Social norms and how they influence social action






In the context of social theories under sociology, understanding human behaviors as well as their actions are very essential. This is especially when it comes to pursuing an understanding of the society from a critical point of view. Since the birth of knowledge and philosophy, in general, remarkable contributions from dedicated sociologist have been put forth to help understand the society from the social perspective. Some of these include Max Weber, Georg Simmel and mass theorists (Mosca, Pareto, Michels) among others such as Karl Max. The basic inquiry that can be  in sought of a sociological understanding of the society would demand a thorough understanding of the social norms concept.  In this regard, this paper explores what the social norms are, and how these influence social action. The discussion shall borrow heavily from fundamental concepts of sociology from renowned social theorists and scholars – Max Weber and Mass Theorists (Mosca, Pareto, Michels). This is as follows:

A brief on Social Norms

From the human context of interactions, social norms refer to accepted rules of behavior in a given group, community or their culture (s). Most important to appreciate is that these rules are not written down neither are they documented for any reference, but are natural to the society at hand. All members of such a culture (or group, community or a society), are expected to be adherent and conformant to such norms lest they are shunned by the community; or punished by being subjected to some form consequences (, 2015). Generally speaking, these norms, which are   as mores, are meant to serve a useful purpose through creating a proper foundation of correct behaviors. In a nutshell, social norms are the essential customs and/or conventions of a given community. These rules may be explicit, in which case, they are clearly spoken openly; or implicit, in which case they are not openly spoken about although when an individual  transgress them, they are revealed to him or her (Knuttila & Magnan, 2012).

In general, sociology is rooted in these norms which, virtually in social theory, are the driving forces leading to human actions. In the social theory context, human actions which have a primary subject of consideration from the actor(s)’ perspective, are regarded as social actors. These are outlined in the following section.

A brief overview of Social Action

The term “Social Action” has more meaning that it sounds. This is when considered from the Max Weber extensive definition. According to him, an action performed by an individual qualifies to be regarded as a social action when it becomes a subject matter in the conscience of the existence of the person who performs it. It also must have a definite intention of the actor him/herself. As mentioned earlier on, a social action has a  cause, which can be linked to social norms as it affects other parties in a wider society (Schiedermair, 2012). Max also considered social actions as having a range and that there are four types of actions. These are:

  • Instrument rational action– the actors have evaluated the actions prior to acting,
  • Value – rational actions– there is a benefit at the end of the action by an individual,
  • Affectual actions– are performed out of emotions depending on the emotional state of the actor
  • Traditional actions– social actions (either of the above three), repeated over time, thus becoming a tradition in a society.

All these have a subject matter which can be proved empirically and affects social relations in a society (, 2015).

How Social Norms influence Social Actions

In order to establish how social norms influence social actions, it is most appropriate to narrow down to a particular group say a social class in terms of the status held by such a group in a country for instance. At this juncture, this discussion shall focus on the political elite who are mostly rich in the society and happen to control the economic activities. For the purpose of this discussion, a postulate of social norms to these elites could be:

  • Wealth creation is justifiable,
  • Justice may be for future benefits,
  • Being corrupt to retain seats of power is justifiable,
  • Access to power and success is normal and justifiable,
  • Decision-making is solely ours and decisions can be for our benefits, e.t.c.,

With these postulates in mind, considering the Mass theorists (Mosca, Pareto, Michels) – “Circulation of Elites” and Max Weber’s theory – “Power, Domination, and Inequality”. These classical social theories offer an arguing platform which is   to the influence which power can have on human behavior in regards to social action. The political elites have the power to make rules and amend them. If we consider the postulated social norms, they will behave and thus act in a manner that reflects and replicates these social norms. This is supported by the Mass theorists (Mosca, Pareto, Michels), in their view of how elites are virtually recycled within the typical society, thus making it hard to replace them with non-elite groups in the society.

