AFM241 Study Guide - Midterm Guide: Customer Switching, Freemium, Bargaining Power

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lilacmouse857

30 May 2018

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM241

Professor

Will Xiang

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Economic value added (EVA), Market value added, return on invested capital, and

Tobin’s q

Tobin’s q specifies the firm’s market value as a multiple of the replacement cost of its assets.

E.g. a firm with asset worth $100,000 and the market value of the firm is $500,000, this

means that the firm has been able to generate value from its assets and achieve above

normal performance.

A value of Tobin’s q above 1.0 indicates (positive) economic profits; has competitive edge

2.3 Business Models

Outlines how to deliver value to customer and turn payments into profits

Business models make assumptions on revenue and cost

Based on the assumptions, the management will decide:

The mechanisms and manner by which value is to be captured

Which technologies and features are to be embedded in the product and service

The way in which technologies are to be assembled

The identity of market segments to be targeted

How the revenue and cost structure of a business is to be designed to meet customer needs

Skype and Linked have thrived using the “feemium” model. Get a large user based with free shit and

introduce paid options.

Success of business model focuses on

Understand your potential customers and their needs

Analyze your operations and make sure that you can deliver what the customers want

(effectiveness) and when they want it (timeliness) at a reasonable cost (efficiency)

A business model defines how an enterprise interacts with its environment to define a unique strategy,

attract the resources and build the capacities to execute it, and in the process, create value for all

stakeholders

A successful business model aligns an organization with its environment

Wal-Mart uses the discount-retailing business model (idea of applying supermarket logic)

How did Sam Walton the founder of Walmart made it unique?

Chose to target a different group of customers (small towns). Customers would then shop

locally instead of going to the retailers in metropolitan areas

Everyday low prices

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Document Summary

Economic value added (eva), market value added, return on invested capital, and. Tobin"s q specifies the firm"s market value as a multiple of the replacement cost of its assets. E. g. a firm with asset worth ,000 and the market value of the firm is ,000, this means that the firm has been able to generate value from its assets and achieve above normal performance. A value of tobin"s q above 1. 0 indicates (positive) economic profits; has competitive edge. Outlines how to deliver value to customer and turn payments into profits. Business models make assumptions on revenue and cost. Based on the assumptions, the management will decide: The mechanisms and manner by which value is to be captured. Which technologies and features are to be embedded in the product and service. The way in which technologies are to be assembled. The identity of market segments to be targeted.

Related Questions

Although the founders of Friendsâ had never even considered selling their business, they were caught completely off guard when a hospital approached them about buying the entire operation. In the surprise call, the hospital president let Betty and Joan know that he would buy them outright now for $400,000, and furthermore, he wanted the founders to stay on with the business. The hospital would provide the founders a guaranteed two-year management contract at $90,000 per year per person, plus 15 percent of the yearly profits during those two years. The hospital president presented this deal to the founders of Friendsâ claiming that the total package was worth approximately $800,000 (assuming that profits grew respectably), which he claimed was the value of the business right now. The resulting conversation among the two partners focused on three critical issues. First, should they even consider selling the business at this point? Second, if they did consider selling, what would be a reasonable price for the business? Third, what were their personal long-term goals, and did this offer get them closer to those goals?

To consider these questions, Betty and Joan had to figure out how much the business was worth. For advice, they approached a friend who had worked in mergers and acquisitions (M&As) as a consultant to manufacturers, and he suggested that the real value of a business was simply the market value of the assets of the firm plus a premium (which he referred to as goodwill), which represented the future value of the firm. He suggested that many M&A deals pay a 20 percent premium above the market value of an established public Âbusiness. Using this calculation, the founders estimated that the business was worth $180,000 ($150,000 in equity capital and equipment plus 20 percent). However, this number did not seem to account for the potential of the business, and in any case, was substantially less than what the hospital had offered.

The founders contacted two members of their board of advisors and asked for their advice. They quickly discounted the friendâs advice regarding M&As as not applicable to a services business. They told the founders to forecast net cash flow for the next five years (five years was chosen as a reasonable return period) and then discount that number back to the present time using a reasonable discount rate for risky newer ventures (say, 20 percent). So, the founders estimated net cash flow for the next five years as follows:

Year 1 $94,296	5-Year Total Earnings $322,159
Year 2 $15,075	Discount Rate @ 20% 2.488
Year 3 $102,305	322,159/2.488â=â$129,485
Year 4 $132,066
Year 5 $167,009

Questions

1. What do you think is a fair value for this firm?

2. Assuming that a fair value can be calculated, should the founders sell the firm at this point? Why or why not?1.

plumzebra20

The study of finance consists of the following interrelated area(s):

a) Financial markets and institutions

b) Financial services

c) Investments

d) Managerial (business finance)

e) All of the above

The liquidity asset is one that can be easily converted to __________ without significant loss of its original value.

