Difference Between Mutually Exclusive and Independent Events

Probability is a mathematical concept,

which has now become a full-fledged discipline and is a vital part of statistics. Random
experiment in probability is a performance that generates a certain outcome, purely based on
chance. The results of a random experiment are called event. In probability, there are various
types of events, as in simple, compound, mutually exclusive, exhaustive, independent,
dependent, equally likely, etc. When events cannot occur at the same time, they are
called mutually exclusive

On the other hand, if each event is unaffected by other events, they are called independent
events. Take a full read of the article presented below to have a better understanding of the
difference between mutually exclusive and independent events.

Content: Mutually Exclusive Event Vs Independent Event

1. Comparison Chart
2. Definition
3. Key Differences
4. Conclusion

Comparison Chart

BASIS FOR MUTUALLY EXCLUSIVE

INDEPENDENT EVENTS
COMPARISON EVENTS

Meaning Two events are said to be Two events are said to be independent,
mutually exclusive, when their when the occurrence of one event
occurrence is not simultaneous. cannot control the occurrence of other.

Influence Occurrence of one event will Occurrence of one event will have no
result in the non-occurrence of influence on the occurrence of the
the other. other.

Mathematical P(A and B) = 0 P(A and B) = P(A) P(B)

formula

Sets in Venn Does not overlap Overlaps

diagram
Definition of Mutually Exclusive Event

Mutually exclusive events are those which cannot occur concurrently, i.e. where the
occurrence of one event results in non-occurrence of the other event. Such events cannot be
true at the same time. Therefore, the happening of one event makes the happening of another
event impossible. These are also known as disjoint events.

Let’s take an example of tossing of a coin, where the result would either be head or tail. Both
head and tail cannot occur simultaneously. Take another example, suppose if a company
wants to purchase machinery, for which it has two options Machine A and B. The machine
which is cost effective and productivity is better, will be selected. The acceptance of machine
A will automatically result in the rejection of machine B and vice versa.

Definition of Independent Event

As the name suggests, independent events are the events, in which the probability of one
event does not control the probability of the occurrence of the other event. The happening or
non-happening of such an event has absolutely no effect on the happening or non-happening
of another event. The product of their separate probabilities is equal to the probability that
both events will occur.

Let’s take an example, suppose if a coin is tossed twice, tail in the first chance and tail in the
second, the events are independent. Another example for this, Suppose if a dice is rolled
twice, 5 in the first chance and 2 in the second, the events are independent.

Key Difference Between Mutually Exclusive and Independent Events

The significant differences between mutually exclusive and independent events are
elaborated as under:

1. Mutually exclusive events are those events when their occurrence is not simultaneous.
When the occurrence of one event cannot control the occurrence of other, such events
are called independent event.
2. In mutually exclusive events, the occurrence of one event will result in the non-
occurrence of the other. Conversely, in independent events, occurrence of one event
will have no influence on the occurrence of the other.
3. Mutually exclusive events are represented mathematically as P(A and B) = 0 while
independent events are represented as P (A and B) = P(A) P(B).
4. In a Venn diagram, the sets do not overlap each other, in the case of mutually
exclusive events while if we talk about independent events the sets overlap.

Conclusion

So, with the above discussion, it is quite clear that both the events are not same. Moreover,
there is a point to remember, and that is if an event is mutually exclusive, then it cannot be
independent and vice versa. If two events A and B are mutually exclusive, then they can be
expressed as P(AUB)=P(A)+P(B) while if the same variables are independent then they can
be expressed as P(A∩B) = P(A) P(B).
 How to Protect Your Business’s
Proprietary Information
June 9, 2014/in Business /

By Leiza Dolghih

Every successful business has some information that gives it a competitive advantage – its “secret sauce” so to
speak. It can include customer lists, customer preferences, financial data, business or marketing plans, formulas,
or technical information, which, if known to a competitor or general public, would destroy the business. So, how
can a company ensure that its secret and proprietary information is legally protected? Here’s how:

1. Identify Your Trade Secrets and Proprietary Information. Before you start implementing any security
measures, you need to identify what information you are trying to protect. Ask yourself two questions: (1) what
information do I have that gives my business a competitive advantage? and (2) is this information publicly
available? As a starting point, the Texas Uniform Trade Secrets Act defines “trade secrets” as “formula, pattern,
compilation, program, device, method, technique, process, financial data, or list of actual or potential customers
or suppliers.” This information, however, is not likely to qualify as proprietary if it is “commonly known” or
available in the public domain.
2. Implement Access System on the “Need to Know Basis.” Limit the access to the proprietary information
only to those employees who need it in order to perform their jobs; password-protect employees’ computers and
phones; and, if the information is maintained in a hard format, make sure the filing cabinet or the room where it
is stored is locked.
3. Require Key Employees to Sign Non-Disclosure Agreements (NDAs). Employees with access to
confidential information should be required to execute NDAs prior to receiving such information. A NDA can
be a part of an offer letter or employment agreement or it can be a free-standing contract.
4. Require Third Parties to Sign Non-Disclosure Agreements. If you are sharing your business’s proprietary
information with another party, such as your supplier, marketing agent, join venturer, etc., make sure that they
execute a NDA as well. Ideally, you should not be sharing your proprietary information with anybody who has
not executed a NDA.
5. Have a Written Confidentiality Policy. Your employee handbook and/or company policy should contain a
statement regarding what information the company considers to be confidential, prohibition of disclosure of
such information, description of the consequences of such disclosure, such as disciplinary action, and a
requirement that all key employees execute a NDA.
6. Provide Training Regarding the Confidentiality Policy and Enforce It. Such training can remind
employees not to discuss the confidential information in public, not to access such information from public
computers, and alert them regarding various ways of inadvertent disclosure that they can encounter in their day-
to-day lives.
7. When Key Employees Leave, Have Them Sign A Non-Disclosure Confirmation Form, Obtain
Information About Their New Company, and Conduct Forensic Imaging of Their Computers. When key
employees leave, during the exit interview have them sign a statement in which they acknowledge that they
have not taken any of your confidential information. You should also ask them about where they are going,
what duties they will be performing there and other information that will help you assess the likelihood of them
using the company’s confidential information at their new company. Finally, it is worth paying a few hundred
dollars to have their computers, iPads, etc., forensically examined to make sure that they have not printed,
emailed themselves or otherwise took any of the company’s proprietary information.
8. If You Suspect That an Employee Is Stealing or Has Stolen Your Proprietary Information, Act
Quickly. The more time passes between you discovering that your employee has taken or is using your
confidential information and your actions, the less likely a court is to find that the information was a “trade
secret.” In other words, if you are not trying to prevent other parties from using your information, then why
should the court do so?

