Sports Finance Test 2

Revenue bonds require a ____ _____ ______ payment

debt service coverage

Liquidity Spread

difference between a long-term interest rate and a short-term interest rate

Modified Internal Rate of Return

discount rate where the present value of the project's costs is equal to the present value of the project's terminal value

Net Present Value

discounted cash flow method in which the present value of a project's future cash flows are compared to the project's initial cost

ZBB Decision packages

discrete additions to the reduced-level budget, ranked in priority order, to maintain existing programs/add new programs

Disadvantage of Discounted Payback Period

does not consider cash flows beyond the payback period

ZBB Decisions unit

each part of the organization where budget decisions are made

Tax abatement

exempt the beneficiary from paying certain taxes

The value of stock is based only on ____ _____ _____ payments, not on any ______ _______ from selling the stock

expected future dividend, capital gain

ZBB Base budget

expenditure level necessary to maintain last year's service level at next year's prices (inflation)

Call Premium

fee assessed when the borrower pays off the principal prior to maturity

Private Financing

financing that does not use public dollars

Revenue Budget

forecast of revenues based on projections of the organization's sales

Cash Budget

forecasts how much cash the organization will have on hand and how much it will need to meet expenses

Revenue Bonds

form of public financing that is paid off solely from specific, well-defined sources (typically 15-30 years)

Terminal value

future value of the cash inflows compounded at the project's cost of capital

Yield curve

graph of interests rates against the time to maturity for bonds (usually slopes upwards, with diminishing slope as maturity increases)

Capital Gain of stock

increase in a stocks price since purchased

3 Problems with Incremental Budgeting

inefficiencies are easily hidden, nothing ever gets cut, encourages managers to use a "spend it or lose it" approach

Expense Budget

list primary activities and allocates a dollar amount to each based on projected costs

Strategic Planning Horizon

long term aspirations of organization

Construction Cost Index

measure of inflation in the construction industry

Payback Period

number of years required to recover a capital investment

Discounted Payback Period

payback period except factors time value of money into calculations of the expected cash flows

ZBB Reduced-level budget

percentage that the budget must be reduced

Business Planning Horizon

period over which forecasts can be made with a reasonable degree of confidence (3-5 years)

General Fund of a Government

pool of money that the government has collected via taxes and other revenue sources and used to pay for all gov. programs

Forecast

prediction of future events and their quantification for the purpose of budgeting

ZBB places a high importance on _______

prioritizing departments

Bond's Coupon Rate

rate that the organization is paying for use of the money (equivalent to an interest rate)

If NPV is negative then...

reject the project

Default Risk

risk that a borrower will not pay back the principal of a debt plus interest

If deciding between 2 projects with positive NPV then

select the project with the higher NPV

Asset-backed securities (ABS)

selling bonds based on COIs or expected revenue streams

Disadvantages of NPV

1) Requires a detailed prediction of the project's future cash flows 2) Assumes the discount rate will remain the same over the useful life of the project

Advantages of NPV

1) analyzes cash flows rather than net earnings 2) considers time value of money 3) identifies projects with a positive NPV, which will increase the firm's value

Two major sources of debt financing

1) bonds 2) loans

Disadvantages of ZBB

1) complex/time-consuming 2) emphasis on short-term benefits not long term 3) may be unrealistic 4) affected by internal politics and can lead to conflicts

Disadvantages of publicly traded equity financing

1) cost of issuing stock is 10-20% of company value 2) time consuming 3) lack of operating confidentiality***** 4) reduces organization's strategic flexibility

4 steps to Capital Budgeting

1) determine the initial cost of the project or projects 2) determine the incremental cash flow of a project 3) select the capital budgeting method 4) conduct a post-audit analysis

4 requirements of ZBB

1) each budget period starts fresh 2) budgets are zero unless manager makes case for resources 3) every activity is questioned as if it were new 4) each plan of action has to be justified in term of total expected costs and benefit

Advantages of PPBS

1) enables org. to allocate resources purposefully 2) shows managers how departments' work relates to whole org. 3) provides evidence to citizens of how department spends tax dollars 4) gets staff involved at early stage and allows significant input

Advantages of MZBB

1) focuses budget setters on variable costs 2) less time consuming than ZBB 3) allocates resources based on results/variable needs

Advantages of ZBB

1) forces budget setters to examine every item 2) allocates resources based on needs 3) eliminates waste and budget slack 4) prevents creeping budgets 5) strong evaluation component

Disadvantages of MIRR

1) if projects are mutually exclusive, it may lead to incorrect decisions 2) not always easy to calculate 3) Unrealistic reinvestment rate 4) difficult to interpret

Advantages of Discounted Payback Period

1) incorporates the time value of money into calculations 2) provides information on how long funds will be tied up in a project

2 keys to successful budgeting

1) input from entire organization 2) a means of sharing the budget across organization

Disadvantages to PPBS

1) limits flexibility to shift dollars between programs 2) increases potential for conflict if programs with strong support receive cuts 3) time consuming 4) results in weak evaluation process due to program length 5) may allow support for irrational objectives

Parts of a Feasibility Study

1) market demand 2) location/construction cost/engineering 3) financing 4) economic and fiscal impact

4 factors influencing RRR

1) production opportunities 2) time 3) risk 4) inflation

7 Advantages of Publicly Traded Equity Financing

1) provides access to capital that doesn't require repayment or interest payments 2) Once public, it is much easier to issue another round of stock 3) easy for owners to carry out exit strategy 4) free publicity generated by IPO 5) ability to attract and retain employees 6) increases the equity in the company 7) mergers/acquisitions are easy for publicly traded companies

