The validity of the Law of One Price has been routinely tested in different commodity markets over the years. The Law of One Price posits that investors should have an opportunity to trade at the same price for equivalent investments that they make in different competitive markets. As an economic theory, the Law of One Price suggests that every identical asset, commodities, and security invested in any venture should trade at the same price in a free market when adjustments are made with the most recent currency exchange rates ( Phillips & Pippenger, 2008 ). Arbitrage opportunity should make it possible to eliminate price differences in different market locations.
However, according to Phillips and Pippenger (2008 ), there are certain commodity markets where the Law of One Price seems to fail. In many different markets around the world, there is a tendency that same commodities will have converging prices. This trend confirms the validity of the Law of One Price, even in cases where arbitrage is not given prominence. However, this should not be interpreted as a statement against the importance of arbitrage in supporting the “law of one price.”
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Markets in different sectors and world locations are bound to have many intricate differences due to broad socioeconomic factors ( Yang, Bessler & Leatham, 2000 ). Additionally, the desired state of a perfectly competitive market may not be existing in reality. For these reasons, the price for the same vehicle model may vary significantly in different countries. It also gives a partial explanation on why Americans pay a relatively high price when buying prescription drugs as compared to populations in other countries. For this reason, the market prices for individual products have to be adjusted through arbitrage to make the perspective of market convergence vividly clear.
Purchasing power parity is a critical consequence of the Law of One Price ( Taylor, 2001 ). The currency value for two different countries is considered equal if a number of identical goods are sold at the same price in the two economies. This basis is used to compare securities for stockholders who operate in different stock markets with varied currency.
Question 3
The capital budgeting process is one of the most important processes undertaken by firms. As a process, capital budgeting involves determining the most optimal investment options that promise good returns (Ryan & Ryan, 2002). These firm proceeds to commit its resources towards the identified investments. To appraise the viability of any specific investment, the costs incurred in investment is weighed against the benefits accruing from the investment. The process of capital budgeting gives the firms the opportunity to select investments that promise to create the highest profits and reject those that are less profitable.
The importance of capital budgeting process lies in its creation of measurability and accountability of resources. The firm gets to learn of the profit returns and the risks associated with every investment venture before it chooses to commit its resources in any of them (Ryan & Ryan, 2002) . Through the capital budgeting process, the management gets an opportunity to act in the best interest of the stockholder because they make investment decisions that can be measured in tangible value. Companies will schedule their growth strategies by tying them to the capital budgeting process. Investments that have a high rate of return will be favored over those with lower rates of return.
According to Ryan and Ryan (2002), a company’s internal factors may also influence the acceptability of an investment option. For instance, charity organizations will seek to foster goodwill during the budgeting process instead of prioritizing the prospective rate of return. The capital budgeting process is important because it empowers firms to create formidable strategic goals for the long term. The firms get an opportunity to prosper and grow if they control the resource allocation process. Capital budgeting also allows firms to forecast the levels of cash flows that they will gain in the future. Companies can monitor their investment expenditures and control the specific cost areas where they have committed their resources.
Question 4
Part 1
“ World's Most Admired Companies" is a list of top companies that are often selected Fortune Magazine in 2018 after a comprehensive survey of top company executives and industry leaders. Similarly, the "World's Most Respected Companies" is a prestigious list of top companies that are often published by Barron's Magazine every year to recognize their competitive status ( Assunta & Agostino, 2007 ).
Fortune Magazine looks for companies with revenues above $10 billion as a criterion for listing. These companies are then evaluated using second criteria concerning corporate reputation. The Fortunes Global conducts a survey among industry leaders, directors and executives in different countries to learn about their corporate reputation on matters such as corporate social responsibility, product quality, employment attractiveness, and management quality. Using the individual scores, companies that appear in the upper half of their specific industry are picked for final listing ( Assunta & Agostino, 2007 ). I agree with this ranking criterion because it relies on credible factors to measure the overall competitiveness of firms.
Part 2
Microsoft was listed as number 7 among the “World's Most Admired Companies" by Fortune Magazine in 2018. I have a strong admiration for Microsoft as a computer software company because it has managed to maintain a steady market dominance in the world in every subsequent decade. It still attracts admiration in a highly competitive industry where there are many other formidable competitors. Barron's Magazine also listed McDonald's at number 18 among the "World's Most Respected Companies" in 2017 ( Assunta & Agostino, 2007 ).
Even though McDonalds Company made it list, I have less respect for it due to the less optimal working conditions it gives to its store workers. Every so often, McDonald's employees are reported in news headlines engaging in strikes over dismal pay and poor working conditions. The McDonalds Company needs to take sure steps to raise the wages payable to workers and give them better terms of work ( Assunta & Agostino, 2007 ). It is also disappointing that a significant percentage of McDonald's employees who work for wages are young people.
References
Assunta, B. M., & Agostino, L. (2007). International Conference on Management Science and Engineering (14 th ) August 20-22, 2007: Leadership Styles of World's Most Admired Companies: A Holistic Approach to Measuring Leadership Effectiveness . Tor Vergata University.
Pippenger, J., & Phillips, L. (2008). Some pitfalls in testing the law of one price in commodity markets. Journal of International Money and Finance , 27 (6), 915-925.
Ryan, P. A., & Ryan, G. P. (2002). Capital budgeting practices of the Fortune 1000: how have things changed. Journal of business and management , 8 (4), 355-364.
Taylor, A. M. (2001). Potential pitfalls for the purchasing ‐ power ‐ parity puzzle? Sampling and specification biases in mean ‐ reversion tests of the law of one price. Econometrica , 69 (2), 473-498.
Yang, J., Bessler, D. A., & Leatham, D. J. (2000). The law of one price: developed and developing country market integration. Journal of Agricultural and Applied Economics , 32 (3), 429-440.