Proprietary information, also known as a trade secret, is information that a

company wishes to keep confidential or secret from those outside the company. Proprietary
information may include secret formulas, processes, and methods used in production. It may
also include a company's business plans, marketing strategies, salary structure, customer
lists, contracts, and computer system. In some cases the special knowledge and skills that an
employee has learned on the job are considered to be a company's proprietary information.
There is no single standard by which to determine if information is proprietary or not. Some
39 U.S. states have laws that define a trade secret and the conditions under which it is
considered to have been stolen. In general, for information to be considered proprietary,
companies must treat it as such. Information that is readily available in public sources will
not be treated by the courts as proprietary. The body of case law covering proprietary
information and trade secrets recognizes a company's right to have proprietary information
and provides it with remedies when its trade secrets have been misused or appropriated
illegally.
There are several ways for a company to protect its proprietary information. Key employees
with access to proprietary information may be required to sign restrictive covenants, also
called noncompete agreements, that prohibit them from competing with their employer for a
certain period after leaving the company. These restrictive covenants are usually enforced by
the courts if they are reasonable with respect to time and place and do not unreasonably
restrict the former employee's right to employment. In some cases the covenants are enforced
only if the employee has gained proprietary information during the course of his or her
employment.
Companies may also develop security systems to protect their proprietary information from
being stolen by foreign or domestic competitors. Business and industrial espionage is an
ongoing activity that clandestinely seeks to obtain trade secrets by illegal methods. A
corporate system for protecting proprietary information would include a comprehensive plan
ranging from employee education to data protection to securing phone lines and meeting
rooms. In some cases a chief information officer would be responsible for implementing
such a plan.
An employee who divulges a trade secret is committing a tort by violating a duty of loyalty
that includes nondisclosure of proprietary information. Once the employee leaves the
company, however, that duty no longer exists. For this reason companies often require
employees to sign a restrictive covenant, or noncompete agreement.
In addition, the courts generally consider it unfair competition for one company to induce
employees of another company who have acquired unique technical skills and secret
knowledge during their employment, to terminate their employment and use their skills and
knowledge for the benefit of the competing firm. In such a case the plaintiff company could
seek an injunction to prevent its former employees and the competing company from using
the proprietary information.
Case law has given rise to the doctrine of" inevitable disclosure," which recognizes that
certain key employees have learned proprietary information and will carry it with them when
they leave their employer. In cases where a key employee has left one company to work for a
competitor, the courts have attempted to balance the original employer's right to protect its
proprietary information against the former employee's fundamental freedom to change
employers.
After a high-profile case involving the vice president and group executive in charge of
purchasing for General Motors, who left GM to work for Volkswagen in Germany, the U.S.
Congress passed the Economic Espionage Act of 1996. This act made it a federal criminal
offense to steal trade secrets. According to the American Society for Industrial Security, theft
of proprietary information and trade secrets costs U.S. companies approximately $300 billion
a year.
DEFINITION: DIVIDEND POLICY
"Dividend policy determines the ultimate distribution of the firm's earnings between retention
(that is reinvestment) and cash dividend payments of shareholders."
"Dividend policy means the practice that management follows in making dividend payout
decisions, or in other words, the size and pattern of cash distributions over the time to
shareholders."
In other words, dividend policy is the firm's plan of action to be followed when dividend
decisions are made. It is the decision about how much of earnings to pay out as dividends
versus retaining and reinvesting earnings in the firm.
Dividend policy means policy or guideline followed by the management in declaring of
dividend. A dividend policy decides proportion of dividend and retains earnings. Retained
earnings are an important source of internal finance for long term growth of the company
while dividend reduces the available cash funds of company.
Top 10 Factors for Consideration of Dividend Policy
This article throws light upon the top ten factors for consideration of dividend policy. The
factors are: 1. General State of Economy 2. Capital Market Considerations 3. Legal,
Contractual Constraints and Restrictions 4. Tax Policy/Tax Consideration 5. Inflation 6.
Stability of Dividends 7. Dividend Pay-Out (D/P) Ratio 8. Owner’s Considerations 9. Nature
of Earnings 10. Liquidity Position.
Factor # 1. General State of Economy:
As a whole, it affects the decision of the management to a great extent whether the dividend
should be retained or the same should be distributed amongst the shareholders.
In the following cases, the business may prefer to retain the whole or part of the earnings in
order to build up reserves:
(i) Where there are uncertain economic and business conditions;
(ii) If there is a period of depression (management may withhold the payment of dividends
for maintaining the liquidity position of the firm);
(iii) If there is a period of prosperity (since there is large profitable investment opportunities);
and
(iv) Where there is a period of inflation.
Factor # 2. Capital Market Considerations:
This also affects the dividend policy to the extent to which the firm has access to the capital
market In other words, if easy access to the capital market is possible whether due to
financially strong or, big in size, the firm in that case, may adopt a liberal dividend policy.
In the opposite case, i.e., if easy access to capital market is not possible, it must have to adopt
a low dividend pay-out ratio, i.e., they have to follow a conservative dividend policy. As
such, they must have to rely more on their own funds, viz retained earnings.
Factor # 3. Legal, Contractual Constraints and Restrictions:
This is one of the most significant factors which are to be taken into account while
considering dividend policy of a firm since it has to be evolved within the legal framework
and restrictions. It is not legally binding on the part of the directors to declare dividends.
Dividend shall be declared or paid only out of current profit or past profits after charging
