Trading on equity 

-is sometimes referred to as financial leverage or the leverage factor.

Trading on equity occurs when a corporation uses bonds, other debt, and preferred stock to increase its
earnings on common stock. For example, a corporation might use long term debt to purchase assets that
are expected to earn more than the interest on the debt. The earnings in excess of the interest expense
on the new debt will increase the earnings of the corporation’s common stockholders. The increase in
earnings indicates that the corporation was successful in trading on equity.
If the newly purchased assets earn less than the interest expense on the new debt, the earnings of the
common stockholders will decrease.

MB0048 Q2.b. Operation Research replaces management by personality.

Answer: Operations research (OR) and management science are terms that are used interchangeably to describe the discipline
of applyingquantitative techniques to make decisions and solve problems. Many methods used in operations research were

developed during World War II to help take the guesswork out of missions such as deploying radar, searching for enemy

submarines, and getting supplies where they were most needed. The prevalence of operations research in the Nation’s economy

reflects the growing complexity of managing large organizationsthat require the efficient use of materials, equipment, and people.

OR analysts determine the optimal means of coordinating these elements to achieve specified goals by applying mathematical

principles to organizational problems. They solve problems in different ways and propose alternative solutions to management,

which then chooses the course of action that best meets their goals. In general, OR analysts are concerned with issues such as

strategy, forecasting, resource allocation, facilities layout, inventory control, personnel schedules, and distribution systems. 

The duties of the operations research analyst vary according to the structure and management philosophy of the employer or client.

Some firms centralize operations research in one department; others use operations research in each division.

Some organizations contract operations research services with a consulting firm. Economists, systems analysts, mathematicians,

industrial engineers, and others may apply operations research techniques to address problems in their respective fields.

Operations research analysts may also work closely with senior managers to identify and solve a variety of problems. 

Regardless of the type or structure of the client organization, operations research in its classical role of carrying out analysis to

support management’s quest for performance improvement entails a similar set of procedures. Managers begin the process by

describing the symptoms of a problem to the analyst, who then formally defines the problem. For example, an operations research

analyst for an auto manufacturer may be asked to determine the best inventory level for each of the parts needed on a production

line and to determine the number of windshields to be kept in inventory. Too many windshields would be wasteful and expensive,

while too few could result in an unintended halt in production. 

Operations research analysts study such problems, then break them into their component parts. Analysts then gather information

about each of these parts from a variety of sources. To determine the most efficient amount of inventory to be kept on hand, for

example, OR analysts might talk with engineers about production levels, discuss purchasing arrangements with buyers, and

examine data on storage costs provided by the accounting department. 

The procedures of operations research were first formalized by the military. They have been used in wartime to effectively deploy

radar, search for enemy submarines, and get supplies to where they are most needed. In peacetime and in private enterprises,

operations research is used in planning business ventures and analyzing options by using statistical analysis, data and computer

modeling, linear programming, and other mathematical techniques. 

Large organizations are very complex. They must effectively manage money, materials, equipment, and people. Operations

research analysts find better ways to coordinate these elements by applying analytical methods from mathematics, science, and

engineering. Analysts often find many possible solutions for meeting the goals of a project. These potential solutions are presented

to managers, who choose the course of action that they think best. Operations research analysts are often involved in top-level

strategizing, planning, and forecasting. They help to allocate resources, measure performance, schedule, design production facilities

and systems, manage the supply chain, set prices, coordinate transportation and distribution, or analyze large databases. 

The duties of the operations research analyst vary according to the structure and management of the organization they are

assisting. Some firms centralize operations research in one department; others use operations research in each division. Operations

research analysts also may work closely with senior managers to identify and solve a variety of problems. Analysts often have one

area of specialization, such as working in the transportation or the financial services industry. 

Operations research analysts start a project by listening to managers describe a problem. Then, analysts ask questions and formally

define the problem. For example, an operations research analyst for an auto manufacturer may be asked to determine the best

inventory level for each of the parts needed on a production line and to ascertain the optimal number of windshields to be kept in

stock. Too many windshields would be wasteful and expensive, whereas too few could halt production. 

Analysts would study the problem, breaking it into its components. Then they would gather information from a variety of sources. To

determine the optimal inventory, operations research analysts might talk with engineers about production levels, discuss purchasing

arrangements with buyers, and examine storage-cost data provided by the accounting department. 

Relevant information in hand, the analysts determine the most appropriate analytical technique. Techniques used may include a

Monte Carlo simulation, linear and nonlinear programming, dynamic programming, queuing and other stochastic-process models,

Markov decision processes, econometric methods, data envelopment analysis, neural networks, expert systems, decision analysis,

and the analytic hierarchy process. Nearly all of these techniques involve the construction of a mathematical model that attempts to

describe the system being studied. So, the problem of the windshields, for example, would be described as a set of equations that

try to model real-world conditions. 

The use of models enables the analyst to explicitly describe the different components and clarify the relationships among them. The

descriptions can be altered to examine what may happen to the system under different circumstances. In most cases, a computer

program is developed to numerically evaluate the model. 

Usually the model chosen is modified and run repeatedly to obtain different solutions. A model for airline flight scheduling, for

example, might stipulate such things as connecting cities, the amount of fuel required to fly the routes, projected levels of passenger

demand, varying ticket and fuel prices, pilot scheduling, and maintenance costs. By assessing different possible schedules, the

analyst is able to determine the best flight scheduleconsistent with particular assumptions. 

Based on the results of the analysis, the operations research analyst presents recommendations to managers. The analyst may

need to modify and rerun the computer program to consider different assumptions before presenting the final recommendation.

Once managers reach a decision, the analyst usually works with others in the organization to ensure the plan’s successful

implementation.

MB0048, Q2. Comment on the following statements: a. Operation Research advocates a system approach and is
concerned with optimization.
Answer: a. Operation Research advocates a system approach and is concerned with optimization. Operations research (O.R.) is
the discipline ofapplying advanced analytical methods to help make better decisions. 
By using techniques such as mathematical modeling to analyze complex situations, operations research gives executives the power

to make more effective decisions and build more productive systems based on: 

• More complete data 

• Consideration of all available options 

• Careful predictions of outcomes and estimates of risk 

• The latest decision tools and techniques 

O.R. is unique. It's best of breed, employing highly developed methods practiced by specially trained professionals. It’s powerful,

using advanced tools and technologies to provide analytical power that no ordinary software or spreadsheet can deliver out of the

box. And it’s tailored to you, because an O.R. professional offers you the ability to define your specific challenge in ways that make

the most of your data and uncover your most beneficial options. 

To achieve these results, O.R. professionals draw upon the latest analyticaltechnologies, including: 

• Simulation Giving you the ability to try out approaches and test ideas for improvement 

• Optimization Narrowing your choices to the very best when there are virtually innumerable feasible options and comparing them is

difficult 

• Probability and Statistics Helping you measure risk, mine data to findvaluable connections and insights, test conclusions, and

make reliableforecasts 

• O.R. has enhanced organizations and experiences all around us. From better scheduling of airline crews to the design of waiting

lines at Disney theme parks

The decision making systems can be classified in a number of ways. There are two types of systems based on the manager’s

knowledge about the environment.

A. Closed decision making system:

If the manager operates in a known environment then it is a closed decision making system. The conditions of the closed decision

making system are:

(a) The manager has a known set of decision alternatives and knows their outcomes fully in terms of value, if implemented.

(b) The manager has a model, a method or a rule whereby the decision alternatives can be generated, tested, and ranked.

(c) The manager can choose one of them, based on some goal or objective.

A few examples are:

1. a product mix problem,

2. an examination system to declare pass or fail, or

3. an acceptance of the fixed deposits.

4. B. Open decision making system:

If the manager operates in an environment not known to him, then the decision making system is termed as an open decision

making system. The conditions of this system are:

(a) The manager does not know all the decision alternatives.

(b) The outcome of the decision is also not known fully. The knowledge of the outcome may be a probabilistic one.

(c) No method, rule or model is available to study and finalize one decision among the set of decision alternatives.

(d) It is difficult to decide an objective or a goal and, therefore, the manager resorts to that decision, where his aspirations or desires

are met best.

Deciding on the possible product diversification lines, the pricing of a new product, and the plant location, are some decision making

situations which fall in the category of the open decision making systems.

The MIS tries to convert every open system to a closed decision making system by providing information support for the best

decision. The MIS gives the information support, whereby the manager knows more and more about the environment and the

outcomes, he is able to generate the decision alternatives, test them and select one of them. A good MIS achieves this.