Social norms justify groups’ ego over that of other groups

According to Giddens & Held, 1982, the Classic Elite theorists (Vilfredo Pareto (1848-1923), Gaetano Mosca (1858-1941), and Robert Michels (1876-1936), acknowledged the presence of powerful groups, “the elites” who were inevitable and controlled the entire societies thus compromising the virtues of democracy. Close to these theories was the Marxist theory which also acknowledged that economic ideologies emanated from powerful groups of individuals who controlled wealth. These elites thought that they were the best accomplishers in any field. They all were dominant minorities, but their say was the rule of the day in the society. They took the form of radical ruling classes, the political classes, aristocracies, and oligarchies. These had conflicting interests with the dominated majorities, the “masses”. Mosca was quick to point out the inevitable power polarization which he considered to be emanating from material, intellectual or even moral superiority of the ruling minority. This can be summed up to mean that the ruling elite (political elite), have a defined social status with “accepted” social norms among the elite group.

Social norms demean the logic of rational reasoning

In the modern society of today, cases of corruption, property grabbing, public incitement, and law infringements are a commonplace among these elites. They strive to choose their successors and democracy is virtually absent due to their social actions. Their actions are well matched to Max Weber’s definition as they are a concrete subject matter for their needs and consciences. Whatever they do is linkable to their social norms which are particularly encouraged by lust for power (Giddens & Held, 1982). This is   in contemporary elite theorists who have acknowledged extension of power command to include better education and better life skills and health care for the elites. These ensure that the dominated majority, “the masses”, never get a breakthrough to having justice, democracy leave alone fairness.

Social norms as a drive for selective succession (status retention)

In a fair consideration, the mass theorists have specifically been the best point of reference from which this discussion has drawn a great deal of supporting arguments in its attempts to illustrate how social norms influence social actions (Daloz, 2012). Max Weber’s reading serves best to define social action, which has altogether has been helpful. The classical elite theorists also pinpointed that revolutions held to better lives for the dominated majority were just but an avenue of recycling elites. This still present in today’s social contexts and it is an ironically disturbing social norm amongst the political elites.


A couple of social theories have been put forward since the early 1800s and are   in learning the human societies all over the world. The root of social theories can be considered to be the social action, which can then be considered to be an attribute of social norms (Ritzer, 2011). Another good reference to justifying this statement is the classical elite theories pioneered by theorists (Pareto, Gaetano Mosca and Robert Michels (1876-1936). Social status induces social norms which become part of life in terms of values, behaviors, accepted do’s and don’ts, which the involved group integrates into its way of life or culture (Giddens & Held, 1982). In order for any group to defend and uphold its social norms, its members act in ways that lead to social actions in the contexts of its members’ status. In other words, social norms influence human behavior, beliefs, speech and radicalize their zeal to defend and retain their identity in the social space. They become a rationalization of self-interests.






References:,. (2015). Social Norms. Retrieved 21 March 2015, from <>

Daloz, J.-P. (2012). The sociology of elite distinction: From theoretical to comparative perspectives. New York: Palgrave Macmillan.

Giddens, A., & Held, D. (1982). Classes, power, and conflict: Classical and contemporary debates. Berkeley: University of California Press.

Knuttila, K. M., & Magnan, A. (2012)Introducing Sociology: A critical approach. Oxford: Oxford University Press.

Ritzer, G. (2011). Sociological theory. New York: McGraw-Hill.

Schiedermair, Joachim. (2012). The Masses and the Elite: the Conception of Social Inequality in 1840s Scandinavian Literature. (Romantik: Journal for the Study of Romanticisms; Vol 1, No 1 (2012); 125-138.) Romantik: Journal for the Study of Romanticisms.

Segre, S. (2014). Contemporary sociological thinkers and theories.,. (2015). Theories of Action and Praxis. Retrieved 21 March 2015, from <>

Topic: Why does Starbucks continue to be the number one coffee company in the world



Starbucks global presence can be seen in over 60 different countries across the globe. Even though they have expanded rapidly worldwide, their main focus has always been in the United States. According to Securities Exchange Commission (SEC) report in 2013, Starbucks have more than 7,000 retail store in the United States and over 10,000 stores worldwide (SEC, 2013).  Starbucks outlets are always located in prime locations with heavy traffic. Those properties represent good investments as most of them occupy prime real estate. The designs of Starbucks outlets are always visually appealing, cozy and emanate “coolness”. This aspect attracts customers and makes them want to stay.  The company has net revenue of $11.7 billion in 2013, listing them as the company with the highest market share in the coffee and snack shops industry in the United States (SEC, 2013). This high level of sales came from a variety of product mix. Starbucks products include fresh brewed coffee, non-coffee beverages, snacks, sandwiches, a variety of instant coffee, canned drinks, music, and books.