depreciation although the Central Government has empowered to allow any company for
paying dividends out of current profits for any financial year before charging depreciation.
The dividend must be paid in cash although a company can capitalize its profits/reserves for
the purpose of issuing fully paid bonus shares or making partly paid shares into fully paid.
Capital profits cannot be distributed by way of dividend.
Sometimes a company may declare dividend out of past accumulated profits if the Central
Government so permits Moreover, the Indian Income-tax Act also prescribes certain
restrictions about the payment of dividend. From the above, it becomes clear that the
directors while declaring dividends, should consider all the relevant legal formalities
prescribed by the Companies Act, Income-tax Act etc.
Contractual restrictions, on the other hand, which are imposed by certain lenders of the firm
also affect the dividend policy of a firm. Because, they impose certain conditions about the
payment of dividend particularly, during the period when the firm is experiencing liquidity or
profitability crisis.
For instance, there may be an agreement between the firm and the lenders that the former
shall not pay dividend to its shareholder more than 10% until the loan is repaid or dividend
shall not be declared if the liquidity ratio is found to be less than 1:1.
Factor # 4. Tax Policy/Tax Consideration:
The tax policy which is followed be a Government also affects the dividend policy of a firm.
Whether it is better to declare and pay dividend in cash or by the issue of bonus shares,
depends to some extent on the tax policy. Because, cash dividends are not even so attractive
to the investors who are in higher tax brackets.
For this purpose, a firm should follow a tax-oriented dividend policy by:
(i) Not declaring dividends and assisting the shareholders to secure their returns by the sale of
appropriated shares,
(ii) Following a policy of regular share dividend in lieu of cash dividend,
(iii) Using classified equity share dividend.
Factor # 5. Inflation:
Inflation may also affect the dividend policy of a firm. With rising prices, funds which are
generated by way of depreciation may fall short in order to replace obsolete equipment. The
shortfall may be made from retained earnings (as a source of funds). This is very significant
when the assets are to be replaced in the near future. As such, the dividend pay-out ratio tends
to be low during the periods of inflation.
Factor # 6. Stability of Dividends:
It should be given due weight-age for this purpose although the same may differ from one
firm to another. The dividend policy, of course, should have a degree of stability, i.e.,
earnings/profits may fluctuate from year to year but not the dividend since the equity
shareholders prefer to value stable dividends than the fluctuating ones.
In other words, the investors favour a stable dividend in as much as they do the payment of
dividend. Stable dividends refer to the consistency or lack of vari-ability in the stream of
dividends, payments, i.e., a certain minimum amount of dividend should be paid regularly.
The stability of dividends can be in any of the following three forms:
(a) Constant Dividend Per Share;
(b) Constant Percentage of Net Earnings (Constant D/P ratio); and
(c) Constant Dividend Per Share plus Extra Dividend.
(a) Constant Dividend Per Share:
Under this form, a firm pays a certain fixed amount per share by way of dividend. For
example, a firm may pay a fixed amount of, say, Rs. 5 as dividend per share having a face
value of Rs. 50, The Fixed amount would be paid regularly year after year irrespective of the
actual earnings, i.e., the firm will pay dividend even if there is a loss.
In short, fluctuation in earnings will not affect the payment of dividend. Of course, it does not
necessarily mean that the amount of dividend will remain fixed for all times in future.
When the earnings of the company will increase the rate of dividend also will increase
provided the new level can be maintained in future. If there is a temporary increase in
earnings, there will not be any change in the payment of dividends.
The relationship between the EPS (Earning per share) and DPS (Div-idend per share) can
better be represented with the help of the following diagram:
Showing Stable Dividend Policy Per Share
From the above, it becomes clear that earnings (EPS) may fluctuate from year to year but the
DPS is constant. In order to formulate this policy, a firm whose earnings are not stable may
have to make provisions to those years when there is higher earnings, i.e., a Dividend
Equalization Reserve’ fund may be created for the purpose.
(b) Constant Percentage of Net Earnings:
According to this policy, a certain percentage of the net earnings/profits is paid by way of
dividend to the shareholders year after year, i.e., when a constant pay-out ratio is followed by
a firm. In other words, it implies that the percentage of earnings paid out each year is fixed
and as such, dividends would fluctuate proportionately with earnings.
This is particularly very useful in cases where there are wide fluctuations in the earnings of a
firm. This policy suggests that when the earnings of a firm decline the dividend would
naturally be low.
For instance, if a firm adopts a 40% dividend pay-out ratio (it indicates that for one rupee
earned, it will pay 40 paisa to the shareholders), i.e., if a firm earns Rs. 5 per share then it will
pay Rs. 2 to the shareholders by way of dividend. The relationship under this policy between
the EPS and DPS is presented below with the help of a diagram that shows.
Showing Stable Dividend Policy Under Constant Payout Ratio
(c) Constant Dividend Per Share Plus Extra Dividend:
Under this policy, firm usually pays a fixed dividend per share to the shareholders. At the
time of market prosperity, additional or extra dividend is paid over and above the regular
dividend. This extra dividend is waived as soon as the normal conditions return.
Now, the questions that arise before us are which one is the most appropriate one and what is
their relative suitability or which one is most favourable to the investors or what are the
implications to the shareholders.
The most appropriate policy may be considered as the first one, viz.. Constant Dividend Per
Share. Because, most of the investors desire a fixed rate of return from their investment
which will gradually increase over a period of time.
This is satisfied by the said policy. But in case of Constant percentage (of net earnings) the
return actually fluctuates with the amount of earnings and it also involves uncertainties and
that is why it is not preferred by the shareholders although the same is favoured by the
management since it correlates the amount of dividends to the ability of the company to pay
its dividend.
At the same time, in case of Constant Dividend per Share plus Extra Dividend, there is
always an uncertainty about the extra dividend and as a result it is not generally preferred by
the shareholders.
A stable dividend policy is advantageous due to the following:
