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