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Exhibit 12.7 illustrates the extremes. On the left is the large relevant range of a semiconductor company such as Intel or Texas Instruments where output is measured in millions of logic chips and a change in relevant range might require an investment in the area of $3 billion. On the right might be a consulting firm where output is measured in billable hours and senior associates are brought on in increments of 2,000 annual billable hours at a cost much less than that of a chip fabricator. When doing this type of competitive analysis, one must be aware of the size of the relevant range and be ready to adjust estimates accordingly. The statement of cash flows provides a window into this area. By carefully comparing the depreciation expense for the period to the corresponding investment in plant, property, and equipment, one can monitor movement within and outside the relevant range. As demonstrated in the left-hand side of Exhibit 12.7, changes in relevant range are chunky. Texas Instruments investing in a new fabrication plant would be evidenced by an investment in plant, property, and equipment account much larger than the depreciation charge for the period. Exhibit 12.8 shows the relevant portion of the statement of cash flows for Company X. Over the past three years, total investment in plant infrastructure of $128 million ($53.17 + $38.32 + $36.75) reflects the depreciation charges $130 million ($40.68 + $45.58 + $44.41), which indicates that this would be an ideal time period for this type of analysis—assuming all other factors constant. If there were a significant plant investment, then a new analysis would have to be compiled once there was adequate data to establish the impact of the changed cost structure. During the interim time period, the only way to estimate the new cost structure would be conjecture given what information could be found on the investment. At a minimum, three to four quarters of data would be needed. Exhibit 12.7 Relevant Range Extremes. Exhibit 12.8 Company X—Cash Flow Data.
Variable Cost as a Function of Output Most experienced managers understand that costs do not vary only with output. In the services industry, the quantity of new business often drives costs. One spends a good deal of resources on firsttime clients learning their industry and the uniqueness of their business practices, but follow-on business is much more efficient. In manufacturing, any experienced production manager would say that cost is a function of the size of the run as well as the quantity of output. Small lot sizes are almost always at the root of unfavorable cost variances. In all industries these front-end setups are a major driver of costs and can account for as much as 40% of variable costs. Most firms are aware of this and try to minimize these, but in industries where they are prevalent they may require some focused thought on how to adjust the analysis. Profit Planning from an Internal Perspective When done from an internal perspective, profit planning is often called cost-volume-profit (CVP) analysis. It is much less complex and more straightforward since both cost structures and profit targets are known. Rather than discussing it in the abstract, it is easier to demonstrate how this tool is used. Returning to Company X, assume that it is true; management is targeting growth of the service revenue at 25% of total revenue due to market research it has compiled. Although the customer service revenue is indeed profitable as currently configured, management has found that growth is constrained by product sales, since service revenue is sold only as an add-on warranty to product sales. But market feedback has shown that customers could be using the product technology of Company X much more effectively to drive their own revenue growth. On a test basis, Company X has provided a
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Table of Contents Title Page Copyri
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Chapter 6 - Planning Capital Expend
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For Further Reading Part IV - Manag
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Successful Postmerger Implementatio
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This book is printed on acid-free p
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Syllabus How Chapter Topics in This
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Some of these experts are full-time
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About the Contributors Richard T. B
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Advances in Quantitative Analysis o
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enterprise development. Dr. Zachara
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The left side shows Nutrimin‟s in
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Gail, let‟s go over this balance
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Gail, do you have any questions abo
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11. Not all expenses are cash outfl
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Financial Statements: Who Uses Them
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profitability to keep investing for
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Financial Accounting Standards It i
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Downloadable Resources for this cha
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Next, we explain each of these thre
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liquidity. Or, more simply, achievi
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If these ratios are seriously defic
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The debt-to-equity ratio is evaluat
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year 1 to year 3. The net effect wa
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to rate of return on the equity. Th
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Other types of comparisons of finan
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income/sales), asset turnover (sale
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successful businesspeople should ha
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More than a decade ago, a special c
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companies is used for illustration.
