MGMT Ch. 8
Discount
If an acquiring firm pays less for another firm than the firm's stock price multiplied by its number of shares of stock outstanding (book value or market value), then that amount minus the actual purchase price is called a discount.
Issuing too much equity could be bad for a firm in what respect?
It could dilute ownership of the firm.
When performing case analysis, students often must show their proposed strategic plan is feasible and doable for the next three years. What technique is used to do this?
Projected financial statement analysis
The link between a projected income statement and projected balance sheet is what?
Retained earnings
Which statement(s) below is TRUE?
Seeing Goodwill regularly increasing on a balance sheet is not a good thing.
EPS/EBIT analysis is used to decide what?
Decide if a firm should raise debt or equity or some combination to fund an investment
What is the first endeavor in performing EPS/EBIT analysis?
Define a range for EBIT.
EPS/EBIT makes its capital acquisition decision based primarily on what criteria?
EPS
One of the most important benchmarks for assessing the performance of public companies is what variable?
EPS
Which of the following is NOT a corporate valuation method?
EPS method
What technique is mentioned as being widely used to determine the correct (best) mix of debt versus equity to be used to raise capital?
EPS-EBIT analysis
Assume the New Leaf Floral Shop is unique enough to require outside investors. Outside investors would most likely perform what type of analysis to determine the proper capital structure needed?
EPS/EBIT analysis
Clayton, Dubilier & Rice, LLC acquired Emergency Medical Services (EMS) Corporation for $2.9 billion (9.4 percent below EMS's stock price of $64.00). This is an example of:
a discount If the purchase price is less than the stock price times the number of shares outstanding, that difference is called a discount. This was the case in the example.
Going public is not recommended for companies with sales of less than
$10 million Going public is not recommended for companies with less than $10 million in sales because the initial costs can be too high for the firm to generate sufficient cash flow to make going public worthwhile. For firms with more than $10 million in sales, going public can provide major advantages.
Issue corporate bonds
- This is analogous to going to the bank and borrowing money, except that with bonds, the company obtains funds from investors rather than banks.
Projected Financial Statements
- allows an organization to examine the expected results of various actions and approaches - allows an organization to compute projected financial ratios under various strategy-implementation decisions
Performing Projected Financial Analysis
1. Prepare the projected income statement before the balance sheet. 2. Use the percentage-of-sales method to project cost of goods sold (COGS) and the expense items in the income statement. 3. Calculate the projected net income. 4. Subtract from the net income any dividends to be paid for that year. 5. Project the balance sheet items, beginning with retained earnings and then forecasting stockholders' equity, longterm liabilities, current liabilities, total liabilities, total assets, fixed assets, and current assets (in that order). 6. Use the cash account as the plug figure. 7. List commentary (remarks) on the projected statements.
Most financial institutions require ______ of projected financial statements whenever a business seeks capital.
3 years
The video discusses several ways businesses like New Leaf can raise capital or funding. An initial step for either an investor or the business is to ______.
evaluate the worth of the business
Under which of the following conditions can issuing bonds be an effective way to raise capital?
when a company's balance sheet is strong A popular way for a company to raise capital is to issue corporate bonds, which is analogous to going to the bank and borrowing money except that with bonds, the company obtains the funds from investors rather than banks. Especially when a company's balance sheet is strong and its credit rating is excellent, issuing bonds can be an effective way to raise needed capital. On a balance sheet, bonds are included in the long-term debt row.
With the merger and acquisition boom this decade, S&P 500 firms experienced a _________ percent increase in goodwill.
70
Many practitioners and students of strategic planning use which of the following to develop existing and projected financial statements?
an excel template provided by www.strategyclub.com
Financial Ratio Analyses
are examined based on 1. How they change over time 2. How they compare to industry norms 3. How they compare with key competitors
Financial ratios are an important tool used to access a firm's financial situation
at one point in time
Corporate valuation ______.
can use different valuation methods, which will yield different results Corporate valuation is not an exact science; value is sometimes in the eye of the beholder. The valuation of a firm's worth is based on financial facts, but common sense and good judgment enter the process because assigning a monetary value to some factors that may not be fully reflected in a firm's financial statements is difficult. Also, different valuation methods will yield different totals for a firm's worth. Evaluating the worth of a business truly requires both qualitative and quantitative skills.
EPS/EBIT analysis is used to
determine the appropriate mix of debt and equity in a firm's capital structure
If earnings and the number of shares are taken at the same point in time, which corporate valuation methods will be the same?
the price/earnings ratio and outstanding shares methods
Limitations of EPS/EBIT analysis include ______.
timing and control
EPS/EBIT Analysis
• A widely used technique for determining whether debt, stock, or a combination of the two is the best alternative for raising capital to implement strategies. • Involves an examination of the impact that debt versus stock financing has on EPS under various expectations for EBIT, given specific recommendations (strategies to be implemented). • The analysis involves a 4-step process.
Which valuation method is most feasible for small business evaluation?
the net income method The Net Income Method for measuring the monetary value of a company grows out of the belief that the worth of any business should be based largely on the future benefits its owners may derive through net profits. In general, this method is more feasible for small business evaluation.
