Impact Of Capital Budgeting For Promotional Strategies On Turnover And Profit Maximisation On Consumer Product

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Impact Of Capital Budgeting For Promotional Strategies On Turnover And Profit Maximisation On Consumer Product


Abstract


This article investigates the impact of capital budgeting for promotional strategies on turnover and profit maximization on consumer product. The study uses a sample of U.S. best performing firms from the Stem Stewart database. We find that product market advertising expenditures have a positive spillover impact on capital markets in terms of reducing a firm’s overall cost of capital. In addition, we find that greater advertising associates with lower cost of equity, higher debt utilization, and lower Altman’s Z-score. Finally, we analyze corporate value contributions of advertising, implying that firms with higher advertising outlays are also the ones that experience higher performance in the MVA.


Chapter One


Introduction

1.1 Background of the Study

The level of competition in the market economy is quite high therefore, it is imperative for firms to design appropriate promotional strategies to drive sales optimally with the view of achieving high turnover in sales which will lead to high revenue and profit maximization. This however requires significant funding of appropriate promotional strategies. Capital budgeting is the decision to commit major capital, or investment, expenditures so as to increase the value of the firm to its shareholders. O’Sullivan, Arthur; Sheffrin, Steven M. (2003). The value of achieving high sales turnover and profit maximisation requires identifying the target segment of the firms product or service so as to adopt appropriate promotional strategy to serve the market. Promotional strategy involves the determination of an appropriate market for the sale of the firms’ product or service and the effect use of promotion mix to attain optimal sale to achieve profit maximization. The primary aim of promotional mix is to create awareness for the brand and importantly to achieve organizational goals and profits. Promotional mix consist of five components such as advertising, personal selling, direct marketing, sales promotion and public relation. The application of capital budgeting for adoption of promotional strategies will require that each promotion mix is ranked to determine the promotion strategy which best suit the firm’s product and services to achieve high turnover and maximize profit. The study therefore seeks to appraise the impact of capital budgeting for promotional strategies on turnover and profit maximization on consumer products.


1.2 Statement of the Problem

Capital Budgeting requires significant long-term investment of funds thereby posing a high level of risk for the firm. Consequently, it is imperative that promotional strategies are ranked and appraised to determine the promotional strategy which best suit the firms product and service and the target customers So as to avoid the risk of loss of investment due to low sales responses and turnover. Most capital budgeting Capital budgeting investments and projects are funded from debt capital, equity capital, or the use of retained earnings. Therefore, significant consideration is required to ensure returns on investment .The study seek to investigate the impact of capital budgeting for promotional strategies on turnover and profit maximization on consumer product.


1.3 Objectives of the Study

The main study objective is to investigate the impact of capital budgeting for promotional strategies on turnover and profit maximization on consumer product; while the specific objectives include

  1. To appraise the relevance of capital budgeting for promotional strategies.
  2. To determine the concept of turnover and profit maximisation.
  3. To determine the impact of capital budgeting for promotional strategies on turnover and profit maximization on consumer product.

1.3 Research Questions

  1. What is the relevance of capital budgeting for promotional strategies?
  2. What is the concept of turnover and profit maximisation?
  3. What is the impact of capital budgeting for promotional strategies on turnover and profit maximization on consumer product?

1.4 Statement of Hypothesis

The statement of the hypothesis of the study is stated in null

  • Ho The impact of capital budgeting for promotional strategies on turnover and profit maximization on consumer product?

1.5 Significance of the Study

The level of competition in the market economy is high, therefore firms are leveraging on the adoption of appropriate promotional strategy for the attainment of high turnover and profit maximisation. The study seek to provide an evaluation on the effectiveness of the use of capital budgeting for promotional strategies with the view to making appropriate recommendations.


1.6 Scope of the Study

The study focuses on the impact of capital budgeting for promotional strategies on turnover and profit maximization on consumer product?


1.7 Limitation of the Study

The study was confronted with logistic and geographical constraint


1.8 Definition of Terms

Capital Budgeting Defined

Capital budgeting is the decision to commit major capital, or investment, expenditures to a project so as to increase the value of the firm to its shareholders.

Turnover Defined

This represent the value of the goods or services sold during a particular period of time.

Profit Maximisation Defined

Profit maximization is the attainment of the highest possible profit with the resources and market share currently at their disposal profit.


Chapter Five


Summary and Conclusion

5.1 Summary

The fundamental question that arises pertains to the impact of advertising expenses on corporate value. Although this is not our focus, we present in Table 8 evidence pertaining to positive correlation between a firm’s advertising expenditure and the MVA—a measure of corporate performance proposed by Stern Stewart. The results suggest a significant positive relationship advertising expenditures and MVA, implying that firms with higher product market advertising also experience greater performance in terms of MVA.


5.2 Conclusion

In this article, we address the issue of spillover effects of product market advertising into the capital market. Specifically, we investigate three questions: What is the impact of a firm’s product market advertising on its overall cost of capital? How does advertising affect the mix of debt and equity? And, what is advertising’s impact on a firm’s beta and Altman’s Z-score? Using a sample of U.S. best performing firms from the Stem Stewart database, we conclude that product market advertising expenditures have a positive spillover impact on capital markets in terms of reducing a firm’s overall cost of capital. The impact seems to be significant even after controlling for other determinants of cost of capital. In addition, we find that greater advertising associates with lower cost of equity, higher debt utilization, and lower Altman’s Z-score. Finally, in analyzing corporate value contributions of advertising, we find that firms with higher advertising outlays are also the ones that experience higher performance in terms of MVA


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