Research design

This part describes in a vivid manner the procedures and strategies that were used in carrying out this study. Research methodology encompasses elements like research design, study location, target population, sample and sampling procedures, research instruments, pilot testing of the instruments, data collection process, and data analysis procedures. The section is an overall plan conceiving to aid the research in answering the research questions. It is a stage where most decisions about the research will be approached as well as when, where and how the research will be completed. In particular, the section describes the target population, the sample sampling producers, research instrument, validity and reliability of instruments, data collection procedures and data analysis. It must be noted that this section is very important to this study because it gives the methods used to collect the primary data from the source.


Research design is sorted into three sections. These sections are exploratory research, explanatory research and lastly descriptive research. These research designs are described below.


Source: Created by author

Exploratory Research

Exploratory research enables the researcher to determine the best research design, selection of subjects and data collection method for a problem that has defined. Furthermore, exploratory research is based on secondary resources such as looking at available literature and data and such as qualitative research interviews with customers, companies, individuals, competitors, focus groups, case studies and so on so forth. Exploratory research aims at gaining an insight for new phenomenon or obtains a familiarity to be able to formulate hypotheses

Explanatory Research

The main purpose of explanatory research is to find out the answer for the question of Why. Explanatory research is an attempt to go beyond exploratory and descriptive research in order to identify what the real reasons are for why a phenomenon occurs. The reasons behind a theory can be enriched and built by this type of research design.

Descriptive Research

There are many researchers who strive to identify and to figure out the terms of these kinds of researches. Descriptive research is also known as statistical research and describes characteristics and data in regards to phenomenon or population that the researcher has studied. In this regard, even though the description of data is accurate, real and systematic, it is almost impossible that the researcher is able to find out what has caused the situation. Hence, it is not proper to use descriptive research in creating causal relationship, where one variable influence another

Justification of Research Design

This research will use exploratory research for research design. It is necessary to state and ask a lot of random questions for the interview regarding with the subject which there is no enough information.  According to Gay mills and Airsian (2009) this design involves collection of standardized quantifiable information from members of a population or a selected sample.

Target Population

A population is the entire set of relevant units of analysis, or data. It can as well be referred to as the aggregate of all cases that conform to some designated set of specifications. In this research the target population is the city of Baltimore,where a sample population was used for the research

Methods of Data Collection

This study will apply various number of research instruments collection of data. It is therefore fundamental to note that the researcher used different types of research instruments. The use of various number of research instruments is always encouraged so as to ensure that the data collected is accurate and holistic. This will contribute to the trustworthiness of the data


A questionnaire is a set of questions or statements that assesses attitude, opinions, beliefs and biographical information..The research employs questionnaires to elicit the desired information since they are economical, ensure anonymity, permit use of standard questions have uniform procedures provide time for respondents to think and are easy to score.

Self-administered questionnaires to the sample population in Baltimore will have five sections and should take 20 – 30 minutes to complete.


This research will employ the use of semi structured interviews. The interviews always compliment the questionnaire through corroboration of the quantitative information. An interview guide, according to Budha (2000) describes interviews as vocal questionnaires which involves the gathering of data through direct and verbal interactions between(s). This allows clarifying any ambiguity or obscurity in the questions.

Thematic concerns on research questions shall guide the division of the interview schedule into sections. For all the owners selected interviews will be conducted in their sites and will last for between 35 – 45 minutes. Open ended questions in unstructured interviews are used for greater flexibility and freedom for the respondents.

