What’s It Worth?What’s It Worth?- The Movies -- The Movies -

CSX Business Explorer Post 333CSX Business Explorer Post 333

December, 2010December, 2010

We all trade our dollars We all trade our dollars for things that we want.for things that we want.

I LOVE going to the moviesI LOVE going to the movies Every weekend (just about)Every weekend (just about) Only $10 (ticket AND popcorn!)Only $10 (ticket AND popcorn!) $520 if I go every week$520 if I go every week

Today, my local theater has an Today, my local theater has an interesting offer…interesting offer…

You have to choose well, whether it is for You have to choose well, whether it is for business or in your personal life.business or in your personal life.

A year’s worth of movies and popcorn A year’s worth of movies and popcorn actually costs $520:actually costs $520: A single ticket with popcorn costs $10A single ticket with popcorn costs $10 There are 52 weeks in a yearThere are 52 weeks in a year $10 × 52 = $520 $10 × 52 = $520

A one-year pass for weekly movies and A one-year pass for weekly movies and popcorn can be bought for $450, saving $70 popcorn can be bought for $450, saving $70 in a year.in a year.

A few weeks ago, we talked about A few weeks ago, we talked about the movie offer in small groups.the movie offer in small groups.

We setup teams of four people We setup teams of four people

We pick a spokeperson whoWe pick a spokeperson who Took notes on our discussionTook notes on our discussion Was willing to share with the rest of the groupWas willing to share with the rest of the group

We thought through:We thought through: What might make this a good deal?What might make this a good deal? What might make it not so good?What might make it not so good? What would What would youyou be willing to pay for the pass? be willing to pay for the pass?

We talked about why the pass We talked about why the pass might be worth more than $520.might be worth more than $520.

It has a good payoffIt has a good payoff $450 is less than $520$450 is less than $520 It’s Convenient, no It’s Convenient, no

standing in linestanding in line Includes popcorn, which Includes popcorn, which

I loveI love We could take our friends We could take our friends

who might not have cashwho might not have cash Save on 3D moviesSave on 3D movies Gives us $70 to use for Gives us $70 to use for

other thingsother things

It’s low riskIt’s low risk I could sell the pass if I I could sell the pass if I

get tired of goingget tired of going It’s Reliable (would get It’s Reliable (would get

me into sold-out movies)me into sold-out movies) It’s Flexible, assuming It’s Flexible, assuming

location is flexible, at any location is flexible, at any theater in the same chain theater in the same chain

And we talked about why the pass And we talked about why the pass might be worth less than $520.might be worth less than $520.

I have other opportunitiesI have other opportunities I can see movies in I can see movies in

different ways , like redboxdifferent ways , like redbox I’d rather buy candy han I’d rather buy candy han

popcornpopcorn I really want an iphoneI really want an iphone

Cash flow problemCash flow problem It is a lot of $ up front It is a lot of $ up front It uses up $450 you might It uses up $450 you might

want for something elsewant for something else

Risk is too highRisk is too high I might get tired of going I might get tired of going

and lose the money, if I and lose the money, if I can’t sell the passcan’t sell the pass

There might be conflicts in There might be conflicts in my schedulemy schedule

Value is too LowValue is too Low It’s only once a weekIt’s only once a week I would feel forced to goI would feel forced to go It’s only $70 difference It’s only $70 difference

spread over a whole yearspread over a whole year

We learned a few things.We learned a few things.

Everything has a valueEverything has a value That value might be all up front, or it might be spread out That value might be all up front, or it might be spread out

over timeover time Value is not the same for all peopleValue is not the same for all people

There’s some science (and art) to figuring out the There’s some science (and art) to figuring out the value of something that’s in the futurevalue of something that’s in the future A dollar today is worth more than a dollar tomorrowA dollar today is worth more than a dollar tomorrow A sure dollar is worth more than a risky oneA sure dollar is worth more than a risky one Different people have different views on just what “risky” Different people have different views on just what “risky”

meansmeans

What’s It Worth?What’s It Worth?Buying a BusinessBuying a Business

CSX Business Explorer Post 333CSX Business Explorer Post 333

January, 2010January, 2010

We learned a few things in our We learned a few things in our discussion of a movie pass.discussion of a movie pass.

Everything has a valueEverything has a value

You can trade dollars now for a benefit in the You can trade dollars now for a benefit in the future, if the future benefit is large enoughfuture, if the future benefit is large enough

Value is not the same for all peopleValue is not the same for all people Some people avoid riskSome people avoid risk Some people need cash today and cannot investSome people need cash today and cannot invest Some people have lots of money and lots of optionsSome people have lots of money and lots of options

The same ideas matter in business.The same ideas matter in business.

