Finance in Sport and Rec Midterm

Financial and Economic Factors Affecting Sport

- Current economic cycle - Television revenues - Relationship between team and real estate holidays - Push for sustainability - Impact of politics on sport governance

Goals of Budget Preparation Process

- Define financial objectives - Establish goals for achieving objectives - Identify activities and quantify elements needed to achieve goals - Describe factors and situations that may affect planned activities

Methods for completing a financial transaction

- Direct transfer - Investment banks - savings

Sources of risk

- Economic conditions - Political developments - Global issues

Influence of Government on Business - Fiscal Policy

- Governmental decisions to collect and spend money in order to influence the economy - Taxes: Flat tax, fair tax, value added tax, depreciation, jock taxes

Typical ownerships in Pro Sports

- In North American Pro Sports, the owners of most teams are individuals or groups of individuals - Green Bay Packers: Owned by the community - Some large Fortune 500 companies: Disney

Four approaches to budgeting

- Incremental - Program planning - Zero based budgeting - Modified zero based budgeting

Public financing sources - indirect

- Land donations - Infrastructure improvements - Tax abatements

Inflation

- Loss of purchasing power - Real value vs. nominal value of money

Key aspects of loans

- Maturity - Interest rate - Pre-payment provisions

Investment risk

- Measurement of the likelihood of low or negative future returns - What is the future performance of a company's stock likely to be? - Stand alone risk: one approach to analyzing investment risk

Risk

- Measures the chance that an unfavorable event will occur - Affects many areas of finance

Issues in a public/private partnership

- Ownership of facility - Voter approval - Payment terms - Responsibility for cost overruns - Management of future revenue streams - Financing sources

Calculating public payments for stadium financing

- Payment schedule table - Annual payments of principal plus interest - Divided by population

Dividends

- Periodic payments made to shareholders of a company as a way of distributing profits - Tied to earnings - Value of a stock is based on expected future dividend payments

Influence of Government on Business - Monetary Policy

- Policy the government sets to control the supply, availability, and cost of money - Federal reserve: sets interest rates, monitors the money supply

Private financing

- Private return on new facilities - Sources and techniques

Reasons for investing public money in new sport facilities

- Provide economic impact - Increase awareness of and tourism for the city/region - Provide a cornerstone for economic development - Generate civic pride - Provide quality-of-life services - Provide positive externalities - Generate political capital for local politicians

More public financing sources - Direct revenue

- Revenues from tickets and parking - Lotteries/gaming revenues - Player income taxes - Utility and business license taxes - Reallocation of existing budget

Risk and deferred compensation

- Salary is delayed under contractual terms - Buy now, pay later: Arizona - Diamondbacks, Pittsburgh Penguins and Mario Lemieux, New York Mets and Bobby Bonilla

Types of Equity Financing

- Shares - Retained earnings - Government funding - Gifts

Reasons for Building New Facilities - Who Benefits?

- Sports teams and owners - Leagues - Fans/patrons - Cities/municipalities

Stock Markets

- Stocks of publicly held companies are listed for sale (e.g. New York Stock Exchange, NASDAQ, Bombay Stock Exchange) - Pro Sport Franchises: Manchester United - Athletes selling stock on themselves - Dow Jones

Depreciation

- The allocation of an item's loss of value over a period of time - Methods for determining: straight-line, sum-of-years digits, double-declining balance, units of production - IRS can help determine which method to use

Relationship between risk and return

- The lesser the risk, the lower the return - The greater the risk, the greater the return

Future value

- The value of money after an interest rate is applied over a specified period of time

Public/Private Partnerships

- Trend in funding is away from tax increases and toward new courses of capital - Taxes generated directly from the facility, the team, the players, and other facility users or vendors - Taxes generated from redevelopment surrounding the facility

Sustainability

- Venue construction and and usage - Overbuilding of publicly financed areas - Uses for venues built for Olympic games and the World Cup

Annuities and perpetuities

- When the value of an investment is paid or received over time, in multiple payments

Size and structure of the sport industry

- methods for measuring sport industry size: GDP, GDSP - structure of sport businesses: franchise owner models, league structure