Validity and Reliability of Research Instrument

According to mills & Airsian (2009), validity refers to the extent to which a researcher’s instrument measures what is designed to measure. Kothari (2003) argues that validity is the appropriateness, meaningfulness and usefulness of any inferences that a researcher draws based on data obtained through the use of an instrument. Instruments validity is the extent to which an instrument measures an aspect in respect of what it can be projected to evaluate. Content validity is the extent to which a measuring instrument provides adequate coverage of the topic under study, and its determination is basically judgmental and intuitive. Marlon (2001), points by designing the questionnaire, the researchers can construct the document to accurately reflect the concepts that the research intends to measure. Therefore this research uses instruments that are expressively written for the study. To ascertain the validity of questionnaires, interview schedules and FGD guides, a pilot study will be done among the workers and owners who will not participate of the study. To ascertain reliability of the results, alternate method will be used and a Pearson product of co- efficient of the results obtained from questionnaires and those obtained in FGD and interview guides.

Methods of Data Analysis

This research uses qualitative and quantitative data analysis. Kothari (2004) asserts that data obtained from the questionnaires and interviews in its original form may be difficult to interpret. Data analysis is therefore the process of bringing order and meaning to raw data. This is achieved through cleaning, coding and entering it into a computer and analyzing it. Quantitative data will be obtained from will be obtained from the close – ended items in the questionnaires. It will thereafter be quantitatively analyzed in order to identify general trends in the selected population. The raw data is analyzed after being coded e.g. 1 for YES and 2 for NO, 1 for male and 2 for female, and entered into the computer by use of statistical package for Social Sciences (SPSS, Version 17.0). Data will be summarized using descriptive statistics as frequencies, means and percentages.

On the other hand qualitative data is derived from interviews and from the open – ended items on the various categories of questionnaires. The raw data will be examined and completeness determined by analyzing qualitative data through systematically searching, arranging, breaking data into manageable units. Synthesizing and looking for patterns among the variables. In this study data will be categorized into themes and use thematic analysis through discussion and present it in form of narrative direct quotes and excerpts. The data will therefore be fed in a word processing documents (MS word)

Operational Definition of Variables.

This part gives a detailed specification of how the given variables will be measured. Like in other research, this study has variables which can be measured in more than one way. For instance, the interaction with respondents is expected to create anxiety which can be measured by asking the respondent how they feel, observing their behaviour and measuring their psychological responses.

During the study the questions address to the respondents are tailored to be able to give answers relating to the main subject been investigated. Since operational definition cannot be 100 percent accurate, the qualitative research will help the researchers to gather any information required to explain on the variables.

Ethical Issues

Ethical issues to consider in any research include privacy, confidentiality, sensitivity to cultural differences and gender. The study makes sure that the purpose of this study is fully explained in advance to respondents, informed consent will be obtained where respondents are requested to sign a consent letter. To safeguard anonymity of the identity of the respondents, the study uses the coding system. The research team should also be open and honest in dealing with respondents. All information from sources other than the research will duly be acknowledged to avoid plagiarism. Findings of the study are reported with the highest possible objectivity and utmost honesty.


In our research we found that starbucks maintained the top position in coffee making industry because of the following reasons:

In conducting operations, it pays close attention to their social responsibilities. Social responsibility is a very important aspect because it shows what you’re giving back to the community. Starbucks implemented sustainable farming method to ensure long term supply of coffee; they also provide job opportunities globally (Starbucks, website). The company encourages diversity in their company and they also provide leadership training for communities that they’re involved in. These activities prove the communities around the world that Starbucks is a socially responsible company.

It is taking advantage of technological development that are present to improve their service and productivity. Free Wi-Fi connection is always available in all Starbucks locations. The company also created an app that enables its customers to view their menu, order items, and even make payment. In 2012, the company began accepting Square Wallet, which is an application for mobile payment. Today, the mobile payment app accounts for 10% of all US Starbucks payments and the Starbucks mobile app generates 30%.


We however found that the company still faces some challenges. Starbucks products are considered of premium quality compared to their competitors. This might be another factor that could halt global expansion. The price of Starbucks products might be considered too expensive in other countries. This can make this convenience product look more luxurious than usual. Moreover, as coffee is a convenience product, people switch brands which could pose a threat for Starbucks.

Starbucks may have thousands of shops that spreads across United States, but having too many retail location can cause self-cannibalization. The distance between each Starbucks outlet is usually not that far, causing them to fight over market share within a location. This kind of problem often occurs when there are too many competitors from the same industry. It slows growth because each outlet is competing with each other as well. Starbucks owns almost 20,000 stores worldwide with around 8,000 of it located in the United States area (SEC, 2013). This shows how unbalanced the spread of Starbucks retail store. It proves that they are too focused on US markets.