A dollar today is worth more than a dollar tomorrowA dollar today is worth more than a dollar tomorrow

A sure dollar is worth more than a risky oneA sure dollar is worth more than a risky one

Different people have different views on just what Different people have different views on just what “value” and “risk” mean“value” and “risk” mean This is why we have markets, so that people can trade dollars This is why we have markets, so that people can trade dollars

and property, to get the things they want, at the time that seems and property, to get the things they want, at the time that seems right to them.right to them.

Every transaction has a seller who is happy to make the sale, Every transaction has a seller who is happy to make the sale, and a buyer who is glad to have spent the money.and a buyer who is glad to have spent the money.

What are the principles?What are the principles?

Buying a business means buying the income that it Buying a business means buying the income that it produces (now and into the future)produces (now and into the future)

We can evaluate that income in terms of several We can evaluate that income in terms of several things:things: How much How much earnings growthearnings growth we expect the company to have we expect the company to have How long it takes us to get our investment backHow long it takes us to get our investment back How risky we think that future income may beHow risky we think that future income may be What other alternatives we have that may generate the same (or What other alternatives we have that may generate the same (or

more, or less) incomemore, or less) income

We can buy a piece of a business by buying stockWe can buy a piece of a business by buying stock That stock will give us the same income (and the same return) That stock will give us the same income (and the same return)

as buying the whole businessas buying the whole business

Here’s a basic business question Here’s a basic business question based on getting future benefits.based on getting future benefits.

* Example assumes that the business continues for 10 years after you buy it

Would you buy my business?Would you buy my business? What would your return be, if the business could generate $7,500 per month in profit, every month?What would your return be, if the business could generate $7,500 per month in profit, every month? Is that good enough for you?Is that good enough for you? Can you raise the money to buy the whole business?Can you raise the money to buy the whole business?

InvestIncome per

MonthIncome per

YearMonths to

get Payback Return $ 450,000 $ 10,000 $ 120,000 45 23% $ 450,000 $ 9,000 $ 108,000 50 20% $ 450,000 $ 8,182 $ 98,182 55 17% $ 450,000 $ 7,500 $ 90,000 60 15%

Performance of the Entire Business

InvestIncome per

MonthIncome per

YearMonths to

get Payback Return $ 450,000 $ 10,000 $ 120,000 45 23% $ 450,000 $ 9,000 $ 108,000 50 20% $ 450,000 $ 8,182 $ 98,182 55 17%

InvestIncome per

MonthIncome per

YearMonths to get

Payback Return $ 45.00 $ 1.00 $ 12.00 45 23% $ 45.00 $ 10.80 50 20% $ 45.00 $ 0.82 $ 9.82 17%

Performance of the Entire Business

What is the Value of One Share of the Business?You Could Break the Business up into 10,000 Shares.

What can you do if you don’t have enough What can you do if you don’t have enough money to buy the whole business?money to buy the whole business?

* Example assumes that the business continues for 10 years after you buy it

Investors pay now, for earnings growth Investors pay now, for earnings growth they expect to get in the future.they expect to get in the future.

You can change the Expected Annual Earnings Growth Rate to You can change the Expected Annual Earnings Growth Rate to get an idea of how much other investors believe the company’s get an idea of how much other investors believe the company’s profits will grow. Do you agree with them?profits will grow. Do you agree with them?

30 Year Investment in Company Stock

(65.89)$ Current Share Price3.71$ Current Earnings per Share

213 Months for Payback17.8 Current Price to Earnings

3.8% Expected Return at Today's Earnings(This is pretty low….)

0.0% Expected Annual Earnings Growth Rate3.8% Expected Return at Future Growth Rate

(Most investors will require a morethan 8% return or they don't invest.)

SummarySummary

StockStock represents ownership of the company, including the represents ownership of the company, including the income that it producesincome that it produces It’s just a piece of paper (or an electronic record), but has value just It’s just a piece of paper (or an electronic record), but has value just

like a dollar bill doeslike a dollar bill does

The basic unit of stock is a The basic unit of stock is a ShareShare If a company issues one million shares, then each one entitles you to If a company issues one million shares, then each one entitles you to

one millionth of that company’s earningsone millionth of that company’s earnings

EarningsEarnings are the income produced by the company after it are the income produced by the company after it has paid all its expenses has paid all its expenses Because investors want to know how much they are entitled to, they Because investors want to know how much they are entitled to, they

are often published as Earnings Per Share, or EPSare often published as Earnings Per Share, or EPS

ReturnReturn is what you get back on your investment, similar to the is what you get back on your investment, similar to the interest rate you might earn on a bank accountinterest rate you might earn on a bank account