Advantages / disadvantages of publicly traded equity financing

- taking a company public can offer numerous advantages to the company's owners - but going public is not always a good idea; there are disadvantages as well

Debt ratio

A measure of an organization's leverage, sometimes referred to as the debt-to-assets ratio

Total asset turnover ratio

A measure of how efficiently a company is utilizing its assets to make money

Inventory turnover ratio

A measure of how often a company sells and replaces its inventory over a specified period of time, typically a year

Net profit margin ratio

A measure of the effectiveness and efficiency of a company's operations

Return on equity ratio

A measure of the rate of return a company's owners or shareholders are receiving on their investment

Price-to-earnings (P/E) ratio

An estimate of how much money investors will pay for each dollar of a company's earnings, used widely to measure corporate performance and value

Owners' equity

An estimate of the ownership value of a company. Also called shareholders' equity or stockholders' equity

Market value

An estimate of the value of a company accord- ing to the stock market

Economic Depression

An extreme recession, lasting two or more years

Jock Taxes

An income tax levied against visitors (e.g. athletes) to a city or state who earn money in that jurisdiction

Credit

An increase to a liability or equity account, entered on the right-hand side of a ledger

Debit

An increase to an asset or expense account, entered on the left-hand side of a ledger

Macroeconomics

the study of forces that affect numerous sectors of the overall economy at the community, national, regional, or global level. Income, unemployment, and inflation

Cost of goods sold (COGS)

(COGS) Those costs that are directly attributable to the production of goods or products, including raw materials and labor costs

Bankruptcy

- A company is unable to pay its debts - Liquidation or reorganization of a insolvent firm - Priority of claims on a company's assets

Bonds

- A financial mechanism to raise capital through debt - A promise to pay back borrowed money plus interest: par value, coupon rate, maturity

Stocks

- All for-profit business have equity (stock) ownership - Common stock - Shareholders with a board of directors

Stand-alone risk

- Consider the investor's risk as if only one asset were held - examine the stand-alone expected rate of return and stand-alone risk in insolation from other investments

Major sources of debt financing

- Corporate bonds - Loans

Fiscal year

A 12-month period over which a company budgets its money

Sherman Antitrust Act

A 1980 law that forbids contracts or other actions among businesses that would restrict competition

North American Industrial Classification System (NAICS)

A classification system used by the U.S. Census Bureau to measure and track economic activity in the United States. The sport industry is not classified as a distinct industry and is scattered across at least 12 different NAICS-defined industries

Economic Cycle

A cycle consisting of four stages - growth, peak, recession, and recovery - and typically lasting for just under six years

Call premium

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

Current ratio

A formula that measures a company's ability to meet its current liabilities with its current assets

Single-entity Structure

A league in which owners purchase shares in the league rather than in an individual franchise

Quick ratio

A measure of a company's ability to meet its cur- rent liabilities with its current assets, not including inventory

Interest coverage ratio

A measure of a firm's ability to pay the interest on its debt. Sometimes called the times interest earned ratio

Debt Financing

A method of raising capital in which an organization borrow money that must be repaid over a period of time, usually with interest

Double-entry bookkeeping

A method of recording financial transactions where each transaction is entered or recorded twice, once on the debit side of the accounting records and once on the credit side

Retained Earnings

A portion of earnings that a firm saves in order to finance operations or acquire assets

Forecast

A prediction of future events for the purpose of budgeting

Sport application scarcity

A professional league does not expand into every metropolitan area that could potentially support a team. Leagues restrict franchise movement to prevent a team from moving too close to an existing team

Statement of cash flows

A report that tracks cash in and cash out of an organization and provides data as to whether a company has sufficient cash on hand to meet its debts and obligations

Financial Management

A sector within firms that is concerned with the acquisition and use of funds to meet the goal of wealth maximization

Balance sheet

A snapshot of the financial condition of an organization at a specific point in time

Generally accepted accounting principles (GAAP)

A standard set of guidelines and procedures for financial reporting

Income statement

A statement of a company's income over a specified period of time, typically issued on an annual or quarterly basis. Also called a statement of earnings or profit and loss statement

Earnings before interest and taxes (EBIT)