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The identification of nonrecurring
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The Dow Chemical single-step income
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is a pretax measure, but income fro
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Sources: Companies‟ annual report
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Exhibit 3.11 Examples of discontinu
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amortization purposes, the Company
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Examples of nonrecurring items disc
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During Fiscal 2006, inventory quant
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The nonrecurring items of Boston Sc
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The disclosure presented earlier in
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gains or losses that appear as part
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ecurring as for Kimberly-Clark, the
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Summarizing Nonrecurring Items and
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This example of using the SEB works
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Exhibit 3.27 Other income (expense)
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Source: Pfizer, Inc., annual report
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Exhibit 3.30 Acquisitions note: Pfi
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Source: Pfizer, Inc., annual report
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Exhibit 3.33 Cost-reduction initiat
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Exhibit 3.36 Share-based payment no
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The Pfizer Worksheet Analysis: Down
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Some Further Points on the Pfizer W
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• It is common to treat items as
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FedEx Corporation (2007) First Sola
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1 The American Institute of Certifi
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28 These alternative translation me
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If you need some instruction in Exc
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To solve using Excel, open your Exc
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As you can see from the previous ex
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C6 = 5 • Now enter the “=” si
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Ordinary Annuity An ordinary annuit
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To confirm that the number of payme
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The FV of this first payment into t
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Exhibit 4.15 Finding the future val
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Exhibit 4.18 Finding the present va
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From Exhibit 4.20, we see that as t
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Exhibit 4.22 Amortization schedule
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Exhibit 4.25 Regular cash flows wit
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Internet Links For Further Reading
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Investors who are risk averse will
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considering the risk of a single as
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Portfolio Risk Stand-alone risk is
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In spite of unique or diversifiable
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If a particular stock is highly sus
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The formula tells us that, to begin
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for the entire market of stocks sin
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The dividend per share for preferre
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If you are able to determine the cu
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Debt finance is the lower-cost meth
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We don‟t observe many firms whose
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Capital Structure in Practice Finan
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are able to observe regularities in
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dividends and capital gains. We wil
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where EBIT is earnings before inter
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Since long-term debt holders have a
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accept more investment projects. Re
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A beer company is considering build
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accounts receivable, and tabulates
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profit by the tax rate determines t
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Accounting profit often mixes varia
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The concept that future cash flows
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Like project A, project C also cost
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The after-tax interest rate is the
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equal mix of debt and equity, its d
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The payback period rule stipulates
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The IRR rule is appealing in that i
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complete with its real options is g
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What does it matter that one invest
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Exhibit 7.3 Time line in dollars an
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There are a number of countries in
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eturn of 10% on its investments in
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Exhibit 7.12 Summary of exchange ra
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and so will the value of the liabil
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Source: CIA, World Factbook, availa
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Exhibit 7.18 Net present value of c
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equired interest payments to be pai
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So if the assistant treasurer was r
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This theory is far from perfect, as
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The Consulting Firm Jennifer, Jean,
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part by a statute, the Uniform Limi
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formation in Delaware (or any state
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purpose of requiring qualification.
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Phil‟s death may terminate the bu
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the transfer. This means that if Br
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These rules extend to tort liabilit
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In the absence of a meeting, stockh
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A more detailed discussion on the b
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Partnerships If possible, the resul
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associated with this arrangement ar
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Partnerships are also not separate
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For most start-up businesses, howev
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form, even at the risk of some unli
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likely that our consultants will be
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Thus, the corporation and LLC, with
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It is not possible to fully describ
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usiness corporation for all purpose
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a cash-basis taxpayer to be taxed a
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The Tax Reform Act of 1986 substant
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limit is the product of the value o
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he would have spent anyway. In fact
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protect Brad from the scenario of h
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paying for the privilege. If the st
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The second tax scenario attaches to
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include that nullity in his taxable
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then the capital gain to be taxed h
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Most relevant to Morris is Section
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To begin with, the ESOP will have t
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general partner of a limited partne
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small businesses) is also subject t
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oth Lisa and Brad would be free to
Page 296 and 297: Assume that a limited liability com
Page 298 and 299: corporations, and had been audited
Page 300 and 301: There is plenty of blame from the c
Page 302 and 303: • An important study about top ma
Page 304 and 305: • The federal government made at
Page 306 and 307: $79.7 million for other services, a
Page 308 and 309: Budgets offer a variety of benefits
Page 310 and 311: determine the impact of specific pr
Page 312 and 313: Exhibit 11.2 Budget variance report
Page 314 and 315: udget, we just add more to it next
Page 316: income statement. The financial bud
Page 319 and 320: For a manufacturing company, cost o
Page 321 and 322: C&G‟s Gift Shop has a policy to m
Page 323 and 324: Meeting cash obligations as they co
Page 325 and 326: was unusually low, say, due to the
Page 327 and 328: A fixed budget, sometimes called a
Page 329 and 330: A large part of the budget selling
Page 331 and 332: • Centralized resource allocation
Page 333: Merewitz, Leonard, and Stephen H. S
Page 337 and 338: This chapter starts with a discussi
Page 339 and 340: Interestingly the numbers for quart
Page 341 and 342: Exhibit 12.4 Scenarion analysis.
