Think about the businesses/companies you either patronize or have a pretty good

Question

Think about the businesses/companies you either patronize or have a pretty good understanding of because you (or a friend or family member) work or have worked there. If it is a chain, do NOT evaluate the entire company or brand but one specific location instead (it’s very hard to discern weaknesses for major corporations since most have excellent public relations firms so we usually don’t know much about the internal workings/concerns unless we work there).

Choose one and create a SWOT analysis which you will create and save as a Word document and then post to the Discussion Board for your group for Assignment 2.

Follow these instructions:

First, briefly describe the business so that we understand what it does (product offerings and nature of the business and location). Then post your analysis in bullet fashion or 4x4 matrix (the list is easier to give you room to explain your points more fully). Save your document in Word to upload to the Discussion Bd rather than try to enter directly in the Discussion Board text box. At a minimum, you should have 3 items mentioned under each component. Weaknesses will likely be the most difficult o detect unless you have been employed in the company. Remember that strengths and weaknesses must affect the target market (customers) in some way (not just employees). For opportunities and threats, think about all the environmental forces and remember that the trends (economic, sociocultural, etc.) may be local as well as national or global.

Explanation / Answer

Dear sir / madam,

Let us take the business of investing in homes. The typical US or Canadian household buys a home by borrowing from a bank or a savings and loan institution. The interaction of inflation and taxes has a big impact on the real cost of borrowing. Traditionally, US mortgages set a fixed nominal interest rate for a duration of 25 or 30 years. The interest payments are deductible in calculating US federal income taxes, thereby reducing the effective interest cost of the loan. For instance, suppose the marginal tax rate is 30 percent, then the nominal interest cost is 70 percent of the actual mortgage rate.

Now consider the economics of investing in a home eg. for someone buying a home in 1963 and financing it with a 25 year fixed-interest mortgage. The mortgage rate in 1963 was 5.9%, and the rate of inflation over the next 25 years averaged 5.4%. Thus, the pretax actual real interest cost of borrowing was 0.5% In addition, the home buyer could deduct the interest paid on the mortgage from his or her taxable income. At an interest rate of 5.9% and a tax rate of 30% , the tax reduction was worth 1.77% a year (30% of 5.9%) so the after-tax real cost of borrowing was minus 1.3%-not a bad deal. But of course inflation could have turned out to be lower than expected, and then the borrower would have done worse than expected and the lender would have made, rather than lost, money.

After the introduction of a new financial instrument, the adjustable rate mortgage, which is a particular example of a floating rate loan, the interest is periodically adjusted in line with prevailing short term interest rates. To the extent that nominal interest rates roughly reflect inflation trends, adjustable rate mortgages reduce the effects of inflation on the long term real costs of financing home purchases. Both adjustable rate and long term fixed interest mortgages are now in use.

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