(i) Desire for Current Income:
There are investors, like, old and retired persons, widows etc., who desire to have a stable
income in order to meet their current living expenses since such expenses are almost fixed in
nature. Such a stable dividend policy will help them.
(ii) Resolution of Investors’ Uncertainly:
If a firm adopts a stable dividend policy, it must have to declare and pay dividend even if the
earnings are temporarily reduced. It actually conveys to the investors that the future is bright.
On the contrary, if it follows a policy of changing dividend with cyclical changes in the rate
of earnings, the investors will not be confined about their return which may induce them to
require a higher discount factor. The same is not desired in case of a stable dividend policy.
(iii) Raising Additional Finance:
If stable dividend policy is adopted by a firm, raising additional funds from external sources
become advantageous on the part of the company since it will make the shares of a firm an
investment. The shareholders/investors will hold the shares for a long time as it will create
some confidence in the company and as such, for further issue of shares, they would be more
receptive to the offer by the company.
This dividend policy also helps the company to sale preference shares and debentures.
Because, past trend regarding the payment of dividend informs them that the company has
been regularly paying the dividends and their interest/dividend naturally will be paid by the
company when it will mature for repayment together with the principal.
(iv) Requirements of Institutional Investors:
Sometimes the shares of a company are purchased by financial institutions, like, IFC, IDB,
LIC, UTI etc., educational and social institutions in addition to the individuals.
These financial institutions are the largest purchasers of shares in corporate securities in our
country and every firm is intended to sell their shares to these institutions. These financial
institutions are interested to buy the shares of those companies who have a stable dividend
policy.
Danger of Stability of Dividends:
Once this policy is being adopted by a firm it cannot be changed with an immediate effect
which will adversely affect the investors’ attitude towards the financial stability of the
company. Because, if a company, with stable dividend policy, fails to pay the dividend in any
year, there will be a severe effect on the investors than the failure to pay dividend under
unstable dividend policy.
That is why, in order to maintain that rate, sometimes the directors pay dividend, even if there
is insufficient earning, i.e., declaring dividend out of capital which ultimately invites the
liquidation of a firm.
The rate of dividend should be fixed at a conservative figure which is possible to pay even in
a lean period for several years. Extra dividend can be declared out of extra earnings which, in
other words, will not create any adverse effect in future.
Factor # 7. Dividend Pay-Out (D/P) Ratio:
Dividend Pay-out (D/P) ratio (i.e., percentage share of the net earnings/profits distributed to
the shareholders by way of dividends) also affects the dividend policy of a firm. It involves
the decisions either to pay out the earnings or to retain the same for re-investment within the
firm. Needless to mention that retained earnings also constitute a reliable source of funds.
Therefore, if dividend is paid, cash will be reduced to that extent. For maintaining assets level
and financing investment oppor-tunities, a firm should obtain necessary funds either from the
issue of additional equity shares or from debt and consequently if the firm fails to raise funds
from outside, its growth will be adversely affected.
So, payment of dividends imply outflow of cash which adversely affect the future growth of
the firm. In short, it affects both the owner’s wealth as well as the long-term growth of a firm.
Thus, the optimum dividend policy should strike that balance between current dividends and
future growth which maximise the price of the firm’s share.
Therefore, this ratio will have to be determined in such a manner so that it will maximise the
firm’s wealth and at the same time, will provide sufficient funds for the growth in future.
Factor # 8. Owner’s Considerations:
The dividend policy is also to be affected by the owner’s consideration of:
(a) Their opportunities of investment; and
(b) The dilution of ownership.
(a) Owner’s opportunities of Investment:
If the rate of return which is earned by a firm is less than the return which have been earned
by the investors from outside investment, a firm should not retain such funds, which in other
words, will be detrimental to the interest of the members although it is difficult to ascertain
the rate of alternative investment as well as alternative investment opportunities of its
shareholders.
Of course, the firm may evaluate such external rate from the firms belonging to the same risk
class.
And if is found that the said rate is comparatively high, it should opt for a high (D/P) ratio or
vice-versa. Thus, while deciding dividend policy of a firm, external investment opportunities
should also be carefully considered.
(b) Dilution of Ownership:
A high (D/P) Ratio recognises the dilution of ownership both from the standpoint of control
as well as from the view point of earnings of the existing shareholders. These two aspects
adversely affect the existing shareholders right.
Because, in the latter case, (dilution of earnings) low retentions may compel the firm to issue
first equity shares which will increase the total number of equity shares and as such, the same
will lower the earning per share (EPS) and market price will go down conse-quently. On the
contrary, if percentage of retained earnings becomes high, dilution of earnings will be
minimised.
Factor # 9. Nature of Earnings:
If the income of a firm is stable, it can afford, a higher dividend pay-out ratio in comparison
with a firm which has not such stability in its income. For instance, public utility consensus
can have a higher dividend pay-out ratio since they have some monopoly rights which are not
enjoyed by other companies who operate in a highly competitive market.
Factor # 10. Liquidity Position:
While deciding the dividend policy, the liquidity aspect should also be considered. Because,
if dividend is paid in cash, there is an outflow of cash. It is interesting to note in this regard
that a firm may have an adequate income/profit but it may not have sufficient cash to pay
dividend.
Thus, it is the duty of the management to see the cash position i.e., liquidity aspect, before
and after the payment of dividends at the time of taking decision about the dividend policy of
a firm. If there is a shortage of cash, question of payment of dividends does not arise, even if
the company makes a sufficient profit.
This problem is, particularly, to be faced by new firms who are still in the process of
extension and development. One particular point is to be noted by the management, i.e, to see
that the liquid ratio must not be less than 1: 1 after the payment of dividends.

