Seventeenth Edition: Implementing Strategies: Finance and Accounting Issues

Strategic Management Concepts: A
Competitive Advantage Approach,

Concepts and Cases
Seventeenth Edition
Chapter 8
Implementing Strategies:
Finance and Accounting
Issues
Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved
Learning Objectives
8.1 Determine an appropriate capital structure for the firm by
performing EPS/EBIT analysis to compare the relative
attractiveness of debt versus stock as a source of capital to
implement strategies.
8.2 Develop projected financial statements to reveal the
impact of recommendations with associated costs.
8.3 Determine the cash value of the firm, or a division of the
firm, using four corporate evaluation methods.
8.4 Discuss financial ratios, initial public offerings (IPOs),
and issuing bonds as strategic decisions.
Figure 8.1 The Comprehensive, Integrative
Strategic-Management Model
Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June
1988): 40. See also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and Putu Artama Wiguna,
“Balance Scorecard of David’s Strategic Modeling at Industrial Business for National Construction
Contractor of Indonesia,” Journal of Mathematics and Technology, no. 4 (October 2010): 20.
Finance/Accounting Issues (1 of 2)
Each strategy has its own cost. You have to analyze not only
cost of the strategy, but also ways of covering this cost!
• Determine capital structure (stock, debt, combination)
• acquire needed capital to implement strategies
• Perform EPS/EBIT analysis
• Develop projected financial statements
• Show expected impact of recommendations
• Perform corporate valuation
• In the event an offer is received or a rival firm is to be
acquired
Finance/Accounting Issues (2 of 2)
• Analyze financial ratios
• Manage initial public offerings (IPOs), cash levels, and
corporate bonds
Capital Structure
• The proportion of debt to equity on a balance sheet is often
referred to as a firm’s capital structure.
• Performing an EPS/EBIT analysis is a common way to
determine the appropriate capital structure needed.
• Earnings per share/earnings before interest and taxes
(EPS/EBIT) analysis is the most widely used technique for
determining whether debt, stock, or a combination of the
two is the best alternative for raising capital to implement
strategies.
Accounting Terms Explained
• EPS is earnings per share, which is net income divided by
number of shares outstanding.
• EBIT is earnings before interest and taxes, also called
operating income.
• Shares outstanding is similar to shares issued (shares
issued also include treasury stock).
• Shares authorized are the number of shares a firm has
approval to issue in total.
• EBT is earnings before tax.
• EAT is earnings after tax (Preferable for profit
maximization).
EPS/EBIT Analysis
• A widely used technique for determining whether debt,
stock, or a combination of the two is the best alternative for
raising capital to implement strategies.
• Involves an examination of the impact that debt versus
stock financing has on EPS under various expectations for
EBIT, given specific recommendations (strategies to be
implemented).
• The analysis involves a 4-step process.
Table 8.1 P&G Input Data Needed for
EPS/EBIT Analysis
P&G Input Data The Number
$ Amount of Capital Needed $5,000 million
EBIT Range $10,000 to $18,000 million

Interest Rate 5%
Tax Rate 23%
Stock Price $94.17
# Shares Outstanding 2,550 million
Table 8.2 P&G Computations in
Performing EPS/EBIT Analysis (in
millions, except the EPS row)
Figure 8.2 P&G’s EPS/EBIT Chart
Table 8.3 Limitations/Considerations Associated
with EPS/EBIT Analysis
1. Flexibility (Is the Capital structure changeable or no?)
2. Dilution of ownership (Additional stock issue dilute ownership)
3. Timing (Debt or stock decision depends on market situation and
decision making time)
4. Leveraged situation (For highly leveraged firm stock may be
preferable)
5. Continuity (Assumption of the constant stock price, tax rate and
interest rates )
6. EBIT ranges (EBIT values estimated based on prior year and
expectations for the strategy)
7. Dividends (In case “all stock scenario” more money will leave)
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
Performing Projected Financial
Analysis (1 of 2)- Minimum for 3 years
1. Prepare the projected income statement before the
balance sheet.
2. Use the percentage-of-sales method to project cost of
goods sold (COGS) and the expense items in the income
statement.
3. Calculate the projected net income.
4. Subtract from the net income any dividends to be paid for
that year.
Performing Projected Financial
Analysis (2 of 2)-Minimum for 3 years
5. 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).
6. Use the cash account as the plug figure.
7. List commentary (remarks) on the projected statements.
Corporate Valuation (1 of 2)
• Corporate valuation is not an exact science; value is
sometimes in the eye of the beholder.
• The valuation of a firm’s worth is based on financial facts,
but common sense and good judgment enter into the
process.
• Different valuation methods will yield different totals for a
firm’s worth.
Corporate Valuation (2 of 2)
Methods:
• The Net Worth Method
– Total Shareholders’ Equity (SE) minus (Goodwill +
Intangibles)
• The Net Income Method
– Net Income × Five
• Price-Earnings Ratio Method
– (Stock Price ÷ EPS) × NI
• Outstanding Shares Method
– # of Shares Outstanding × Stock Price
Table 8.12 Company Worth Analysis for P&G (in
millions)
The Input Data
Shareholder’s Equity $55,778
Net Income $15,326
Stock Price $94.17
EPS $6.01019
Number of Shares Outstanding 2,550
Goodwill $44,699
Intangibles $24,187
The Four Valuation Methods
Stockholders’ Equity − (Goodwill + Intangibles ($13,108)
Net Income × 5 $76,630
(Share Price/EPS) × Net Income $240,134
Number of Shares Outstanding × Share Price $240,134
Method Average (Buyers and sellers have $135,947
different viewpoints, so, avg is the best option)
Financial Ratio Analyses
Financial ratios are examined based on
1. How they change over time
2. How they compare to industry norms
3. How they compare with key competitors
IPOs and Corporate Bonds
• Go public with an IPO (Initial Public Offering)
– “Going public” means selling off a percentage of a
company to others to raise capital; this action dilutes
the owners’ control of the firm.
• Issue corporate bonds
– This is analogous to going to the bank and borrowing
money, except that with bonds, the company obtains
funds from investors rather than banks.
Figure 8.3 How to Gain and Sustain
Competitive Advantages
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Strategic Management Concepts: A

Competitive Advantage Approach,

$ Amount of Capital Needed $5,000 million

EBIT Range $10,000 to $18,000 million

Tax Rate 23%

Stock Price $94.17

# Shares Outstanding 2,550 million

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