Starbucks has increasing product recalls lately. One of its latest pastry product line La Boulange had to recall some of their soft caramel jams because it contains undeclared hazelnut, which might be potentially harmful for some people that did not know. Earlier in 2011, the company also had to recall all chipotle chicken wraps due to salmonella contamination.


Starbucks needs to maintain the position it holds in the industry. To do this it will have to work on its strengths and try to eliminate the weaknesses that it is facing. The research has shown that the good practices in the management have contributed a lot in placing the company at the top. These need to be emphasized for the company to stay at the top of the industry.



Aaker, D. A., Kumar, V., & Day, G. S. (1998). Marketing research. New York: Wiley.

Bussing-Burks, M. (2009). Starbucks. Santa Barbara, Calif: Greenwood Press.

Canadian Broadcasting Corporation., CBC International Sales., & Educational Film Services. (1996). Starbucks. Toronto, Ont.: CBC International Sales.

Kachra, A., & Richard Ivey School of Business. (1997). Starbucks. London, Ont: Richard Ivey School of Business, University of Western Ontario.

The effect of temperature on the embryonic development of sea urchins (Lytechinus variegatus)


Bryan Graye and Laura Carballo
Franklin & Marshall College and Swarthmore College
2001, 2004

Objective: This experiment aims to discover if temperature has an effect on the rates of sea urchin embryonic development. By altering the external environment, the experiment will determine if temperature will affect the length of the first and subsequent cell cycles up to the pluteus larvae stage.



Sea urchin embryos exhibit radial holoblastic cleavage in which the first and second cleavages are both meridional and perpendicular to each other. The third cleavage is equatorial, and the fourth cleavage divides unequally to produce mesomeres, macromeres, and micromeres (Gilbert, 2003). These cleavage patterns are well understood on a group level, but it is not completely clear how the individual cells are regulated on a molecular level. One can follow the egg from fertilization to blastula to gastrula to pluteus larvae formation, but this is usually performed under ideal situations. If the conditions change, such as the salt concentration or temperature of the water, how will this affect the development of the sea urchin?

Many processes, acting in sequence or in parallel, make up the cell cycle. Many studies have shown how the cell cycle is regulated at the molecular level in the cyclic accumulation and destruction of cyclins and the cyclic activity of M phase-promoting factor (Meijer et al., 1991). However, only some of these processes affect the length of the cycle (Nurse, 1990). Other environmental factors have been suggested as additional regulators of the cell cycle. For example, temperature has been shown to have a number of effects on the role of various phases of mitotic division, such as the rate of oxygen consumption and carbon dioxide production (Hoadley, 1937). Researchers have found that cell cycle events differ greatly in their degree of temperature dependence. Sea urchins are one organism that is affected by temperature. A temperature- dependent period exists after egg fertilization in which the duration of the cleavage cycle and normal development patterns are affected by the temperature of the surrounding environment (Yamada, K, and K. Mihashi, 1998).

Sewell and Young’s experiment ‘Temperature limits to fertilization and early development in the tropical sea urchin Echinometra lucunter” showed that each sea urchin species has an optimal fertilization temperature based on the average temperature found in its natural habitat (Sewell, M.A.and C.M. Young, 1999). This optimal temperature is necessary for the successful development of the embryos and pluteus larvae (Katsuyuki, Y., and K. Mihashi, 1998).

A number of species of sea urchins are found around the world. Each species thrives in their own unique environment. The subject of this experiment is Lytechinus variegatus, which is found in the Gulf of Mexico and normally develops in water temperatures near 22°C.


male and female Lytechinus variegates
100 mL beakers
sterile syringes and needles
petri dishes with covers
artificial salt water (ASW)
graduated cylinder
glass Pasteur pipets
glass depression slides
ice bucket
aluminum foil
0.5M KCl
14°C incubator
37°C incubator
light microspcope
digital camera


1.Obtain gametes of sea urchins; store egg in a gently stirred suspension at 22°C, washing several times with artificial sea water (ASW)