Dividend Type # 1. Cash Dividends:

Cash dividends are, by far, the most popular form of dividend. In cash dividends,
stockholders receive checks for the amounts due to them. Cash generated by business
earnings is used to pay cash dividends. Sometimes, the firm may issue additional stock to use
proceeds so derived to pay cash dividends or bank may be approached for the purpose.
Generally, stockholders have strong preference for cash dividends.
Dividend Type # 2. Stock Dividends:
Stock dividends rank next to cash dividends in respect of their popularity. In this form of
dividends, the firm issues additional shares of its own stock to the stockholders in proportion
to the number of shares held in lieu of cash dividends. The payment of stock dividends does
not affect cash and earning position of the firm nor is ownership of stockholders changed.
Dividend Type # 3. Scrip Dividend:
Scrip dividend means payment of dividend in scrip or promissory notes. Sometimes
companies need cash generated by business earnings to meet business requirements or
withhold the payment of cash dividend because of temporary shortage of cash.
In such cases the company may issue scrip or notes promising to pay dividend at a future
date. The scrip usually bears a definite date of maturity. Sometimes maturity date is not
stipulated and its payment is left to the discretion of Board of Directors. Scrip may be interest
bearing or non-interest bearing. Such dividends are relatively scarce.
Dividend Type # 4. Bond Dividend:
As in scrip dividends, dividends are not paid immediately in bond-dividends; instead
company promises to pay dividends at future date and to that effect issues bonds to
stockholders in place of cash. The purpose of both bond and scrip dividends is alike, i.e.
postponement of dividend payment.
Difference between the two is in respect of date of payment and their effect is the same. Both
result in lessening of surplus and in addition to the liability of the firm. The only difference
between bond and scrip dividends is that the former carries longer maturity date than the
latter.
Thus, while issue of bond-dividend increases long-term obligation of the Company, current
liability increases as consequence of issue of scrip dividends. In bond dividends stockholders
have stronger claim against the company as compared to scrip dividends.
Bonds used to pay dividends always carry interest. This means that company assumes fixed
obligation of interest payments annually on principal amount of bond at the maturity date. It
should be remembered that the company is assuming this obligation in return of nothing
except credit for declaring the dividend.
How far the company will be able to meet this obligation in future is also difficult to predict
at the time of issue of bonds.
Management should, therefore, balance cost of issuing bond dividends against benefits
resulting from them (benefit of the bond dividend lies in postponement of dividend for a
distant date) before deciding about distribution of dividends in the form of bonds. Bond
dividends are not vogue in India.
Dividend Type # 5. Property Dividends:
In property dividends, Company pays dividends in the form of assets other than cash.
Generally, assets that are superfluous for the Company are distributed as dividends to stock-
holders. Sometime, a Company may use its products to pay dividends. Securities of
subsidiaries owned by the Company may also take the form of property dividends. This form
of dividend is not vogue in India.
Functional Currency
What is a Functional Currency
Popular with multinationals, functional currency represents the primary economic
environment in which an entity generates cash and expends cash. Functional currency is the
primary currency used by a business or business unit. As a monetary unit of account, a
functional currency represents the primary economic environment in which that entity
operates.
BREAKING DOWN Functional Currency
At times, a company’s functional currency may be the same currency as the country where it
does most its business. Other times, the functional currency may be a separate currency from
the currency in which a firm is headquartered.
Example of Functional Currency
For example, a Canadian company with the bulk of its operations in the United States would
consider the U.S. dollar its functional currency, even if financial figures on its balance sheet
and income statement are expressed in Canadian dollars.
International Accounting Standards (IAS) and U.S. Generally Accepted Accounting
Principles (GAAP) offer guidance for the translation of foreign currency transactions and
financial statements. Perhaps, SFAS 52 which introduced the concept, best sums up
functional currency: "the currency of the primary economic environment in which the entity
operates; normally, that is, the currency of the environment in which an entity primarily
generates and expends cash."
Now, the world's economies have grown increasingly interdependent. Multinational
corporations recognizing the integration of world markets, including the trade of commodities
and services and the flow of international capital are thinking global to remain competitive.
With international operations comes the tough choice of selecting a functional currency,
which must address several financial reporting issues, including determining appropriate
functional currencies, accounting for foreign currency transactions, and converting financial
statements of subsidiaries into a parent company’s currency for consolidation.
Factors may include finding the currency that most affects sales price. For retail and
manufacturing entities, the currency in which inventory, labor, and expenses are incurred
may be most relevant. Ultimately, it’s often managements’ judgment between a local
currency, that of a parent, or the currency of a primary operational hub.
It can be difficult to ascertain overall business performance when a variety of currencies are
involved. Therefore, both U.S. GAAP and IAS outline procedures for how entities can
convert foreign currency transactions into the functional currency for reporting purposes.

