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Table 8-4 E P S/E B I T Analysis for the X Y Z Company (1 of 2)

Input Data The Number How Determined
$ Amount of Capital Needed $100 million Estimated $ cost of recommendations
E B I T Range $20 to $40 million Estimate based on prior year E B I T and recommendations for the coming year(s)
Interest Rate 5 percent Estimate based on cost of capital
Tax Rate 30 percent Use prior year %: taxes divided by income before taxes, as given on income statement
Stock Price $50 Use most recent stock price
# Shares Outstanding 500 million For the debt columns, enter the existing # shares outstanding. For stock columns, use the existing # shares outstanding + the # new shares that must be issued to raise the needed capital (i.e., based on stock price). So divide the stock price into the $ amount of capital needed.

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Table 8-4 E P S/E B I T Analysis for the X Y Z Company (2 of 2)

Conclusion: The best financing alternative is 100% stock because the E P S values are largest; the worst financing alternative is 100% debt because the E P S values are lowest.

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The best way to explain EPS/EBIT analysis is by working through an example for the XYZ Company, as provided in Table 8-4. Note that 100 percent stock is the best financing alternative as indicated by the EPS values of 0.0279 and 0.056.

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Figure 8-6 An EPS/EBIT Chart for the XYZ Company

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Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved

As noted in Figure 8-6, the top row (EBIT) on the x-axis is graphed with the bottom row (EPS) on the y-axis, and the highest plotted line reveals the best method. Sometimes the plotted lines will interact, so a graph is especially helpful in making the capital acquisition decision, rather than solely relying on a table of numbers.

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Projected Financial Statements

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

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Most financial institutions require at least three years of projected financial statements whenever a business seeks capital.

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Performing Projected Financial Analysis (1 of 2)

Prepare the projected income statement before the balance sheet.

Use the percentage-of-sales method to project cost of goods sold (C G S) and the expense items in the income statement.

Calculate the projected net income.

Subtract from the net income any dividends to be paid for that year.

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Projected financial analysis can be explained in seven steps.

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Performing Projected Financial Analysis (2 of 2)

Project the balance sheet items, beginning with retained earnings and then forecasting stockholders’ equity, long-term liabilities, current liabilities, total liabilities, total assets, fixed assets, and current assets (in that order).

Use the cash account as the plug figure.

List commentary (remarks) on the projected statements.

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Corporate Valuation

Methods:

The Net Worth Method

Total Shareholders’ Equity (S E) minus (Goodwill + Intangibles)

The Net Income Method

Net Income × Five

Price-Earnings Ratio Method

 

Outstanding Shares Method

# of Shares Outstanding × Stock Price

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Four methods are often used to determine the monetary value of a company.

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I P Os, Cash Management, and Corporate Bonds

Go public with an I P O?

Keep cash offshore if earned offshore?

Issue corporate bonds for what purpose?

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This slide lists important financial decisions that companies must make.

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Research and Development (R and D) Issues

Emphasize product or process improvements.

Stress basic or applied research.

Be leaders or followers in R and D.

Develop robotics or manual-type processes.

Spend a high, average, or low amount of money on R and D.

Perform R and D within the firm or contract R and D to outside firms.

Use university researchers or private-sector researchers.

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Research and development (R&D) personnel can play an integral part in strategy implementation. These individuals are generally charged with developing new products and improving old products effectively.

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R and D Approaches for Implementing Strategies

Be the first firm to market new technological products.

Be an innovative imitator of successful products, thus minimizing the risks and costs of start-up.

Be a low-cost producer by mass-producing products similar to but less expensive than products recently introduced.

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There are at least three major R&D approaches for implementing strategies.

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Management Information System (M I S) Issues

Having an effective management information system (M I S) may be the most important factor in differentiating successful from unsuccessful firms.

The process of strategic management is facilitated immensely in firms that have an effective information system.

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Firms that gather, assimilate, and evaluate external and internal information most effectively are gaining competitive advantages over other firms.

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Mobile Computing

Mobile tracking of employees

Mobile apps for customers

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Mobile devices and inexpensive monitoring software now enable companies to know where employees are, eavesdrop on their phone calls, and do other things such as know whether or not a driver is wearing his/her seatbelt.

Companies are increasingly developing mobile apps for customers and using resultant data to devise improved strategies for attracting customers.

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Copyright

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