Page 343 and 344: Pitfalls Although this analytic tec
Page 345: Exhibit 12.6 Variable cost element
Page 349 and 350: If scenario 2 yields a lower profit
Page 351 and 352: Microsoft certainly does not price
Page 353 and 354: If it is determined that dumping ha
Page 357 and 358: Leaving government agencies and not
Page 359 and 360: transaction processing. Each proces
Page 361 and 362: Exhibit 13.3 E-commerce transaction
Page 363 and 364: To summarize the analysis, the busi
Page 365 and 366: Capacity costs are probably the mos
Page 367 and 368: which it was, but for the inventory
Page 369 and 370: They called this strategic cost man
Page 371 and 372: A closer study, however, revealed s
Page 373 and 374: the benefits of business planning.
Page 375 and 376: The last type of plan is called a d
Page 377 and 378: The Business Plan We will progress
Page 379 and 380: Hook the Reader That means having t
Page 381 and 382: Industry The goal of this section i
Page 383 and 384: upscale suburban client who wants p
Page 385 and 386: Company and Product Description Com
Page 387 and 388: Exhibit 14.8 shows the competitive
Page 389 and 390: Exhibit 14.9a Advertising schedule.
Page 391 and 392: Scope of Operations What is the pro
Page 393 and 394: Development Time Line A development
Page 395 and 396: By law, most organization types req
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As mentioned in the development pla
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that can be depreciated, you should
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1 Special thanks to Matt Feczko, Mi
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For better or worse, the business e
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Leeson bet and lost. Japanese stock
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Between February and April 1994, Da
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LTCM could be picky when it came to
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An investor who wished to invest in
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Similarly, the swaps market has rev
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speculator would suffer losses equa
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American manufacturer will suffer l
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The ease with which futures facilit
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Exhibit 15.1 Call option payoff dia
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Exhibit 15.2 Payoff diagram for a w
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Notice that the put option payoff r
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Bank, owns a large block of NASDAQ
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can be tailored so that the money r
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Finally, the last step is to choose
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3 Fischer Black, who co-invented th
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not include assets that the firm ha
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Thus, a business valuation will usu
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Negative • Acme is highly depende
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Exhibit 16.3 Acme Manufacturing, In
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Profitability ratios reflect the re
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When we talk about the value of a b
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This example illustrates that with
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Income Approach: Discounted Cash Fl
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Exhibit 16.5 Acme Manufacturing, In
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Victoria explains that the second p
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Victoria analyzes Acme‟s audited
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In summary, the discounted cash flo
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Adjustment for Illiquidity As previ
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51% position sells for a higher pri
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examples. The proper application of
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The subject of this chapter is grow
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Finally, an acquisition can be effe
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M&A activity has been the focus of
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companies continue to make the same
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equals was taking on a distinctive
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Anatomy of a Successful Acquirer: T
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employees kept their original jobs
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where ΔCF t is the incremental cas
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where it‟s ultimately buried. Suc
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The following example summarizes th
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make sure that you are at least awa
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acquisition, there is no immediate
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its vascular business, which was so
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While all employees should be part
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makes strategic and financial sense
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Bhagat, Sanjai, Ming Dong, David Hi
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The 2008 financial crisis underscor
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Source: Plunkett’s Outsourcing &
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To summarize: Trends • Large numb
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Companies are becoming increasingly
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What steps should a company follow
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• Results of meetings with vendor
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• Breach of contract and remedies
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Assuming the project or service rev
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The answer is: profits. The company
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19 Information Technology and You D
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People‟s lives have been turned u
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its self-contained rechargeable bat
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Random-Access Memory (RAM) Random-a
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On laptop computers and PDAs, the s