Real Option
What is a Real Option
A real option is a choice made available to the managers of a company with respect to
business investment opportunities. It is referred to as “real” because it typically references
projects involving a tangible asset instead of a financial instrument. Real options are choices
a company’s management makes to expand, change or curtail projects based on changing
economic, technological or market conditions. Factoring in real options affects the valuation
of potential investments, although commonly used valuations, such as net present value
(NPV), fail to account for potential benefits provided by real options. Using real options
value analysis (ROV), managers can estimate the opportunity cost of continuing or
abandoning a project and make decisions accordingly.
Real options do not refer to a derivative financial instrument, but to actual choices or
opportunities of which a business may take advantage or may realize. For example, investing
in a new manufacturing facility may provide a company with real options of introducing new
products, consolidating operations or making other adjustments to changing market
conditions. In the course of making the decision to invest in the new facility, the company
should consider the real option value the facility provides. Other examples of real options
include possibilities for mergers and acquisitions (M&A) or joint ventures.
BREAKING DOWN Real Option
The precise value of real options can be difficult to establish or estimate. Real option value
may be realized from a company undertaking socially responsible projects, such as building a
community center. By doing so, the company may realize a goodwill benefit that makes it
easier to obtain necessary permits or approval for other projects. However, it’s difficult to pin
an exact financial value on such benefits. In dealing with such real options, a company’s
management team factors potential real option value into the decision-making process, even
though the value is necessarily somewhat vague and uncertain.
Still, valuation techniques for real options do often appear similar to the pricing of financial
options contracts, where the spot price refers to the current net-present value of a project,
while the strike price corresponds to non-recoverable costs involved with the project. The
most common method of valuing real options currently is a form of binomial tree following a
latticed (flexible) model. Monte Carlo simulations are also often used in the evaluation of real
options.

The foreign exchange market is a global decentralized or over-the-counter market for

the trading of currencies. This market determines the foreign exchange rate. It

includes all aspects of buying, selling and exchanging currencies at current or

determined prices. for·eign ex·change - an institution or system for dealing in the

currency of other countries. the currency of other countries.

Top 5 Forex Risks Traders Should Consider

The foreign exchange market, also known as the forex market, facilitates the buying and
selling of currencies around the world. Like stocks, the end goal of forex trading is to yield a
net profit by buying low and selling high. Forex traders have the advantage of choosing a
handful of currencies over stock traders who must parse thousands of companies and sectors.
In terms of trading volume, forex markets are the largest in the world. Due to high trading
volume, forex assets are classified as highly liquid assets. The majority of foreign exchange
trades consist of spot transactions, forwards, foreign exchange swaps, currency swaps and
options. However as a leveraged product there is plenty of risk associated with forex trades
that can result in substantial losses. (For more, see: Forex Broker Summary: Easy Forex.)
Leverage Risks
In forex trading, leverage requires a small initial investment, called a margin, to gain access
to substantial trades in foreign currencies. Small price fluctuations can result in margin calls
where the investor is required to pay an additional margin. During volatile market conditions,
aggressive use of leverage will result in substantial losses in excess of initial investments.
(For more, see: Forex Leverage: A Double-Edged Sword.)
Interest Rate Risks
In basic macroeconomics courses you learn that interest rates have an effect on countries'
exchange rates. If a country’s interest rates rise, its currency will strengthen due to an influx
of investments in that country’s assets putatively because a stronger currency provides higher
returns. Conversely, if interest rates fall, its currency will weaken as investors begin to
withdraw their investments. Due to the nature of the interest rate and its circuitous effect on
exchange rates, the differential between currency values can cause forex prices to
dramatically change. (For more, see: Why Interest Rates Matter For Forex Traders.)
Transaction Risks
Transaction risks are an exchange rate risk associated with time differences between the
beginning of a contract and when it settles. Forex trading occurs on a 24 hour basis which can
result in exchange rates changing before trades have settled. Consequently, currencies may be
traded at different prices at different times during trading hours. The greater the time
differential between entering and settling a contract increases the transaction risk. Any time
differences allow exchange risks to fluctuate, individuals and corporation dealing in
currencies face increased, and perhaps onerous, transaction costs. (For more, see: Corporate
Currency Risks Explained.)
Counterparty Risk
The counterparty in a financial transaction is the company which provides the asset to the
investor. Thus counterparty risk refers to the risk of default from the dealer or broker in a
particular transaction. In forex trades, spot and forward contracts on currencies are not
guaranteed by an exchange or clearing house. In spot currency trading, the counterparty risk
comes from the solvency of the market maker. During volatile market conditions, the
counterparty may be unable or refuse to adhere to contracts. (For more, see: Cross-Currency
Settlement Risk.)
Country Risk
When weighing the options to invest in currencies, one must assess the structure and stability
of their issuing country. In many developing and third world countries, exchange rates are
fixed to a world leader such as the US dollar. In this circumstance, central banks must sustain
adequate reserves to maintain a fixed exchange rate. A currency crisis can occur due to
frequent balance of payment deficits and result in devaluation of the currency. This can have
substantial effects on forex trading and prices. (For more, see: Top Ten Reasons Not to Invest
In The Iraqi Dinar.)
Due to the speculative nature of investing, if an investor believes a currency will decrease in
value, they may begin to withdraw their assets, further devaluing the currency. Those
investors who continue trading the currency will find their assets to be illiquid or incur
insolvency from dealers. With respect to forex trading, currency crises exacerbate liquidity
dangers and credit risks aside from decreasing the attractiveness of a country's currency. This
was particularly relevant in the Asian Financial Crisis and the Argentine Crisis where each
country's home currency ultimately collapsed. (For more, see: Examining Credit Crunches
Around The World.)
The Bottom Line
With a long list of risks, losses associated with foreign exchange trading may be greater than
initially expected. Due to the nature of leveraged trades, a small initial fee can result in
substantial losses and illiquid assets. Furthermore time differences and political issues can
have far reaching ramifications on financial markets and countries’ currencies. While forex
assets have the highest trading volume, the risks are apparent and can lead to severe losses.

