries.

As economic growth is measured as the annual percent change of gross domestic product (GDP), it has all the advantages and drawbacks of that measure. Economic growth versus the business cycle

Economists distinguish between short-run economic changes in production and long-run economic growth. Short-run variation in economic growth is termed the business cycle. Briefly, the business cycle is made up of booms and busts in production that occur over a period of months or years. The most recent example of a business cycle was the global boom starting in approximately 2002 that ended with the late-2000 recession|bust of 2008–9. As discussed in the article on the business cycle, economists attribute the ups and downs in the business cycle to a number of causes including: overproduction of goods followed by large inventories that can't be readily sold, overexpansion of credit resulting in piling up of debt that inhibits purchasing; speculative bubbles, and shocks—like wars, political upheavals, and so on.

In contrast, the topic of economic growth is concerned with the long-run trend in production due to basic causes such as industrialization. The business cycle moves up and down, creating fluctuations in the long-run trend in economic growth.

Historical sources of economic growth

Main article: Productivity improving technologies (historical)

Increases in productivity are the main factor responsible for economic growth, especially since the mid 19th century. Most of the economic growth since that time been due to reduced inputs of labor, materials, energy, capital and land per unit of economic output (less input per widget). The balance of growth has come from using more inputs overall because of the growth in output (more widgets).^[1]

Opening up new territories was considered a growth factor in the past, being important since the late 19th century and in limited cases in the 20th century, such as the Amazon.

During colonial times, what ultimately mattered for economic growth were the institutions and systems of government imported through colonization. There is a clear reversal of fortune between the poor and wealthy countries, which is evident when comparing the method of colonialism in a region. Geography and endowments of natural resources are not the sole determinants of GDP. In fact, those that were blessed with good factor endowments experienced colonial extraction which only provided limited rapid growth; whereas, countries that were less fortunate in their original endowments experienced European settlement, relative equality, and demand for rule of law. These initially poor colonies end up developing an open franchise, equality, and broad public education, which helps them experience greater economic growth than the colonies that had exploited their economies of scale.

During the Industrial Revolution, mechanization began to replace hand methods in manufacturing and new processes were developed to make chemicals, iron, steel and other products.

Since the Industrial Revolution, a major factor of productivity was the substitution of energy from, human and animal labor, water and wind power to electric power and internal combustion. Since that replacement, the great expansion of total power was driven by continuous improvements in energy conversion efficiency.^[2] Other major historical sources of productivity were automation, transportation infrastructures (canals, railroads, and highways),^[3] new materials (steel) and power, which includes steam and internal combustion engines and electricity. Other productivity improvements includedmechanized agriculture and scientific agriculture including chemical fertilizers and livestock and poultry management, and the Green Revolution. Interchangeable parts made with machine tools powered by electric motors evolved into mass production, which is universally used today.

Productivity lowered the cost of most items in terms of work time required to purchase. Real food prices fell due to improvements in transportation and trade, mechanized agriculture, fertilizers, scientific farming and the Green Revolution.

Great sources of productivity improvement in the late 19th century were the railroads, steam ships, horse-pulled reapers and combine harvesters, and steam-powered factories. The invention of processes for making cheap steel were important for many forms of mechanizationand transportation. By the late 19th century, power and machinery were creating overproduction, which eventually caused a reduction of the hourly work week. Prices fell because less labor, materials, and energy were required to produce and transport goods; however, workers real pay rose, allowing workers to improve their diet and buy consumer goods and better housing.^[4]

Mass production of the 1920s created overproduction, which was arguably one of several causes of the Great Depression of the 1930s.^[5]Following the Great Depression, economic growth resumed, aided in part by demand for entirely new goods and services, such as householdelectricity, telephones, radio, television, automobiles, and household appliances, air conditioning, and commercial aviation (after 1950), creating enough new demand to stabilize the work week.^[6] Building of highway infrastructures also contributed to post World War II growth, as did capital investments in manufacturing and chemical industries. The post World War II economy also benefited from the discovery of vast amounts of oil around the world, particularly in the Middle East.

Economic growth in Western nations slowed after 1973, but growth in Asia has been strong since then, starting with Japan and spreading to Korea, China, the Indian subcontinent and other parts of Asia. The Japanese economic growth has slowed down considerably since late 1980s.

Economic growth per capita

Often, the concern about economic growth focuses on the desire to improve a country's standard of living—the level of goods and services that, on average, individuals purchase or otherwise gain access to. It should be noted that if population has grown along with economic production, increases in GDP do not necessarily result in an improvement in the standard of living. When the focus is on standard of living, economic growth is expressed on a per capita basis.

Economic growth per capita is primarily driven by improvements in productivity, also called economic efficiency. Increased productivity means producing more goods and services with the same inputs of labour, capital, energy, and/or materials. For example, labour and land productivity in agriculture were increased during the Green Revolution. The Green Revolution of the 1940s to 1970s introduced new grain hybrids, which increased yields around the world.

However, there is not necessarily a long term one-to-one relationship between improvements in productivity and improvements in average standard of living.^[7] Among other factors that might prevent a long-term improvement in standard of living despite economic growth is the potential for population growth matching or outstripping productivity improvements. When increased food supplies spur population growth rather than an improvement in the standard of living, people are said to be caught in the "Malthusian trap," named for Thomas Robert Malthus, the first observer to detail out this dilemma. There is considerable controversy, for example, as to whether the Green Revolution resulted in long-term improvements in the standard of living as it was accompanied by rapid population growth creating population sizes that may be unsustainable.^[8]

Economic growth can also be of interest without reference to per capita changes in standard of living. An example of this is the economic growth in England during the Industrial Revolution. Certainly, per capita increases in productivity occurred due to the replacement of hand labour by machines. However, economic growth during this period was in large part so dramatic because England's population simultaneously increased very rapidly (1700 A.D. – 1860 A.D.). The two factors together, more production per worker combined with many more workers, resulted in a sixfold increase in production between 1700 and 1860. Population growth alone accounted for most of this increase.^[9]

Measuring economic growth

Economic growth is measured as a percentage change in the Gross Domestic Product (GDP) or Gross National Product (GNP). These two measures, which are calculated slightly differently, total the amounts paid for the goods and services that a country produced. As an example of measuring economic growth, a country which creates $9,000,000,000 in goods and services in 2010 and then creates $9,090,000,000 in 2011, has a nominal economic growth rate of 1% for 2011.

In order to compare per capita economic growth among countries, the total sales of the countries to be compared may be quoted in a single currency. This requires converting the value of currencies of various countries into a selected currency, for example U.S. dollars. One way to do this conversion is to rely on exchange rates among the currencies, for example how many Mexican pesos buy a single U.S. dollar? Another approach is to use the purchasing power parity method. This method is based on how much consumers must pay for the same "basket of goods" in each country.

Inflation or deflation can make it difficult to measure economic growth. If GDP, for example, goes up in a country by 1% in a year, was this due solely to rising prices (inflation) or because more goods and services were produced and saved? To express real growth rather than changes in prices for the same goods, statistics on economic growth are often adjusted for inflation or deflation.

For example, a table may show changes in GDP in the period 1990 to 2000, as expressed in 1990 U.S. dollars. This means that the single currency being used is the U.S. dollar with the purchasing power it had in the U.S. in 1990. The table might mention that the figures are "inflation-adjusted" or real. If no adjustment were made for inflation, the table might make no mention of inflation-adjustment or might mention that the prices are nominal.