Go public with an IPO
- "Going public" means selling off a percentage of a company to others to raise capital; this action dilutes the owners' control of the firm.
Limitations/Considerations Associated with EPS/EBIT Analysis
1. Flexibility 2. Dilution of ownership 3. Timing 4. Leveraged situation 5. Continuity 6. EBIT ranges 7. Dividends
Which statement(s) is TRUE?
Sometimes firms will increase their Treasury Stock near the end of the quarter, or near the end of the year, to inflate their EPS "artificially".
Treasury Stock
An item in the equity portion of a balance sheet that reveals the dollar amount of the firm's common stock owned by the company itself.
Which of the following statements is NOT given by the author in the video?
Strategic planning is required by the IRS and various accrediting bodies.
Why does the author say marketing is a key business function?
Because marketing is so expensive a firm can go broke doing it
What is another name for additional-paid-in-capital?
Capital surplus
To expand nationally, the businesses in the video would need to understand more about their valuation in order to implement financial strategies successfully. Which of the following is TRUE about corporate valuation?
Corporate valuation is not an exact science
What are the primary means for raising capital in a corporation?
Debt or equity
Financial ratios are examined based on three major areas; these include which of the following?
How they compare to key competitors Financial ratios are examined based on (1) how they change over time, (2) how they compare to industry norms, and (3) how they compare with key competitors.
Moving a company from being private to being public is a(n) ______.
IPO (initial public offering)
Premium
If an acquiring firm pays more for another firm than that firm's stock price multiplied by its number of shares of stock outstanding (book value or market value), then the overage is called a premium.
What is the most commonly used method for corporate valuation?
Market capitalization (stock price times number of shares outstanding)
In today's business environment, a company like New Leaf may expand such that it is either acquired or offered an opportunity to merger with a company like Amazon or 1-800-Flowers. What would be one of the initial items a corporate analyst might want to know about the company?
New Leaf's corporate value
Book Value
Number of shares outstanding multiplied by stock price.
Market Capitalization
Number of shares outstanding multiplied by stock price.
Market Value
Number of shares outstanding multiplied by stock price.
The top 20 most valuable college football programs are listed in the chapter in terms of their monetary value. What team is most valuable?
Ohio State Buckeyes
What is another term used for "total equity"?
Owners' equity
What resource can students use to obtain assistance in performing corporate valuation?
The Excel student template developed by the authors
Goodwill can be defined as:
The excess money one business spends on buying another business (i.e. when the business pays more than the market capitalization number) Goodwill requires that a premium be paid.
What method is best for assigning a monetary value to a college football team?
The net worth method
Capital Structure
The proportion of debt to equity on a balance sheet is often referred to as a firm's capital structure. • Performing an EPS/EBIT analysis is a common way to determine the appropriate capital structure needed
A small business, like the floral shop mentioned in the video, wants to expand, so it applies for a bank loan. The bank would commonly want to examine which of the key indicators of financial health?
The shop's proportion of debt to equity
Which of the following statements is TRUE regarding the issuance of corporate bonds in the United States?
The year 2017 was the seventh straight year that a record dollar value of bonds was sold in the United States, totaling more than $1.5 trillion.
What is the author's rationale for talking about projected financial statements in the video
They are needed to show the expected impact of whatever you and your partner are recommending the firm do in the next three years.
What should provide the foundation for your projected financial statement "projections"?
Whatever you recommend the firm does going forward
Where should one start when performing projected financial statement analysis?
With the revenue row on the income statement
The first step in performing projected financial analysis is to
forecast sales as accurately as possible
What is the fourth and final step of an EPS/EBIT analysis
graph the analysis
Moving a company from being private to being public ______.
is an IPO
To use the outstanding shares method of corporate valuation, ______.
multiply the number of shares outstanding (or issued) by the market price by share
What does it mean to "go public"?
selling off a percentage of a company to others to raise capital
The denominator of EPS is
shares outstanding
Corporate Valuation
• Corporate valuation is not an exact science; value is sometimes in the eye of the beholder. • The valuation of a firm's worth is based on financial facts, but common sense and good judgment enter into the process. • Different valuation methods will yield different totals for a firm's worth. Methods: • The Net Worth Method - Total Shareholders' Equity (SE) minus (Goodwill + Intangibles) • The Net Income Method - Net Income × Five • Price-Earnings Ratio Method - (Stock Price ÷ EPS) × NI • Outstanding Shares Method - # of Shares Outstanding × Stock Price P&G Worth Analysis is $135,947 (in millions)
Finance/Accounting Issues
• Determine capital structure • acquire needed capital to implement strategies • Perform EPS/EBIT analysis • Develop projected financial statements • Show expected impact of recommendations • Perform corporate valuation • In the event an offer is received or a rival firm is to be acquired • Analyze financial ratios • Manage initial public offerings (IPOs), cash levels, and corporate bonds
Accounting Terms Explained
• EPS is earnings per share, which is net income divided by number of shares outstanding. • EBIT is earnings before interest and taxes, also called operating income. • Shares outstanding is similar to shares issued (shares issued also include treasury stock). • Shares authorized are the number of shares a firm has approval to issue in total. • EBT is earnings before tax. • EAT is earnings after tax.