Advantages of IRR

1) same decision at NPV 2) often same discount as NPV

Advantages of MIRR

1) same decision at NPV 2) often same discount as NPV

4 ways a company can gain equity

1) shares 2) government funding 3) gifts 4) retained earnings

Disadvantages of IRR

1) unconventional cash flows may result in multiple answers 2) if projects are mutually exclusive, it may lead to incorrect decisions 3) not always easy to calculate 4) Unrealistic reinvestment rate 5) difficult to interpret

5 characteristics of MZBB

1) uses cost identification and behavior techniques 2) begins with a floor of expenses 3) includes decision or add packages 4) requires managers to reduce their budgets by a predetermined percentage 5) puts existing programs in competition with new ones

Budget Formulation Process

1) define financial objectives 2) establish goals for meeting objectives 3) identify activities/elements needed to achieve goals 4) describe factors/situations that may affect planned activities

Private Financing Sources

1) Contractually obligated income(COI) 2) Asset-backed securities

Advantages of the Payback Method

1) Easiest to Use 2) Easy to Understand 3) Provides information on how long funds will be tied up in a project

6 Steps in MZBB

1) Identify expenses 2) allocate fixed and mixed expenses 3) Identify any fixed expense that could be eliminated 4) Average the mixed expenses to determine the avg amount spent per month to figure annual expenses 5) Prioritize variable expenses 6) Subtract total expenses from total anticipated revenues to find potential net profit/loss

Disadvantages of the Payback Method

1) Ignores time value of money 2) Ignores cash flows produced beyond the payback period

4 approaches to budgeting

1) Incremental Budgeting 2) Program Planning Budgeting System (PPBS) 3) Zero-based budgeting (ZBB) 4) Modified zero-based budgeting (MZBB)

Market Demand Subsections

1) Individual ticket demand 2) corporate demand 3) event activity 4) facility specifications

5 Capital Budgeting Methods

1) Payback Period 2) Discounted Payback Period 3) Net Present Value 4) Internal Rate of Return 5) Modified Internal Rate of Return

Highest Bond Rating

AAA

Lowest Bond Rating

D

Sensitivity analysis

Developing several forecasts under different potential scenarios. Assign a probability to each scenario and calculate a weighted average to find acceptable forecast

Advantages of COPs

Do not require a public vote

Inverted Yield Curve

Downward sloping yield curve caused by market expectations of lower interest rates in the future that outweigh the maturity risk premium

Difference between plan and forecast

Forecast = prediction, Plan = defines what we are going to do

General Obligation Bond (GOBs)

Most common method of facility financing, spread cost of the facility over 20/30 years, city/county/state has a commitment to repay the principal plus interest through whatever means necessary, generally tax exempt

What is a budget?

Quantifies planned revenues and expenses for a period of time

Which has a higher cost Revenue Bonds or GOBs?

Revenue Bonds

Disadvantages of COPs

Riskier than GOBs

When a choice must be made between two or more alternative projects, which one should be selected?

The one with the shortest payback period

Difference between ZBB and MZBB

ZBB focuses time/effort on ALL expenditures MZBB focuses on variable expenses and accepts fixed expenses as necessary

Secured claim

a debt for which the borrower provided collateral

Incremental Budgeting

a form of line-item budgeting in which net year's budget is arrive at by either decreasing/increasing last year's budget for each line item by the same percentage

Contractually obligated income (COI)

a revenue stream that a team receives under multi-year contracts

If NPV is positive then...

accept the project

Capital Expenditures Budgets

allows management to forecast future capital requirements and to ensure that adequate cash will be available to meet expenses as they come due

Call Provision

allows the borrower to pay the bond off early

Certificates of Participation (COP)

an instrument that is set up to build a facility will sell to one or more financial institutions to obtain the initial capital for construction, then the agency leases the facility to the tenant and uses the lease payments to pay off the COP

Required Rate of Return

annual return that an investor would require from a particular investment

Zero-Based Budgeting

budget not based on previous year's budget, but started all over again from scratch

Efficiency principle

calls for a tax to be easy to understand, simple to collect, low in compliance costs, and difficult to evade

Post-audit analysis

comparison of the project's actual results with the predicted results and attempt to explain any differences

Vertical equity

concerned with the taxpayer's ability to pay

a project with an IRR greater than its ________ should be accepted into the capital budget

cost of capital

Current Expenditure

short term and is completely written off during the same year as the expense is incurred

trade credit

short term credit granted by a manufacturer to a retailer

Program Planning Budgeting System

specific goals and objectives form the framework for a strategic process

Modified zero-based budgeting

spending levels are matched with services to be performed

Horizontal equity

suggests people with similar incomes should pay similar amounts of tax

Incremental cash flow

the cash flow created through the implementation of a new project

Internal Rate of Return

the discount rate at which the present value of estimated cash flows is equal to the initial cost of the investment

Planning

the establishment of objectives and the formulation, evaluation, and selection of the policies, straggles, tactics and actions required to achieve those objectives

Budget Time Horizon

the immediate future that can be predicted with a reasonable degree of certainty (the next 12 months)

Capital Budgeting

the process of evaluating, comparing, and selecting capital projects to achieve the best return on investment over time

Public financing

the use of public funds to finance a project

Disadvantages of GOBs

their use may limit the amount of other bonds that the city/county/state can use for schools, bridges, and other projects

Benefit principle of equity

those who benefit from a particular project ought to be the ones taxed

Capital Expenditure

use of funds to acquire operational assets that will help the organization earn future revenues or reduce future costs

MZBB focuses on ____ expenses

variable