Qualitative factors are decision outcomes that cannot be measured. Examples of

qualitative factors are:
 Morale. The impact on employee morale of adding a break room to the production
area.
  Customers. The impact on customer opinions of a business if an investment is made
in answering their phone calls in less time by adding customer support staff.
 Investors. The impact on investors of conducting a road show to meet as many of
them as possible.
 Community. The impact on the local community of allowing employees to spend a
few hours of paid time assisting with community projects.
 Products. It may be possible to use somewhat cheaper components in products.
However, if this is done too much, it may create an overall impression of reduced
quality, which may lead customers to buy fewer products.
A manager should consider qualitative factors as part of his or her analysis of a decision.
Depending on the manager and the level of investment involved, qualitative factors can be
the deciding point in whether to engage in a certain activity. For example, if a large
investment of funds is involved, the key decision factors are more likely to be quantitative,
since the investing business has a great deal at stake in the decision. However, if the
investment of funds is minor, the impact of qualitative factors could play a more important
role in the decision.
From a branding perspective, qualitative factors can be particularly important. Proper
branding requires high expenditure levels to establish and maintain an aura of quality, which
a purely quantitative analysis might not justify.
Accounts Receivable Management. Accounts receivable management incorporates is all
about ensuring that customers pay their invoices. Good receivables management helps
prevent overdue payment or non-payment. It is therefore a quick and effective way to
strengthen the company's financial or liquidity position.

4 ways to minimize foreign currency

risk
1. Look for countries with strong, rising currencies.
High debt usually precedes high inflation, Carrillo says. And when inflation kicks in,
currencies usually fall as confidence in them declines. However, countries with low debt to
GDP have rising currencies, which can be profitable for U.S. investors.
“Make sure you pick an economically sound country and stick with it,” Carrillo says. “If
there’s a big devaluation in the dollar, foreign stocks will also do well.”
2. Know that foreign bonds can be especially hard hit.
Bonds are especially vulnerable to currency fluctuations, since they have lower gains to offset
currency losses.
“When investing in a foreign bond index, currency fluctuations can be plus or minus 10
percent,” says Ed Boyle, senior portfolio manager for American Century Investments in New
York City. “These changes are double what a bond may return.” To be sure, however, there’s
less effect on equities since they can have higher returns.
Scott Stratton, president of Good Life Wealth Management LLC, agrees. Currency
fluctuations have a much greater impact on foreign bonds than changes in the bonds’ prices,
he says. Historically, most foreign-country bonds were issued in dollar valuations, Stratton
says. Today, many are issued in local currencies. Still, investors can find bonds issued in
dollars, and that can be a more stable investment.
3. Invest in currency-hedged funds.
The best way to protect your foreign returns is to invest in mutual funds or exchange-traded
funds that are hedged, says Boyle. These funds usually use sophisticated investments like
futures and options to hedge the currency risk of a bond or equity, and reduce losses.
Many new ETFs that hedge currencies have been introduced within the past year, says Neena
Mishra, director of ETF research at Zacks Investment Research. Now, currency-hedged ETFs
are available in almost any region of the world, including emerging markets, Germany and
Japan. For example, the WisdomTree Japan Hedged Equity Fund hedges currency
fluctuations between the dollar and the Japanese yen.
Currency-hedged ETFs can cut into returns while also lowering your losses, Mishra says.
“They are slightly more expensive than non-hedged ETFs,” she says. “On the upside,
currency-hedged ETFs are less volatile than ones that do not hedge. So, it’s one of the most
important ways to protect yourself from losses.”
4. Diversify globally.
If you have lots of investments in foreign securities, make sure you have investments in a
basket of regions, rather than in just one region, Boyle says. “So if you have lots of exposure
in Europe, that can be a bad thing,” he says. “Instead, diversify across different geographic
regions.”
Mishra says another option is to invest in regions where the currency is pegged to the dollar.
For example, several Middle Eastern countries, including Lebanon and Saudi Arabia, peg
their pounds and riyals to the dollar. Conversely, several African countries, such as Senegal
and Cameroon, peg their currencies to euros. “That’s another way to diversify holdings,” she
says.
Generally, Boyle says currency volatility is at an all-time low for developed countries,
despite rising geopolitical risks, and the dollar is still the world’s safe-haven currency. “So if
there’s trouble overseas, the dollar will appreciate,” he says.
Lastly, don’t put all your assets in foreign markets. The limit should be 25 percent of
portfolio assets, Carillo says. “And understand your currency risk,” he says.

Enterprise Risk Management Framework: 8 Core

Components
1. Internal Environment
Where resources are put to work really defines the course of a project. Besides the physical
location itself, work culture is a huge factor that influences a team’s risk aptitude and moral
code of conduct. This ability to take calculated risks as well as the ability to go an extra mile
when the situation demands it really matters, given the uncertainties that come with portfolios
that span multiple divisions.

A healthy work culture generally rests on the aptitude of the seniors in the organization,
especially the C-suite. It is often observed that though the senior management is a very well-
qualified one, their ability to train line managers and mid-senior staff really makes or breaks a
risk contingency plan. One complaint that plagues the management is the fact that team
leaders’ push for task completion can often come at the cost of risk oversight. To simplify,
your internal environment largely influences risk standpoints and the quality of your strategy
itself.
2. Objective Setting
When it comes to objectives, given the extent of the enterprise-wide risk strategy,
organizational vision and mission must be the guidebook for the risk management plan
template that incorporates mitigation strategies. Besides monetary and resource investments,
your risks could also alter the drive your employees have and the way your clients perceive
you, as an organization.
Two things that you’ll really need to evaluate here include –

Risk Appetite
This is the high-level view of the risks that you are likely to face and the level of complexities
that the organization is willing to take responsibility for.

Risk Tolerance
The next step is to then account for the different variations and the likelihood of the risks that
the projects may spill into, in accordance with the risk appetite.

Once both these aspects are defined and aligned with the organization’s overall strategy, you
can go onto define them for portfolios as well as projects. For instance, managing risks in a
vendor-driven situation might range from having to postpone the release of a product so that
there is lesser room for error from the vendor’s end to actually assessing the vendor’s
credentials itself in extreme cases.

Former multinational Enron’s infamous scandal and complex business model that hid its poor
performance with make-believe profitability is an example often visited over ethical
malpractices that overrun moral code of conduct for larger organizations. To reiterate, such
risks are never worthwhile.