A useful measure of income or profit

Call provision

Allows borrower to pay off bond early

Accrual basis accounting

An accounting method that recognizes income when it is earned and expenses when they are incurred, rather than when the money is exchanged

Cash basis accounting

An accounting method that recognizes transactions when money is either received or paid out

Multiple Owners / Publicly Traded corporation Model

An ownership model in which a franchise is governed by a board of directors who are elected by shareholder vote. The board of directors appoints the team's senior management. With the exception of the Green Bay Packers, this model is not currently used in the United States

Multiple Owners / Private Investment Syndicate Model

An ownership model in which individuals pool their resources to purchase a franchise and incorporate as a partnership, LLC, or the like. The most common model of team ownership

Single Owner / Private Investor Model

An ownership model in which one individual owns the firm.

Required rate of return

Annual return that an investor requires from an investment, whether in stocks or bonds

Government Financing

Funding provided by federal, state, or municipal sources, including land use, tax abatements, direct financing, state and municipal appropriations, and infrastructure improvements

Expenses

Funds flowing out of an organization as costs of doing business

Partnerships

General partnerships Express partnerships Limited partnerships Minority partners and limited partners

Gift Financing

Charitable donations, either cash or in-kind, made to an organization

Portfolio Return

Combination of assets held by investors to eliminate some risk

Yield curve

Created by graphing interest rates against the time to maturity for bonds within equal credit quality

Contingent liabilities

Debts that may or may not occur

Plan

Definition of actions to be taken

Measuring Risk

Determine the chance of making a profit or loss - level of risk and risk of time

Equity Financing

Financing in which an organization exchanges a share or portion of ownership for money

Leverage

How a company chooses to finance its operation with debt versus equity. A company that relies extensively on borrowing money is considered to be heavily leveraged. Such a company faces greater risk of financial problems than one not so reliant on debt

Revenues

Income generated from business activities, such as the sale of goods or services

Interim Year Compounding

Interest can be calculated and added to the principal annually (or quarterly, monthly, weekly, or even daily)

Accounts receivable

Money owed by a company's customers

Long-term liabilities

Liabilities due after one year

Current liabilities

Liabilities due within one year

Money Markets

Markets for highly liquid, short-term securities

Capital Markets

Markets for immediate or long-term debt, as well as corporate stocks

Wealth Maximization

Maximizing the overall value of the firm. This is the goal or outcome of financial management for most organizations.

Sustainability

Meeting today's needs without compromising future generations' ability to meet their own needs.

Interest Rates

Nominal interest rate: the real risk-free rate of interest plus multiple risk premiums

Calculating the value of a bond

Present value of a bond: price that a buyer would pay for it prior to maturity

Budget

Quantifies planned revenues and expenses for a period of time

Revenue sharing

Revenue sharing models: Increased revenue to teams with low local revenues, reward teams that generate higher revenue

Investments

Security choices made by individual and institutional investors as they build portfolios

Liquidity

The ease and speed with which an asset can be converted to cash

Liabilities

The financial obligations or debts owed by an organization to others

Gross Domestic Sport Product (GDSP)

The market value of a nation's output of sport-related goods and services in a given year. This includes the value added to the economy by the sport industry, as well as the gross product originating from the sport industry

Gross Domestic Product (GDP)

The market value of all final goods and services produced within the borders of a county, state, country, or other region in a year

T-accounts

The method accountants have historically used to track revenues and expenses and to create accounts to be entered on balance sheets and income statements

Economic Growth

The part of the economic cycle when the economy is increasing in real terms (faster than the rate of inflation)

Liquidity

The readiness with which an asset can be converted to cash

Finance

The science of fund management, applying concepts from accounting, economics, and statistics

Economic principals

The study of how people choose to allocate their scarce resources. Choices are influenced by demand, scarcity, surplus, price

Microeconomics

The study of issues that occur at the firm level. Supply, demand, pricing

Assets

What a company owns, including items such as cash, inventory, and accounts receivable

Rate of Return

the gain (or loss) of an investment over time

Business types

• Government operated organizations • Community owned entities • Non-profit organizations • Sole proprietorships • Partnerships • S corps • LLCs and LLPs • C corps