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Copyright © 2007 South-Western. All rights reserved.
Chapter 17
Expandingthe Business
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Copyright © 2007 South-Western. All rights reserved.
Expanding the Business
2
Learning Objectives
Expanding the Business
Decisions Tasks
Budgeting Motives
Investing
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Expanding the Business
3
The Key Decisions in Running a Business
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Expanding the Business
4
Investment Decisions
DecisionsTasksMotivesInvestingBudgeting
Capital Budgeting
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Expanding the Business
5
Classifying Capital Expenditures
DecisionsTasksMotivesInvestingBudgeting
ExpensesExpansionDevelopment
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Expanding the Business
6
Capital Budgeting Tasks
DecisionsTasksMotivesInvestingBudgeting Estimating
Feasibility
Implementing
Proposing
Monitoring
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Expanding the Business
7
Capital Budgeting Tasks
DecisionsTasksMotivesInvestingBudgeting
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Expanding the Business
8
Mergers
DecisionsTasksMotivesInvestingBudgeting
Horizontal
Vertical
Conglomerate
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Expanding the Business
9
Motives for Mergers
DecisionsTasksMotivesInvestingBudgeting
Growth
Economies of Scale
Manager Expertise
Tax Benefits
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Expanding the Business
10
Merger Analysis
DecisionsTasksMotivesInvestingBudgeting
1 - Identify
2 - Evaluate
3 - Decision
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Expanding the Business
11
Merger Procedures
DecisionsTasksMotivesInvestingBudgeting
Financing
Tender Offer
Integrating
Evaluation
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Expanding the Business
12
Merger Issues
DecisionsTasksMotivesInvestingBudgeting
Defense
LBODivestiture
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Expanding the Business
13
Short-Term Investments
DecisionsTasksMotivesInvestingBudgeting
InventoryLiquidityAccounts
Receivable
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Expanding the Business
14
Present Value
DecisionsTasksMotivesInvestingBudgeting
Payment( 1 + Interest Rate today)
Example:$50,000(1 + .10)
PV = $45,455
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Expanding the Business
15
P.V. of Future Cash Flow
DecisionsTasksMotivesInvestingBudgeting
CF at end of Year 1( 1 + r)
Example:$10,000(1 + .12)
PV = $8,929
CF = Lump sum cash flowr = Required return on investment
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Expanding the Business
16
P.V. of Future Cash Flow
DecisionsTasksMotivesInvestingBudgeting
CF at end of Year 2( 1 + r)2 Example:$10,000
(1 + .12)2
PV = $7,972
CF = Lump sum cash flowr = Required return on investment
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Expanding the Business
17
P.V. of Future Cash Flow
DecisionsTasksMotivesInvestingBudgeting
CF at end of Year 3( 1 + r)3 Example:$10,000
(1 + .12)3
PV = $7,118
CF = Lump sum cash flowr = Required return on investment
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Expanding the Business
18
P.V. of Future Cash Flow
DecisionsTasksMotivesInvestingBudgeting
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Expanding the Business
19
Net Present Value
DecisionsTasksMotivesInvestingBudgeting
CF @ Year 1 + CF @ Year 2PV = (1 + r)1 (1 + r)2
Example: $8,000 + $12,000 (1 + .15)1 (1 + .15)2
PV = $6,957 + $9,074 = $16,031
NPV = PV – I $16,031 - $15,000 = $1,031Feasible Project