2. Collect sperm from sea urchin and dilute one drop into 10 ml beaker containing ASW.

  1. Prepare three baths of ASW at 14�C, 22�C (control), and 37� using a water bath or incubator.
  2. Fertilize all the eggs with the diluted sperm in a 100 ml beaker.
  3. Once fertilization envelope has developed, note time.
  4. Transfer fertilized eggs and 30 ml of ASW into three glass dishes according to appropriate temperature.
  5. Dilute with 30 ml of ASW at appropriate temperature (14�C, 22�C, and 38�C)
  6. Cover each glass dish and place into incubator maintaining temperature.
  7. Monitor the progress of development by taking a small sample and placing it on a depression slide to be viewed under a light microscope.
  8. When 90% or more of the eggs have completed cytokinesis, note the time after fertilization and take still photographs.
  9. Allow the fertilized embryos to develop for 24 hours.
  10. After 24 hours, transfer 1 drop of each of the three samples onto depression slides.
  11. Observe the sample under the light microscope. Take still photographs and compare embryonic development.
  12. 48 hours after fertilization, repeat steps 12 and 13.


Temperature had an effect on the cleavage rates of developing sea urchin embryos. Generally, the higher the environmental temperature, the faster the embryo divided. At 37°C, the sea urchin eggs reached the first cell cleavage at 40 minutes after fertilization, and cleaved the second time at 65 minutes after fertilization. Abnormalities in the gastrulating embryo were observed at 37°C. Under ideal conditions, 22°C, the embryos first cleavage cycle occurred at 60 minutes after fertilization and the second cleavage cycle at 100 minutes. At 14 °C, the cleavage rate was dramatically slower, with the first division taking place at 95 minutes after fertilization. Only 50% of the embryos continued to divide, in which they reached the second cleavage at 205 minutes after fertilization. When the cultures were photographed 95 minutes after fertilization, the embryos incubated at 14°C had only divided once, the control embryos had divided twice, and the embryos incubated at 37-38°C had already divided 3 times (Figure 2).
Figure 2. Sea Urchin embryos 95 minutes after fertilization. Embryos (A.) incubated at 14°C, (B.) incubated at 22°C(Control), and (C.) incubated at 38°C.

Twenty-four hours after fertilization (Day 2), the control group had developed normally. The majority of the embryos displayed archenteron formation and were motile. Not all embryos kept at 14°C had hatched by day 2. The ones that had hatched did not have archenterons and were not motile. The majority of the embryos kept at 37°C had died and lacked archenterons. The remaining embryos had developed abnormally, had not hatched and were smaller than the control group (Figure 3)
Figure 3. Sea Urchin embryos 24 hours after fertilization. Embryos (A.) incubated at 14°C, (B.) incubated at 22°C(Control), and (C.) incubated at 38°C.
Forty-eight hours after fertilization, all embryos of the control group were at the pluteus larvae stage. At 14°C, the vast majority of the embryos were dead and those alive still did not show signs of regular development such as archenteron formation. At 37°C, there were some pluteus larvae but the majority of the embryos were small and unhatched (Figure 4).

Figure 4. Sea Urchin embryos 48 hours after fertilization. Embryos (A.) incubated at 14°C, (B.) incubated at 22°C(Control), and (C.) incubated at 38°



Sea urchin development can be altered by a series of environmental changes. One of these changes is temperature. In our initial experiment, we showed that sea urchins undergo cleavage more rapidly in higher temperatures. In our second experiment observations were extended over a longer period of time. We observed that changes in temperature caused changes in development. Twenty-four hours after fertilization, archenteron formation was visible in the control embryos whereas the embryos in the other two temperatures were undergoing abnormal and slow development. Lastly, 48 hours after fertilization the control embryo were all at the pluteus larvae stage while the other embryos were either dead or developing abnormally. Overall, sea urchin embryo development is temperature- dependent, with the process occurring at a faster rate and demonstrating abnormal developments at warmer than ideal temperatures, and a slower rate, and even cell death, taking place at cooler than optimal temperatures.


Gilbert, S. 2003. Developmental Biology. Sinauer Associates Inc. Massachusetts. 7th edition

Hoadley, L., and E. R. Brill. 1937. Temperature and the cleavage rate of Arbaciaand Chaetopterus. Growth 1: 234-244.