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Operating System An operating syste
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the spreadsheet software together w
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Exhibit 19.5 Pro forma sales and in
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Database Software A database is a c
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Internet e-mail addresses often con
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Personal Finance Software There are
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There are several different approac
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One of the major attractions of the
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While not a new version of the Web
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industrial revolution, and has occu
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Dummies Inc. has a series of books
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organization. This chapter is desig
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As technology has evolved, the term
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While the software mentioned earlie
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Most of the focus of the investor c
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Data Access and OLAP Before the lat
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Exhibit 20.5 illustrates a differen
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Productivity Tools Workers expect t
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Client-server technology is based o
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Today, most programmers write in C+
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Exhibit 20.6 is a model of a typica
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No treatment of relational database
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Online analytical processing (OLAP)
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server) and the rest on the users
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the other operational departments w
Page 587:
The world of business has changed d
Page 591:
Chaffey, Dave, E-Commerce and E-Com
Page 595 and 596:
According to the results of the sur
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understand the financial situation
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MBA graduates who are hoping to ent
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Summary Financial services opportun
Page 603 and 604:
Let‟s begin with the “I left it
Page 605 and 606:
MBA student: “Well, I go to [Grea
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Aiming for Your Goals For career ch
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Networking is generally regarded as
Page 611 and 612:
Let‟s begin with some key assumpt
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like, or moving ahead in the compan
Page 618 and 619:
Accrual accounting: An accounting m
Page 620 and 621:
Cash flow: Cash that is spent or re
Page 622 and 623:
Distribution channel: A chain of in
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Goodwill: As it relates to valuatio
Page 626 and 627:
Management’s discussion and analy
Page 628 and 629:
Ordinary annuity: An annuity that p
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Securities and Exchange Commission
Page 632 and 633:
Vertical merger: A merger in which
Page 634 and 635:
about activity-based costing progre
Page 636 and 637:
Application systems ARPAnet Arthur
Page 638 and 639:
Bell Labs Benefit measurement Beta
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goal orientation legal and contract
Page 642 and 643:
segment information note share-base
Page 644 and 645:
process of purpose of real world us
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uy/build decision capital budget in
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written resume Careers in corporate
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Cell Center for Research in Securit
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Compensation and ownership Competit
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Corporate culture Corporate debt in
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profit planning from an internal pe
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Data Data access and OLAP Database
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Askin Capital Management Barings Ba
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market approach publicly traded gui
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Electronic data interchange (EDI) E
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Extensible markup language (XML) Ex
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short term liquidity users and uses
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Fourth generation programming (4GL)
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Going private Going private transac
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Hypertext links Hypertext markup la
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Information technology and the firm
Page 678 and 679:
International Accounting Standards
Page 680 and 681:
Last-in-first out (LIFO) vs. curren
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Long call option payoff Longer-term
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Market risks Market size and struct
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Motivation to outsource Multiple IR
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Nonrecurring items defined disclosu
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Operational complexity Operational
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Outsourcing metrics Overhead Over-t
Page 694 and 695:
Personal end game Personal expense
Page 696 and 697:
Price competition Price decreases P
Page 698 and 699:
Projected cash flow statements Proj
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Relevant range Relevant range assum
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Risk sharing Risk transfer Risk vs.
Page 704 and 705:
Short call option payoff Short part
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Spot price Spreadsheet software Spr
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Summarizing nonrecurring items and
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acquisition the business dividends
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Timmon‟s Model of Opportunity Rec
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U.S. immigration quotas U.S. Intern
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discounting with discount rate form
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