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    Chapter05 Finance

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    Chapter05 Finance

    Uploaded by

    gerald ocan
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    Chapter05 finance

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    31 views18 pages

    Chapter05 Finance

    Uploaded by

    gerald ocan

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    © All Rights Reserved
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    You are on page 1of 18

    Chapter 5

    Growing the Business

    Copyright © 2007 by John Wiley


    & Sons, Inc. All rights reserved
    Chapter Overview
    • Need for Growth
    • Shareholder Value
    • Benefits of Growth
    • Growth Strategies

    Copyright © 2007 by John Wiley


    & Sons, Inc. All rights reserved
    Need for Growth
    • Essential to a company’s success
    – Private company owners expect profits, cash
    flow, and ROI to increase
    – Stockholders expect the price of their stock to
    rise
    • Growth company’s earnings increase at
    least 15% each year

    Copyright © 2007 by John Wiley


    & Sons, Inc. All rights reserved
    Shareholder Value
    • Shareholder Value = Market Value
    • Market Value
    – Public Company
    • Current market price of common stock multiplied
    by number of shares outstanding
    – Private Company
    • Sale price of the company on the open market

    Copyright © 2007 by John Wiley


    & Sons, Inc. All rights reserved
    Public Company Goals
    • Increase earnings per share (EPS)
    – EPS = EBIDTA / Shares of Common Stock
    • Increase the company’s stock multiple
    – Multiple = Current Market Price / EPS
    • Increase the market price of common
    stock

    Copyright © 2007 by John Wiley


    & Sons, Inc. All rights reserved
    Risk and Reward
    • Investors are risk averse
    – The greater the risk, the higher the ROI
    demanded by investors

    Copyright © 2007 by John Wiley


    & Sons, Inc. All rights reserved
    Private Company Goals
    • Increase cash flow
    • Generate a favorable return for owners

    Copyright © 2007 by John Wiley


    & Sons, Inc. All rights reserved
    Benefits of Growth
    • Clear career paths for employees
    • Attract qualified employees
    • Increase market share
    • Limit new competition
    • Diversify risk

    Copyright © 2007 by John Wiley


    & Sons, Inc. All rights reserved
    Growth Strategies
    • Increase sales and Productivity of Existing
    Properties
    – Increase Profit Margin
    – Increase sales
    – Reduce expenses
    – Increase labor productivity
    – Reduce credit card commissions

    Copyright © 2007 by John Wiley


    & Sons, Inc. All rights reserved
    Growth Strategies
    • Expansion of Physical Facilities
    – Focus on current or new markets
    – Requires large quantities of new capital
    – Earnings of additional assets must be greater
    than the company’s cost of capital
    • If earnings are lower, earnings per share are
    diluted

    Copyright © 2007 by John Wiley


    & Sons, Inc. All rights reserved
    Growth Strategies
    • Franchising
    – Sell the rights to a brand in a specific
    location/market for a stated number of years
    – Franchisees pay:
    • Franchise fees
    • Franchise royalty fee
    • Ancillary services
    – Marketing, training, purchasing fees, etc.

    Copyright © 2007 by John Wiley


    & Sons, Inc. All rights reserved
    Franchising
    • Benefits
    – Greater distribution system
    – Rapid growth without large amounts of capital
    – Higher profit margins
    • Disadvantages
    – Risk of not being able to control brand standards
    – Unable to control quality and consistency of the
    product and services

    Copyright © 2007 by John Wiley


    & Sons, Inc. All rights reserved
    Growth Strategies
    • Management Contracts
    – Operate properties for owners without management
    capabilities
    – Available primarily to lodging companies
    – Fees
    • 3% to 5% of total sales
    • Incentive fee based on a percentage of operating profit
    – Disadvantage
    • Risk of contract being terminated

    Copyright © 2007 by John Wiley


    & Sons, Inc. All rights reserved
    Growth Strategies
    • Mergers and Acquisitions
    – Available to large public companies
    – Must have substantial amounts of capital
    – Funded by:
    • Debt
    • Existing equity
    • Selling new shares of stock
    • Bartering
    Copyright © 2007 by John Wiley
    & Sons, Inc. All rights reserved
    Growth Strategies
    • Initial Public Offering (IPO)
    – Utilized when:
    • a company is ready for rapid growth
    • a company’s potential future value is much greater
    than its current value

    Copyright © 2007 by John Wiley


    & Sons, Inc. All rights reserved
    IPO Process
    1. Investment banker manages process
    2. Law firm writes prospectus
    3. Accounting firm prepares certified audits for
    prior three years
    4. Road show
    5. Stock offering is priced
    6. Management meets with the stock exchange

    Copyright © 2007 by John Wiley


    & Sons, Inc. All rights reserved
    Investment Banker
    • Plays important role in the IPO process
    – Before stock is sold
    • Helps value the company
    • Establishes a price for the stock
    • Manages the selling process
    – After stock is on the market
    • Maintains a market for the stock

    Copyright © 2007 by John Wiley


    & Sons, Inc. All rights reserved
    Managing a Public Company
    • Management at public companies have
    many responsibilities
    – Required to file reports with the SEC
    – Deal with Wall Street research analysts
    – Must report to:
    • board of directors
    • stockholders

    Copyright © 2007 by John Wiley


    & Sons, Inc. All rights reserved

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