Katsuyuki, Y., and K. Mihashi. 1998. Temperature-independent period immediately after fertilization in sea urchin eggs. Biol. Bull. 195: 107-111.

Meijer, L., L. Azzi, and J. Y. J. Wang. 1991. Cyclin B targets p34cdc2for tyrosine phosphorylation. EMBOJ. 10: 1545-1554.

Nurse, P. 1990. Universal control mechanism regulating onset of M-phase. Nature. 344: 543-552., 2015

Sewell, M.A., and C.M. Young. 1999. Temperature limits to fertilization and early development in the tropical sea urchin Echinometra lucunter. Journal of Experimental Marine Biology and Ecology. 236: 291-305

Estimate the Value of Mercury

Mercury Estimate




Date of submission:




















Estimate the Value of Mercury using a discounted cash flow approach


    2007 2008 2009 2010 2011
  Revenue $479,329 $489,028 $532,137 $570,319 $597,717
Less: Operating Expenses $423,837 $427,333 $465,110 $498,535 $522,522
Less: Corporate Overhead $8,487 $8,659 $9,422 $10,098 $10,583
  EBIT $47,005 $53,036 $57,605 $61,686 $64,612
Less: Taxes (EBIT*40% tax rate) $18,802 $21,214 $23,042 $24,674 $25,845
    $28,203 $31,822 $34,563 $37,012 $38,767
Add: Depreciation $9,587 $9,781 $10,643 $11,406 $11,954
Less: Capital Expenditures $11,983 $12,226 $13,303 $14,258 $14,943
Less: Increase in Net Working Capital $4,569 $2,648 $9,805 $8,687 $6,234
  Free Cash Flows $21,238 $26,728 $22,097 $25,473 $29,544


market rate of return(Km)  = 9.93%


Growth Rate: 3%


WACC: 11.08%


CAPM =KRF + β(KM – KRF)          
= 4.93+1.6(9.93-4.69)          
= 13.3%          
= .20*.06(1-.40)+.80(.1295)        
= .0072+ .1036          
= 11.08%          
Vn    = $29,544 (1+.03) =$376,613        







  2007 2008 2009 2010 2011  
V0 = $21,238 + $26,728 + $22,097 + $25,473 + $29,544 + $376,613
  (1+.1108) (1+.1108)^2 (1+.1108)^3 (1+.1108)^4 (1+.1108)^5 (1+.1108)^5
= $19,120 + $21,662 + $16,122 + $16,732 + $17,470 + $222,698
= $313,804          
  Enterprise Value= V0 + Cash0 – Debt0      
  = $313,804-$56,525+$106476      
  = $359,653        



Mercury enterprise value is $359,653. The cash flow for the years 2007 -2011 should be calculated. It is calculated by adding the free cash to depreciation and then subtracting the capital expenditures and the increase in the net working capital. The values of capital expenditures and depreciation are provided; hence we can find the net increases in the working capital. Differences between the current liabilities and assets are compared to the prior year.

To calculate the CAPM the formulae KRF + β (KM  – KRF ) is applied. It is vital to determine the risk free rate and the beta. The risk rate is 4.69% while the risk free rate is 4.93% and finally the beta was evaluated by the use of the average 1.6. The calculation of these values equate to 12.95 as the capital equity cost.




weighted average cost of capital (WACC)

It was derived by the following formula WD ( Cost (1-T) + WS Costs. the weight of the debt is 20% and the cost of the debt is 6%. the values of tax rate is given as 40% . the cost equity is calculated by using the CAPM and all the input values in WACC are used,


The terminal value is used in calculating the present value for the future cash flows. Through substitution in the present value formula the enterprise value is obtained. Finally there is substitution to the formula so as to determine the enterprise value. To obtain enterprise value: V0 debt added to cash are applied. The value of V0 is $313804 and cash is $10,676, debt of $56,525 for the year 2006. The result of the enterprise value $359,653


Use of excel



     year         present value
2007 19120
2008 21662
2009 16122
2010 171470
2011 222698



The appreciating impact in the graph shows that there is a good return on investment to the company. Tis is due to the fact that after the year 2009 the gradient is steep implying that the company is enjoying good profits.