a) Bonds

b) Cash

c) Gold

d) Liquid

e) Silver

A goal of financial intermediaries is to improve the economic well-being. Other benefits include:

a) Diversification (risk)

b) Financial flexibility

c) Funds divisibility/pooling

d) Reduced costs

e) Related services

f) All of the above

4.____________ represents the current value of some future amount.

a)Assumed value

b)Future value

c)Present value

d)Zero value

The cost of money (interest rates) is based on (1) the rate of return that borrowers expect to earn on their investments, (2) saversâ preferences to spend income in the current period rather than delay consumption until some future period, _____________________________, and (4) expected inflation.

a) the level of economic activity

b) the risks associated with investments/loans

c) the trade deficit

d) the yield, or return that is earned on an investment

6.Short-term debt includes all of the following EXCEPT:

a)Bankerâs Acceptances

b)Certificates of Deposits (CDâs)

c)Commercial Paper

d)Eurodollar Deposits

e)Federal Funds

f)Government Bonds

g)Money Market Mutual Funds

h)Repurchase Agreements (Repos)

i)Treasury Bills (T-bills)

7.Common stockholders are usually referred to as the owners of the firm because investors in common stock have certain rights and privileges generally associated with ________________.

a)Contracts

b)Income stocks

c)Property ownership

d)Treaties

8.The concept of reducing the stand-alone risk of an individual investment by combining it with other investments to form a portfolio is called ______________.

a)Correlation coefficient

b)Diversification

c)Realized rate of return

d)Risk aversion

9.A _____________ is defined as the cash flows that could be generated from assets the firm already owns if they are not used for the project in question.

a)Balance Sheet

b)Budget

c)Income Statement

d)Opportunity Cost

e)Sunk Cost

To determine its required rate of return, the firm must compute the cost of each source of funds of capital that investors provide; that is, the firm must compute the ___________, the cost of preferred stock, the cost of retained earnings, and the cost of new common equity.

a) Cost of debt

b) Cost of equity

c) Cost of living

d) Cost of unemployment

ivorybat714

1. A discount factor:

A. Is the same as compounding future cash flow B. performs the reverse function of a compounding interest rate C. allows investors to quantify a figure which will assist them in comparing alternative investments D. b and c E. a, b and c

2. As the interest rate used to discount future cash flows is decreased present value of the future cash in-flows: A. increases B. decreases C. stays the same

3. Most bonds pay interest: A. monthly B. quarterly C. semi-annually D. annually E. none of the above

4. How much money will Jane have in 3 years if the money compounds at the annual rate of 10% and she sets aside $1000: A. $1300 B. $1331 C. $1406 D. $1420 E. None of the above

5. When performing sensitivity analysis:

A statistical methods should not be employed B. electronic spreadsheets make the job more manageable C. assumptions should be changed one at a time D. all of the above E. B and C

6. A differential analysis: A. can be used to compare an alternative to the status quo B. can be used to compare any set of alternative C. is easier to comprehend if a consistent frame of reference is employed D. B and C E. A, B, C

7. When projected assets are less than projected liabilities and equity the firm will have:

A a need for debt B. need for equity C. excess cash D. none of the above

8. If the bonds coupon rate is less than the general interest rate in the market the bond will sell at:

A premium B. discount C. neither A or B

9. Present value calculations: A. can help the creation of value B. can provide managers with a means of identifying the investment choices C. do not help the creation of value D. A and B E. B and C

10. When projected assets are more than projected liabilities and equity the plug will be:

A notes payable B. notes receivable C. cash D. none of the above

11. Earl is saving for a pair of jet skis, how much money must Earl put aside now to receive $14,000 six years from now if the money is compounding at an 8% annual compound rate:

A $8847 B. $8800 C. $8822 D. $8810 E. none of the above

12. Which of the following methods helps to size the investments: a. payback b. present value payback c. present value index d. irr e. none of the above

13. Jones company acquires the Mathis company. Jones is in a totally unrelated business to mathis. This is an example of: a. vertical integration b. horizontal integration c. diversification d. none of the above

14. The bondâs yield to maturity calculation is similar to a __________ calculation

a. NPV b. IRR c. payback d. discounted payback e. none of the above

15. If the bonds coupon rate is equal to the general interest rates in the market, the bond will sell at a: a. premium b. discount c. neither A nor B

16. synergy may result from: a. enhanced cash flow b. diversification c.excess cash d. all of the above

17. profit margin and asset turnover are combined to yield: a. EPS b.Payout c. ROA d.ROE e. none of the above

18. the ______matches revenues with expense for the entire accounting period: a, balance sheet b. cash flow statement c. statement of retained earnings d. income statement e. none of the above

19. which of the following would be included amoung the investment numbers of a capital budget? A. purchase price of the asset b. trade-in value of and asset being replaced c. investment tax credit from acquisition d. installation costs of the machinery e. all of the above

20. economic value is the same as: a. book value/net asset value b. owners equity c. none of the above

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AFM241 Study Guide - Midterm Guide: Customer Switching, Freemium, Bargaining Power

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