3. Event Identification
The next crucial step to take would be that of identifying the risks and events in the course of
project execution. COSO lists down negative risks and differentiates them from positive
opportunities. That is, events that disrupt the project are risks and events that present tangible
value and progress are opportunities that justify the deterrents. The extent of harnessing these
opportunities though is something that the organization must tie in with its strategy on the
whole.

One of the things prescribed here is that of developing organizational awareness in terms of
identifying events that could be potential risks and those that are potential opportunities. To
develop that maturity for your entire portfolio, it is essential that you define the components
from a strategic standpoint as opposed to an operational one. Also, it is not too uncommon for
new portfolio managers to expect very few or no events to play spoilsport in the project plan.
This ambitious idea of perfection can cause a lot of confusion when unforeseen risks play
spoilsport. To avoid succumbing to false notions of the aftereffects of risk, create a risk
management plan template that documents the type, category, project area(s) affected such
that future project teams can reach a consensus on the action plans at the earliest.

In terms of the processes that identify the risks, besides one-off events, you’ll also need to
factor in the consequential risks and delays that are not always ad hoc. While the COSO
ERM may take an internal environment-centric, event-driven route, you’ll need to also have
one that factors in the external atmosphere. An in-depth analysis of events in the course of the
external risks is often tied to the core of the risk strategy.
4. Risk Assessment
While event identification goes hand in hand with analysis, assessment on its own is
prescribed as a component as well to emphasize the role played by inter-linked risks. The
framework places a lot of importance on this component by stressing both on qualitative
methods as well as quantitative ones of risk assessment.

Besides the methods, assessment on its own must also be tied to the objective setting again,
much like all other components. To revisit, internal risks include operational ones, resource-
centric ones as well as individual business induced. On the other hand, external ones could be
anything from a market slowdown, changes in physical environment or loss of brand identity.

The assessment then is all about sound measurement and accurate prioritization of risks such
that the worst is mitigated and the best is harnessed so as to maximize the value obtained.
Risks are collective measure and individually evaluated based on how they influence one
another. What is important to understand is the fact that risks are never isolated from one
another. They interact with each other and therefore a seemingly insignificant one may be the
root cause for several things going awry. It is recommended that risks are viewed in a
probability chart with diagrams that help you find the right grey area that merges value within
your tolerance level and the opportunity you are looking for.

5. Risk Response
Once risks aligned with the organization’s tolerance and appetite levels are chosen, a review
of the response is to be made. Broadly, the framework advocates following responses-

a.Reduce
b.Accept
c.Avoid
d.Transfer

In this component, the portfolio view of a risk is especially stressed upon more so when
diversified assets are involved. And your portfolio management strategy, will need to address
the magnitude of the risk on the whole. It has been established with enough details that risks
cannot be isolated from each other, as seen in the component above.

The response plan, in turn, must not only account for the financial liability involved but also
that of the product and resource impact. Responses, in general, depend upon the nature of
regulations that the organization subscribes to as well as the projects involved. For example,
when health and safety become a huge cause of concern, as they do in construction projects
with extreme weather conditions or an exposure to harmful chemicals, certain set principles
like the ALARP or the As Low As Reasonably Practicable is put to use. This set scheme
compares trouble, time and money needed to control the risks and prescribes actions.

On the whole, leaders need to empower teams with the flexibility to monitor and implement
risk responses such that a holistic approach is adopted towards strategic planning process.

6. Control Activities
Regulations and policies are put in place to make sure that responses do not exceed the
predetermined scope of things. When designed meticulously, controls not only encompass
guidelines and systems but also go into the very DNA of the organization’s control of
situations.
Control becomes essential simply because this is one of the components in which the human
involvement is at its peak. For example, when a vendor’s bad quality affects the product
output and it is up to the line manager to negotiate new terms with the clients, the manager’s
judgment bias, perceptions and way of communication outweighs almost every scheme of
control that the organizational policy can mandate. However, with effective training and
nurture, if the managers can all be encouraged to embrace a common code of ethics, internal
control becomes far more realistic.

As a part of processes, clarified list of duties and responsibilities along with transparency in
terms of controls can be some of the things that ensure that fraudulent behaviour cannot go
unnoticed, while the exercise of action is realistic.

7. Information and Communication

A component that holds value in every phase of COSO’s Risk Management Framework cube,
communication and sharing of information, frankly becomes a given in the digital age. It is a
basic component, the lack of which can be an inherent risk within the organization.

But the beauty of the framework is the fact that, it stresses on the management’s involvement
in being reciprocative of communication. For example, managers typically go into depths of
negative reports while portfolios that are seemingly healthy are left untouched. This typical
callousness can often face the brunt of unforeseen risks. Few proactive measures can put a
permanent end to this patterns.

Similarly, staff must be trained to recognize potential risks and communicate it to their
leaders. This means the training provided must be of quality and cover all forms of risks that
cover the realm of the objectives discussed. Keeping seniors in the loop in emails to having
them assess logical liabilities, are seemingly small measures that can help you stay notified of
huge roadblocks.

8. Monitoring
Ultimately, what doesn’t adapt in good time, perishes. Your risk contingency plan is no
different. It is crucial that the organizations invest in constantly monitoring and modifying the
plan. One of the core activities that the framework pushes is that of an annual review.

The management system should be monitored and modified if necessary. In the likes of the
much appreciated Turnbull report that stresses on regular as well as period monitoring, the
framework also focuses on the importance of feedback and action. Also, any potential
weaknesses can be assessed and fixed during such reviews.

Evaluation and auditing can be another important annual meeting to have if you want to
establish diversified portfolios and have a separate risk management wing. Experts often say
that it is not advisable to adopt such processes after the portfolio has been put into action.
Instead, it must come with a strategic change management initiative that addresses risks well
before the portfolio goes live.

Risk Management is always work in progress. The fact that COSO releases reviews year after
year only testifies the fact. And projects evolve with time. Your Enterprise Risk Management
strategy could go from strength to strength with a sound PPM tool.