For example, there may be a bank that wants to be able to say that they are the biggest lender of home equity loans. While

For example, there may be a bank that wants to be able to say that they are the biggest lender of home equity loans. While that sounds nice, and one would normally expect that that would be a good thing, it depends on what the profitability on those types of loans is. In reality, whoever was the largest in that market when the home loan market crashed a couple of years ago actually lost in a big way. Home equity lenders are second in line for payback when a customer has a first and second mortgage. If a house has gone down in value by so much that it is even worth less than the original first mortgage, the home equity line of credit is basically an unsecured loan (since there is no asset with value that is backing up the loan (it all backs up the first mortgage)). So, in this case, this bank would have had the largest unsecured amount of loans in the industry. As the economy continued to suffer, this particular type of loan suffered from customers not paying (perhaps more so than the first mortgages), and this company had many write-offs. So, I think that the desire to have the largest market share should be adjusted to be a desire to have the largest of the right kind of market share (the largest profitable kind). The goal of companies should be to have the largest profits, the largest sales/revenue. Does anyone have any other examples of instances when a company having a large market share actually suffered as a result? Can anyone think of a situation that exist like this if it doesn’t already exist? Risk Based Pricing In addition to being a customer of my employer (95% of my banking needs are with them), I am a member of a credit union. It has been my experience that commercial banks price the interest they charge on loans in large part based on the borrower’s credit score/history, and use that history to determine whether to give the customer the loan or not. This is called risk-based pricing. The loan is not restricted to current bank customers. On the flip side, credit unions charge interest on loans at the same rate for all customers. The borrower’s credit history will impact whether or not a loan is even made, but once the decision to make the loan has been made, the interest rate charged is the same for all customers. Finally, credit unions can only make loans to members, so not all borrowers are eligible to even apply for a loan with all credit unions. What is everyone’s opinion about risk-based pricing? Does it seem “fair”? Why or why not? . I would say that if banks are not allowed to charge fees for these services, they will eventually have to refuse service to anyone that doesn’t maintain a minimum balance in their account. This would put you further behind the eight ball, as your choices in where to bank will be severely diminished. Simply put, those customers that don’t maintain a certain balance with a bank, or that don’t have other services with that bank (credit cards, loans, investment accounts) are not profitable without being able to charge fees. Banks are in the business to make a profit for their shareholders, while providing a valuable service to their customers. If customers feel strongly enough about the fees that they are being charged for certain products/services, they have the right to not use that product/service, or to take their business to other institutions that don’t charge those fees (credit unions, online banks maybe, etc.). If enough customers do that, the bank may rethink their strategy and change some of their policies/fees. I believe that the customer is always the one that pays for things in the end. As a customer, I may not like this, but I realize that whenever there is government regulation, or some other increase in the costs of running a business (such as gas prices affecting even the price of groceries), the cost is passed onto the consumer. If a company does not pass on these expenses to the consumer, they will make less money, and may eventually go out of business. If it is a publicly traded company, if it eats these costs, the return to shareholders is reduced. This may not sound like it impacts the average Joe, but anyone that has a retirement plan or a 401K can suffer if their plan happens to hold shares of this company. I hope I haven’t offended anyone with my thoughts – I’m just trying to share one person’s opinion, and would encourage others to respond with their thoughts as well. You absolutely have raised good points, and I appreciate you bringing them up. In the end, we are all consumers, and I think that we all want our expenses to be as low as possible – we may just differ on how we think we need to get there. Share Thoughts? In your own words, explain capital budgeting. Why is it important to a company’s long-term success? Provide an example of poorly performed capital budgeting. How does this affect a company’s long-term success? Why is capital budgeting part of a company’s long-term strategic planning process? What are the pros and cons of these methods: NPV Simple payback IRR Which would you recommend using? Why? Would your recommendation differ What are major areas of risk in financial management? What are major areas of financial risk in your company? Which risk management techniques are important to your company? Why? . As an aside to this set of questions,

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