Professional Documents
Culture Documents
David - sm17 - PPT - 08
David - sm17 - PPT - 08
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.
Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved
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.
Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved
Finance/Accounting Issues (1 of 2)
• Determine capital structure
• 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
Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved
Finance/Accounting Issues (2 of 2)
• Analyze financial ratios
• Manage initial public offerings (IPOs), cash levels, and
corporate bonds
Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved
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.
Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved
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.
Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved
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.
Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved
Table 8.1 P&G Input Data Needed for
EPS/EBIT Analysis
P&G Input Data The Number
Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved
Table 8.2 P&G Computations in
Performing EPS/EBIT Analysis (in
millions, except the EPS row)
Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved
Figure 8.2 P&G’s EPS/EBIT Chart
Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved
Table 8.3 Limitations/Considerations
Associated with EPS/EBIT Analysis
1. Flexibility
2. Dilution of ownership
3. Timing
4. Leveraged situation
5. Continuity
6. EBIT ranges
7. Dividends
Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved
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
Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved
Performing Projected Financial
Analysis (1 of 2)
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.
Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved
Performing Projected Financial
Analysis (2 of 2)
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.
Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved
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.
Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved
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
Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved
IPOs and Corporate Bonds
• Go public with an IPO
– “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.
Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved
Figure 8.3 How to Gain and Sustain
Competitive Advantages
Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved
Copyright
Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved