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Chapter 12
Products can be classified as:
1. Convenience products: Purchased frequently, such as milk, soda, newspaper
2. Shoppingproducts:Notpurchasedfrequently.Consumerscompare thepricesbeforetheybuy
it. Such as furniture and appliance
3. Specialty products: Need special effort to purchase. Based on personal experience, not an
comparative things. Such as Iphone, rolex, jaguar
Product line:Relatedproductsofferbysinglefirm.Suchascoke,Dietcoke,andsprite,are the product
line at The Coca-Cola Company.
Product mix: Most firms tend to expand their product mix to identify customer needs. Such as
Amazon.com originally focused on selling books. Then they add up electronics, toys, music, etc.
Advances in technology have enabled firms to improve their convenience and products. Such as
buying ticket online, book, etc.
Product life cycle:
1. Introduction: Introduce the product and make sure that consumers aware about it.
Price skimming: Settingahighprice fora productif no othercompetingproductsinthe same market
2. Growth: Sales of products increase rapidly.
The price of the product may be lowered once they enter the market
3. Maturity: Competing products have entered the market and sales of the products level off
because of the increased competition
Anticipation: Giving discount, change product design
4. Decline: Sales of a product decline. Either because of reduced consumer demand or the
increased competition in the market.
Marketing efforts are usually targeted toward a particular target market, which is a group of
individuals or organizations with similar traits who may purchase a particular product.
Target market is classified as:
1. Consumer market: Exist for various product and service, such as camera, clothes
2. Industrial market: What industry needs, such as plastic, steel
Some products (such as tires) can serve consumer markets or industrial markets
Factors that affect consumer preferences and affect the target market:
1. Demographics: characteristics of the human population
2. Geography: Surfboards to Bali
3. Economicfactors: Duringa recessionaryperiod,the demandformosttypesof goodsdeclines.
When the economy becomes stronger, firms have more flexibility to raise prices
4. Social values:the demandforcigarettesandwhiskeyhasdeclinedasconsumershavebecome
more aware of the dangers to health from using these products.
E-marketing refers to the use of the Internet to execute the design, pricing, distribution, and
promotion of products.
E-marketing is part of e-commerce, which is the use of electronic technologyto conduct business
transactions
Most new products are simply improvements of existing products. Existing products become
obsolete, or less useful than in the past, because:
1. fashion obsolescence
2. technological obsolescence
Many firms prefer to make product decisions that are more innovative than those of their
competitors. To obtain more insight on what consumers want, firms use marketing research, which
is the accumulation and analysis of data in order to make a particular marketing decision.
A key to developing or improving new products is to receive feedback on existing or experimental
products. Many firms rely on e-marketing to support their product development.
Firms can use the Internet for marketing research in several ways, such as:
1. comment from customer throughout email
2. contact customer to give feedback
3. send out samples of an experimental product to customers
Firms invest funds in research and development (R&D) to design new products or to improve the
products theyalreadyproduce. To protect theirideas,firmsapplyfor patents, whichallow exclusive
rights to the production and sale of a specific product.
Negative of patent:
1. quite tedious and may require a 20- to 40-page description of the product
2. Expensive
Steps to create new products:
1. Developproductidea:As firmsattempttoimprove existingproductsorcreate new products,
theymustdetermine whatwillsatisfycustomers,suchassurvey.Or customer’s information
2. Access the feasibility of the product idea: by estimating the costs and benefits
3. Design and test the product
4. Distribute and promote the product: through various marketing techniques
5. Post-auditthe product: the actual costsandbenefitsshouldbe measuredandcomparedwith
the costs and benefits that were forecasted earlier
Product differentiation is the effort of a firm to distinguish its product from competitors’ products
Methods used to differentiate the product:
1. Product design
2. Packaging
3. Branding
A trademark is a brand’s form of identificationthat is legally protected from use by other firms. For
example, “Coke” is often used to refer to any cola drink
Family branding is the branding of all or most products produced by a company, such as The Coca-
Cola Company sells Coca-Cola, Diet Coke
individual branding assign a unique brand name to different products or groups of products. For
example, Procter & Gamble produces Tide, Bold, and Era.
Products can be classified as:
1. Producer brand: reflect the manufacturer of the products. These brands are usually well
known because they are sold to retail stores nationwide
2. Store brand: reflectthe retail store where the productsare sold. Store brandproductsdonot
have as much prestige aspopularproducerbrands;however,theyoften have a lower price.
3. Generic brand: products that are not branded by the producer or the store
co-branding, in which firms agree to offer a combination of two noncompeting products at a
discounted price. For example, collaboration between ovo and grab. Customers will get discount if
they use ovo for the transaction
Firms set the prices of their products by considering the following:
1. Cost of production
cost-based pricing: estimating the per-unit cost of producing a product and then adding a markup
2. Supply of inventory
Most manufacturers and retailers tend to reduce prices if they need to reduce their inventory.
3. Competitors’ prices
Firms commonly consider the prices of competitors when determining the prices of their products.
They can use various pricing strategies to compete against other products
a. Penetrationpricing:the strategyof settingalowerprice thanthose of competingproductsto
penetrate a market
price-elastic: the demand for a product is highly responsive to price changes
price-inelastic: the demand for a product is not very responsive to price change
b. Defensive pricing:the strategyof reducinga product’sprice todefend(retain) market share
predatory pricing: the strategy of lowering a product’s price to drive out new competitors
c. prestige pricing: the strategy of using a higher price for a product that is intended to have a
top-of-the-line image
fixedcosts: operatingexpensesthatdonotchange inresponse tothe numberof products produced
variable costs: costsoperatingexpensesthatvarydirectlywiththe numberof productsproducedthat
vary with the quantity produced
The break-even point is the quantity of units at which total revenue equals total cost.
contribution margin: the difference between price and variable cost per unit
In addition to setting the price of a product, firms must decide whether to offer:
1. Discounting
2. Sales prices
For example,retail stores tend to put some of their products on sale in any given week. This
strategynot onlyattractscustomerswhomay have beenunwillingtopurchase those productsat
the full price, but it also encourages them to buy other products while they are at the store.
3. Credit terms
Chapter 13
Direct channel: the situation when a producer of a product deals directly withcustomers.Example:
Land’s End that produces clothing and sells some clothing directly to customers
PRODUCER - > CUSTOMER
Advantage of direct channel:
1. When manufacturers sell directly to customers, they have full control over the price to be
charged to the consumer. Conversely, when they sell their products to marketing
intermediaries, they do not control the prices charged to consumers.
Marketingintermediaries:firmsthatparticipate inmovingthe productfromthe producertowardthe
customer
2. the producer can easily obtain firsthand feedback on the product
Disadvantage of direct channel:
1. Company needs more employees to avoid intermediaries
2. More expenses to promote
3. the manufacturermayhave to sell its products on credit whensellingtocustomersdirectly.
By selling to intermediaries, it may not have to provide credit.
One level channel: one marketing intermediary is betweenthe producer and the customer. Some
marketing intermediaries (called merchants) become owners of the products and then resell them.
For example,wholesalersactasmerchantsbypurchasingproductsinbulkandresellingthemtoother
firms.
PRODUCER -> RETAILER - > CUSTOMER
Other marketing intermediaries, called agents, match buyers and sellers of products without
becoming owners.
Two level channel: two marketing intermediaries are between the producer and the customer
PRODUCER -> WHOLESALER - > RETAILER - > CUSTOMER
Whenfirms can avoid a marketingintermediary,theymaybe able to earn a higherprofit perunit
on theirproducts,buttheywill likely sell asmallerquantityunlesstheyuse othermarketing
strategies.
Factors That Determine the Optimal Channel of Distribution:
1. Ease of transporting: If a product can be easilytransported,the distributionchannel ismore
likely to involve intermediaries. If the product cannot be transported, the producer may
attempt to sell directly to consumers.
2. Degree of standardization: Products that are standardized are more likely to involve
intermediaries. When specifications are unique for each consumer, the producer must deal
directly with consumers.
3. Internet orders: Firmsthat fill ordersover the Internettendto use a directchannel because
their website serves as a substitute for a retail store
Any firm that uses a marketing intermediary must determine a plan for market coverage, or the
degree of product distribution among outlets, can be classified as:
1. Intensive distribution:isusedtodistributeaproduct acrossmostorall possible outlets.Firms
that use intensivedistribution ensure that consumers will have easy access to the product.
+ Easy access
- Many outlet will not accept some products if consumers are unlikely to purchase
2. Selective distribution: the distribution of a product through selected outlets. Such as
computer only sold at computer outlet
+ Being sold if there is a demand for the products or employees have the expertise to sell it
-products are not accessible
3. Exclusive distribution: the distribution of a product through only one or a few outlets. Such
as luxury items
+ Prestigious products
-limited customers
Marketing research can help a firm determine the optimal type of coverage by identifying where
consumers desire to purchase products or services.
transportation used to distribute products:
1. Truck: they can reach any destination on land (for short distance)
2. Rail: useful for heavy products (for long distance)
3. Air: relatively inexpensive for light items such as computer chips and jewelry. For a large
amount of heavy products such as steel or wood, truck or rail is a better alternative
4. Water: For some coastal or port locations
5. Pipeline: For products such as oil and gas, but limited for a few products
Negative effects of lengthy distribution
1. Will take longer to reach the customer
2. will alsoresultinalengthyperiodfromthe timethe firminvestsfundstoproduce the product
until it receives revenue from the sale of the product.
Streamline the channel of distribution (so that the final product reaches customers more quickly)
 PREVIOUS ( Distribution center - > Regional warehouse -> Customer)
 RESTRUCTURED (Distribution center - > Customer)
Electronic business has streamlined the distribution by providing information on websites so that
customers can compare prices and quality of products. When firms sell their products directly to
customers without using retail stores, they can improve their efficiency. They may be able to sell
their product at a lower price as a result
the distributionof products relieson production. If any step inthe productionprocessbreaksdown
and lengthens the production period, products will not be distributed on a timely basis.
Retailers serve as valuable intermediaries by distributing products directly to customers
Most retailers can be described by the following characteristics:
1. Number of outlets: An independent retail store has only one outlet, whereas a chain has
more than one outlet
2. Quality of service: A full-service retail store generally offers much sales assistance to
customersandprovidesservicingif needed,suchaselectronicstore. A selfserviceretail store
does not provide sales assistance or service and sells products that do not require much
expertise, such as supermarket.
3. Varietyofproducts offered:A specialtyretail store specializesinaparticulartype of product,
such as sporting goods, furniture. A variety retail store offers numerous types of goods,
including clothes, household appliances
+ specialty store: Prestige
-specialty store: not as convenient for customer
4. Store vs non store: types of non store retailers are mail-order retailers (receives orders
throughthe mail or overthe phone), websites(the firmdoesnothave to sendout catalogs),
and vending machines (often accessible at all hours)
Wholesalers are intermediaries that purchase products from manufacturers and sell them to
retailers
Wholesalers offer five key services to manufacturers:
1. Warehousing: Wholesalers purchase products from the manufacturer in bulk and maintain
these products at theirown warehouses.Thus,manufacturersdonot needto use theirown
space to store the products
2. Sales expertise: Once a wholesaler persuades retailers to purchase a product, it will
periodicallycontactthe retailersto determine whetherthey needto purchase more of that
product
3. Deliverytoretailers:Wholesalersare responsiblefordeliveringproducts tovariousretailers.
Therefore, manufacturers do not need to be concerned with numerous deliveries. Instead,
they can deliver in bulk to wholesalers.
4. Assumption to credit risk: When the wholesaler purchases the products from the
manufacturer andsellsthemtoretailersoncredit.The manufacturerdoesnotneedtoworry
about the credit risk of the retailers
5. Information: Wholesalers often receive feedback from retailers and can provide valuable
information to manufacturers
Wholesalers offer five key services to retailers:
1. Warehousing:Wholesalers maymaintainsufficientinventorysothatretailerscanordersmall
amounts frequently
2. Promotion:Wholesalerssometimespromote theirproducts,andthese effortsmayincrease
the sales of those products by retail stores
3. Display: Some wholesalers setupa displayof the products for the retailers.The displaysare
often designed to attract customers’ attention but take up little space
4. Credit: Wholesalers sometimes offer products to retailers on credit
5. Information: Wholesalerscan informretailersaboutpoliciesimplementedbyotherretailers
regardingthe pricingof products,special sales,orchangesinthe hourstheirstoresare open.
Some firmsuse vertical channel integration,inwhichtwoor more levelsof distributionare managed
by a single firm. This strategy can be used by:
1. Manufacture: Manufacturersmaydecidetoverticallyintegratetheiroperationsbyestablishing
retail stores
2. Retailer: a retailer may consider producing its own products
Chapter 14
Promotion:the actof informingorremindingconsumersaboutaspecificproductorbrand.Promotion
can alsoremindconsumersthat the productexists.Promotionmayalsobe usedona long-termbasis
to protect a product’s image and retain its market share.
The promotion mix isthe combinationof promotionmethodsthatafirmusesto increase acceptance
of its products. The four methods of promotion are:
1. Advertising:is a nonpersonal salespresentationcommunicatedthroughmediaornonmedia
forms to influence a large number of consumers.
Brand advertising is a nonpersonal sales presentation about a specific brand.
Comparative advertising is intended to persuade customers to purchase a specific product by
demonstrating a brand’s superiority by comparison with other competing brands.
Reminderadvertisingisintendedtoremindconsumersof aproduct’sexistence.Itiscommonlyused
for products that have already proved successful and are at the maturity stage of their life cycle.
Institutional advertising is a nonpersonal sales presentation about a specific institution. (such as
Toyota, Daihatsu)
Industry advertising is a nonpersonal sales presentation about a specific industry. (such as milk,
mango)
Types of adv:
a. Newspaper: for local customer
b. Magazine: for nationwide
c. Radio: for local customer. Plus there is music or other content on radio that can attract the
customer
d. Television:Audiovisual,expensive.Infomercials,orcommercialsthatare televisedseparately
rather than within a show. Infomercials typically run for 30 minutes or longer and provide
detailed information about a specific product promoted by the firm. For local/national
e. Internet: For national
f. E-mail: Many firms send e-mail messages to their customers to promote products. For
national
g. Direct mail: For national/local
h. Telemarketing: uses the telephone for promoting and selling products. For local
i. Outdoor ads: are shown on billboards and signs. For local
j. Transportation ads: are often displayed on forms of transportation, such as buses and the
roofs of taxi cabs. For local
k. Specialty Ads:, such as T-shirts, hats, and bumper stickers. For local/national
2. Personal selling:isa personal salespresentation usedto influence one or more consumers.
Personal selling is commonlyused to sell expensive products, especially when the products
require personal service for customers.
Salespeople performs the following steps:
 Identify the target market
 Contact potential customer
 Make the sales presentation
 Answer question
 Close the sale
 Follow up
sales manager: an individual who manages a group of sales representatives
3. Sales promotion: is the set of activities that is intended to influence consumers. Sales
promotion strategies:
a. Rebates: is a potential refund by the manufacturer to the consumer. When manufacturers
desire to increase product demand, they may offer rebates rather than lowering the price
charged to the retail store.
b. Coupons: a promotional device used in newspapers, magazines, and ads to encourage the
purchase of a product
c. Sampling: offeringfree samplestoencourage consumersto try a new brand or product.the
free sample is intended to achieve brand loyalty, or the loyalty of consumers to a specific
brand over time.
d. Displays: Products are placed in a prominent area in stores.
e. Premiums:Gifts or prizes are provided free to consumers who purchase a specific product.
4. Public relations: actions taken with the goal of creating or maintaining a favorable public
image
types of public relations strategies:
a. Special events
b. Newsreleases:abrief writtenannouncementaboutafirmprovidedbythatfirmtothe media
c. Press conferences: an oral announcement about a firm provided by that firm to the media
Firms must consider the characteristics of their target market and their promotion budget when
determining the optimal promotion mix
1. Target market
pull strategy:firmsdirecttheirpromotiondirectlyatthe targetmarket,andconsumersinturn
request the product from wholesalers or producers
push strategy: producersdirecttheirpromotionof aproductat wholesalersorretailers,who
in turn promote it to consumers
2. promotion budget: the amount of funds that have been set aside to pay for all promotion
methods over a specified period
The promotion budget for a specific product is influenced by the following characteristics:
a. Phase of the product life cycle:
Introduction: to inform the customer (many promotions)
In growth: To inform and remind
Maturity/decline: to remind (not that much)
b. Competition: Kalo banyak yang iklan, kita jadi pen iklan biar bertahan di pasaran
c. Eco condition
Chapter 15
Firms use accounting to report their financial condition, support decisions, and control business
operations
1. Reporting: One accounting task is to report accurate financial data. Bookkeeping is the
recording of a firm’s financial transactions. Firms are required to periodically report their
revenue,expenses,andearningstothe Internal Revenue Service (IRS) sothat theirtaxescan
be determined. The type of accounting performed for reporting purposes is called financial
accounting.
Publiclyownedfirmsare requiredto periodicallyreporttheirfinancialcondition forinvestorswho
either already own the firm’s stock or may purchase it in the future.
If theyconclude that the price of the stock will rise substantiallyinthe future,they maybuy the
stock. If the financial statements indicate that the firm has performed poorly, investors will not
buy the firm’s stock, and existing shareholders may decide to sell their stock.
Firms also report their financial condition to existing and prospective creditors. The creditors
assess firms’ financial statements to determine the probability that the firms will default on
loans.
Creditorsthat considerproviding short-termloans assessfinancial statementsto determine the
firm’s liquidity(abilityto sell existingassets). Creditorsthat considerproviding long-termloans
may assess the financial statements to determine whether the firm is capable of generating
sufficientincomeinfutureyearstomake interestandprincipal paymentsonthe loan far intothe
future.
2. Decision support: For example, a firm’s financial managers may use historical revenue and
cost information for budgeting decisions. The type of accounting performed to provide
information to help managers make decisions is referred to as managerial accounting.
3. Control: by providing information to support decisions, managerial accounting helps
managers maintain control. By reviewing financial information, managers monitor the
performance of individuals,divisions,andproducts. Anotheraccountingtaskusedforcontrol
is auditing, which is an assessment of the records that were used to prepare the firm’s
financial statements.Internal auditorsspecializein evaluatingvariousdivisionswithinafirm
to ensure that they are operating efficiently.
Private accountants provide accounting services for the firms where they are employed. Although
they usually have an accounting degree, they do not have to be certified.
Publicaccountants provide accountingservicesforavarietyof firms fora fee.Alicense isrequired to
practice public accounting. Accountants who meet specific educational requirements and pass a
national examination are referred to as certified public accountants (CPAs).
Publicly traded firms are required to have their annual financial reports audited by an independent
accounting firm of public accountants, known as an independent auditor. The auditor’s role is to
certifythatthe financial reports are accurate andwithinthe generallyacceptedreportingguidelines.
a firm’s board of directors representsthe shareholders,itcantry to preventthe firm from providing
misleadingfinancial reports. However,some boards do not effectively represent the stockholders.
the most important regulatory changes to ensure accurate financial disclosure are the result of the
Sarbanes-Oxley Act of 2002.
The most important financial statements are the income statement and the balance sheet.
1. The income statementindicatesthe firm’srevenue,costs,andearningsoveraperiodof time
(such as a quarter or year)
Net sales reflect the total sales adjusted for any discounts. Cost of goods sold is the cost of the
materialsusedtoproduce the goodsthat were sold. Gross profit is equal to netsalesminusthe cost
of goodssold. Operating expenses are composed of sellingexpenses andgeneral andadministrative
expenses
earnings before interest and taxes (EBIT) is gross profit minus operating expenses. Earnings before
taxes earningsbefore interestandtaxesminusinterestexpenses.Netincome (earningsafter taxes)
earnings before taxes minus taxes
2. The balance sheetreportsthe bookvalueof all thefirm’sassets,liabilities,andowner’sequity
at a given point in time.
Anything owned by a firm is an asset. Anything owed by a firm is a liability.
Basic accounting equation Assets = Liabilities + Owner’s Equity
current assets:assetthat will be convertedintocashwithinone year.Fixedassets:assetsthatwillbe
usedbya firm formore than one year. Depreciation:areductioninthe value of fixedassetstoreflect
deteriorationin the assets over time. Accounts payable: money owed by a firm for the purchase of
materials.Notespayable:short-termloanstoafirmmade bycreditorssuchasbanks.Owner’sequity:
includesthe par(or stated) value of all common stock issued,additional paid-incapital,andretained
earnings
A firm’s financial managers can use the financial statements to assess the financial condition of the
firm. Animportantpartof thisassessmentis ratioanalysis,anevaluationof therelationshipsbetween
financial statement variables. Firms can assess their financial characteristics by comparing their
financial ratios with those of other firms in the same industry.
Financial ratios are commonly classifiedaccordingtothe characteristicstheymeasure.These include
the following:
1. Measuresofliquidity:Liquidityreferstoafirm’sabilitytomeetshort-termobligations.A high
degree of liquidity can enhance the firm’s safety, but an excessive degree of liquidity can
reduce the firm’s return.
2. Measuresof efficiency:Efficiencyratiosmeasure howefficientlyafirm manages its assets.
3. Measuresoffinancial leverage:Financial leverage representsthe degreeto whichafirm uses
borrowed funds to finance its assets. Firms that borrow a large proportion of their funds
have a high degree of financial leverage.
Debt-to-EquityRatio: A measure of the amount of long-termfinancingprovidedbydebtrelative
to equity
Timesinterestearnedratio measuresthe abilityof afirm to coveritsinterestpayments
4. Measuresof profitability
Netprofit margin: a measure of netincome as a percentage of sales
Return on assets (ROA) measuresa firm’snetincome as a percentage of the total amountof
assetsutilizedbythe firm
Return on equity(ROE) measuresthe returntothe commonstockholders(netincome) asa
percentage of theirinvestmentinthe firm;earningsasa proportionof the firm’sequity
Ratio analysisisusefulfordetectingafirm’sstrengthsandweaknesses.Nevertheless,ithas some
limitations, which can result in misleading conclusions, such as comparing some firms with an
industry average can be difficult because the firms operate in more than one industry.
Chapter 16
Debt financing: the act of borrowingfunds.The interestmustbe paidonthe loan.The higherthe
interestpaidina givenmonth,the higher are the firm’s expenses, and the lower are its profits.
The common methods of debt financing:
1. Borrowing from financial institutions
Commercial banksare the biggestlenderstobusinesses.Theyare knownfortheirlow loanrates
and their useful advice to businesses that borrow from them. Before a commercial bank will
provide a loan, however, it will want to be certain that the business is capable of generating
enough cash each month to cover its loan payments.
Firms that need to borrow may be asked to pledge a portion of their assets as collateral to back
the loan. The rate of interesttypicallychargedonloanstothemostcreditworthyfirmsthatborrow
is called the prime rate.
When firms need funds, they must choose between a fixed-rate loan and a floating-rate loan.
Firms that expect interest rates to rise consistently over the five-year periodwill prefer a fixed-
rate loansothattheycan avoidthe upwardadjustmentsonafloating-rate loan.Firmsthatexpect
interestratestodeclineorremainstable overthe five-yearperiodwill preferafloating-rate loan.
Several differenttypesofbusinessloans are
 to support ongoingbusinessoperations
 term loan, whichisusedto finance the purchase of fixedassetssuchas machinery.The
maturityona termloanis typicallybetween3and 10 years.
 line of credit,whichallowsthe firmto borrow up to a specifiedamountof moneywithina
specifiedperiodof time.
The Small BusinessAdministration(SBA) backsloansprovidedbylenderstosmall businesses
undervariousprograms.Whena loanis backedbythe SBA, a financial institutionismore willing
to lendbecause itislessexposedtothe riskthat the businesswill be unable torepaythe loan.
2. Issuing bonds: long-term debt securities (IOUs) purchased by investors.
Some large firmsprefertoissue bondsratherthanobtainloansfromfinancialinstitutionsbecause
the interestrate maybe lower. Bondholdersare creditors,notowners,of the firmthatissuedthe
bonds.
The par value of a bond is the amount that the bondholders receive at maturity. When a firm
planstoissue bonds,itcreatesan indenture,whichisalegal documentthatexplainsitsobligations
to bondholders. Secured bonds are backed by collateral, whereas unsecured bonds are not
backed by collateral. The indenture also states whether the bonds have a call feature, which
provides the issuing firm with the right to repurchase the bonds before maturity.
The interestrate paidon bonds isinfluencednotonlyby prevailinginterestratesbut alsoby the
issuing firm’s risk level. Firms that have more risk of default must provide higher interest to
bondholders to compensate for the risk involved.
Bondholders may attempt to limit the risk of default by enforcing protective covenants, which
are restrictionsimposedonspecificfinancial policiesof the firm.The purpose of these covenants
istoensure thatmanagers donotmake decisionsthatcouldincrease the firm’srisk andtherefore
increase the probabilityof default.Forexample,some protective covenantsmay restrictthe firm
from borrowing beyond some specified debt limit until the existing bonds are paid off.
3. Issuingcommercial paper:short-termdebtsecuritynormallyissuedbyfirmsingoodfinancial
condition. The issuance of commercial paper is an alternative to obtain loans directly from
financial institutions.
4. Impact of the debt financing level on interest expenses: When firms borrow money
excessively, they have large annual interest payments that are difficult to cover
5. Common Creditors That Provide Debt Financing
 Commercial banksobtaindepositsfromindividualsanduse thefundsprimarilytoprovide
business loans.
 Savingsinstitutions (alsocalled“thriftinstitutions”)alsoobtaindepositsfromindividuals
and use some of the deposited funds to provide business loans. Although savings
institutions lendmostof theirfunds to individuals whoneedmortgage loans,theyhave
increased their amount of business loans in recent years.
 Finance companies typicallyobtainfundsbyissuingdebtsecurities(IOUs)and lendmost
of their funds to firms. In general, finance companies tend to focus on loans to less
establishedfirmsthat have a higherriskof loandefault.The finance companiescharge a
higher rate of interest on these loans to compensate for the higher degree of risk.
 Pension funds receive employee and firm contributions toward pensions and invest the
proceeds for the employees until the funds are needed. They commonly invest part of
their funds in bonds issued by firms
 insurance companies receive insurance premiums from selling insurance to customers
and invest the proceeds until the funds are needed to pay insurance claims
 Mutual fundsare investmentcompaniesthatreceivefundsfromindividualinvestors.the
mutual funds pool the amounts and invest them in securities. Mutual funds can be
classified by the type of investments that they make. Some mutual funds (called bond
mutual funds) investthe fundsreceivedfrominvestorsinbondsthatare issuedbyfirms.
The common methods of equity financing (the act of receiving investment from owners) are:
1. Retaining earnings: A firm can obtain equity financing by retaining earnings rather than by
distributingthe earningstoitsowners. Dividendpolicyisthe decisionregardinghow muchof
the firm’s quarterlyearningsshouldbe retained(reinvestedinthe firm) versusdistributedas
dividends to owners.
Two characteristics that can influence the dividend policy are:
 Shareholder expectation: A firm’s shareholders may expect to receive dividends if they
have historically been receiving them. If the firm discontinues or reduces the dividend
payment, shareholders could become dissatisfied.
 Firm’s financingneeds:A firm that has no needforadditional fundsmaydistribute most
of its earnings as dividends.
2. Issuing stock: Common stock is a security that represents partial ownership of a particular
firm. Only the owners of common stock are permitted to vote on certain key matters
concerning the firm. Preferred stock is a security that represents partial ownership of a
particular firm and offers specific priorities over common stock. Preferred stockholders
normally do not have voting rights
Firmscan issue stock privatelytoa venture capital firm, whichis a firm composedof individuals
who invest in small business. These individuals act as investors in firms rather than as creditors.
They expect a share of the businesses in which they invest. Their investments typically support
projects that have potential for high returns but also have high risk.
If asmall privatelyheldbusinessdesirestoobtainadditionalfunds,itmayconsideran initialpublic
offering (IPO) of stock (also called “going public”),which is the first issue of stock to the public.
Insurance companies and pension funds commonly purchase large amounts of stocks issuedby
firms. In addition, stock mutual funds (investment companiesthat invest pooled funds received
from individual investors in stocks) purchase large amounts of stocks issued by firms.
IPOs have some disadvantages. First, firms that go public are responsible for informing
shareholders of their financial condition. Second, when a small business attempts to obtain
funding from the public, it may have difficulty convincing investors that its business plans are
feasible. Third, the firm’s ownership structure is diluted.Once shares are sold to the public, the
proportionofthe firm ownedbythe original ownersisreduced. Fourth,investmentbanks charge
high fees for advising and placing the stock with investors.
Once a firm has issued stock to the public, it lists its stock on a stock exchange. This allows the
investors to sell the stock they purchased from the firm to other investors over time.The stock
exchange servesasasecondarymarketoramarketwhere existingsecuritiescanbe tradedamong
investors. Thus, investors have the flexibility to sell stocks that they no longer wish to hold.
DEBT AND EQUITY FINANCING METHODS
A public offering of securities (such as bonds or stocks) represents the selling of securitiesto the
public. A firm that plansa publicofferingof securitiescanreceive helpfrominvestmentbanks, there
are:
1. Origination:Investmentbanks advise firmson the amountof stocksor bondstheycan issue.
2. Underwriting: When securities offerings are underwritten, the investment bank guarantees
a price to the issuing firm, no matter what price the securities are sold for. The investment
bank may attempt to sell the securities on a best-efforts basis; in this case, it does not
guarantee a price to the issuingfirm. For large issuesof securities,the investmentbankmay
create an underwriting syndicate, which is a group of investment banks that share the
obligations of underwriting the securities.
3. Distribution: The issuing firm must register the issue with the Securities and Exchange
Commission(SEC).It providesthe SEC witha prospectus,whichis a documentthat discloses
relevantfinancial informationaboutthe securities(such as the amount) and about the firm.
Some firms may preferto use a private placement,in whichthe securitiesare soldto one or
a few investors. Firms that issue securities incur flotation costs, which include fees paid to
investmentbanksforadvice andfor sellingthe securities,printingexpenses,andregistration
fees.
to debt financing and equity financing, firms may obtain funds from:
1. Financing from suppliers
2. Leasing: Some firmspreferto finance the use of assetsby leasing,or rentingthe assets for a
specified period of time. These firms rent the assets and have full control over themover a
particularperiod.Theyreturntheassetsatthe timespecifiedintheleasecontract.Manyfirms
that lease assets cannot afford to purchase them.
All firms must decide on a capital structure, or the amount of debt versus equity financing. The
use of debt (such as bank loans or bonds) as a source of funds is desirable because the interest
paymentsmade bythe firmonitsdebtare tax-deductible.A higherlevelof debtresultsinahigher
level of interest payments each year, which can make it difficult for a firm to cover all its debt
payments.
Many firms revise theircapital structure in response tochangesin economicconditions,suchas
economicgrowthandinterestrates.If economicgrowthdeclinesandtheirearningsdecline,they
mayreduce theirdebtbecauseitismore difficulttocoverinterestpayments.When interestrates
decline, firms may increase their debt because the interest payments will be relatively low.
How the Capital Structure Affects the Return on Equity
The firm’s return on equity or ROE (measured as earnings divided by owner’s equity).
Remedies for debt problem
1. Extension:If a firm is havingdifficultycoveringthe paymentsitowes,itscreditorsmayallow
an extension, which provides additional time for the firm to generate the necessary cash to
cover its payments.
2. Composition: If the failing firm and its creditors do not agree on an extension, they may
attempt to negotiate a composition agreement,which specifies that the firm will provide its
creditors with a portion of what they are owed.
3. Private liquidation: creditors may informally request that a failing firm liquidate (sell) its
assets and distribute the funds received from liquidation to them
4. Formal remedies: If creditors cannot agree to any of the informal remedies, the solutionto
the firm’s financial problems will be worked out formally in the court system. The formal
remedies are either reorganization or liquidation under bankruptcy.
Reorganization of a firm can include the terminationof some of its businesses,anincreased
focus on its other businesses, revisions of the organizational structure, and downsizing.
Liquidation value: the amount of funds that would be received as a result of the liquidation
of a firm.
Liquidation under bankruptcy: If the firm and its creditors cannot agree on some informal
agreement,andif reorganizationisnotfeasible,the firmwill file forbankruptcy. A law firmis
appointed to sell off the existing assets and allocate the funds received to the creditors.
Secured creditors are paid with the proceeds from selling off any assets serving as their
collateral.
The interestrate onfundsto be borrowedisinfluencedbythe supplyof loanable funds(providedby
depositors) and the demand for those loanable funds by borrowers.
Factors that can affect interest rates:
1. Monetary policy
2. Economic growth
3. Expected inflation
4. Saving behavior
Chapter 17
Firms continuallyevaluate potential projectsin which they may invest, such as the construction of a
new building or the purchase of a machine. They think about the capital budgeting which is a
comparisonof the costsand benefitsof aproposedprojecttodeterminewhetheritisfeasible. Firms
planacapital budget,oratargetedamountof fundstobeusedforpurchasingassetssuchasbuildings,
machinery, and equipment that are needed for long-term projects.
Interestrates determine the costof borrowedfunds.A change ininterestratescanaffectthe costof
borrowing as well as the project’s feasibility.
Classification of capital expenditures:
1. Expansionof current business: If the demandforafirm’sproductsincreases,afirminvestsin
additional assets (such as machinery or equipment) to produce a large enough volume of
products to accommodate the increased demand.
2. Development of new business: When firms expand the line of products that they produce
and sell, they need new facilities for production
3. InvestmentinAssetsThat Will Reduce Expenses:Firmsreplace oldmachinesandequipment
to capitalize on new technology, which may allow for lower expenses over time
The process of capital budgeting:
1. Proposing new projects
2. Estimating cash flows of projects
3. Determining whether projects are feasible
In some cases,the evaluationinvolvesdecidingbetweentwo projectsdesignedforthe same
purpose. When only one of the projects can be accepted, such projects are referred to as
mutuallyexclusive.Whenthe decisionof whethertoadoptone projecthasnobearingonthe
adoption of other projects, the project is said to be independent project.
4. Implementing feasible projects
5. Monitoring projects that were implemented
A firm may invest in another company by purchasingall the stock of that company. This results in a
merger, in which two firms are merged (or combined) to become a single firm owned by the same
owners (shareholders). Merger can be classified as:
1. Horizontal merger: isthe combinationof firmsthat engage inthe same typesof business. Ex:
Commercial bank
2. Vertical merger: is the combination of a firm with a potential supplier or customer
3. Conglomerate merger:isthe combinationof twofirmsinunrelatedbusinesses.Ex:Astraand
Gramedia
Corporate Motives for Mergers:
1. Immediate growth
2. Economicsofscale:Productsthatexhibiteconomiesof scalecanbe producedatamuchlower
cost per unit if a large amount is produced. A merger may allow a firm to combine two
production facilities and thereby achieve a lower production cost per unit.
3. Managerial expertise
4. Tax benefits:Firmsthatincur negative earnings(losses)are sometimesattractive candidates
for mergers because of potential tax advantages. Although the losses of the acquired firm
have occurredprior to the acquisition,theyreduce the taxableearningsof the newlymerged
corporation
When a firm plans to engage in a merger or acquisition, it must conduct:
1. Identifyingpotential mergerprospects: Firmsattempttoidentifypotential mergerprospects
that may help them achieve their strategic plan
2. Evaluate potentialmergerprospects:Once mergerprospectshave beenidentified,theymust
be analyzed thoroughly, using publicly available financial statements
3. Make the merger decision
Some firms that continuously acquire or sell businesses may employ their own investment banking
department to handle many of the necessary tasks. Most tasks can be classified into
1. Financing the merger: A merger normally requiresa substantial amountof long-term funds,
as one firmmaypurchase the existingstockof anotherfirm.Inacommonmethodof financing
a merger, a firm issues more of its own stock to the public
2. Tenderoffer: Whentwofirmscannotcome toterms,the acquiringfirmmayattemptatender
offer. This is a direct bid by the acquiring firm for the shares of the target firm.
The acquiring firm must decide the price at which it is willing to purchase the target firm’s
shares and then officially extend this tender offer to the shareholders. The tender offer
normally represents a premium of 20 percent or more above the prevailing market price,
whichmay be necessarytoencourage the shareholdersof the targetfirm to sell theirshares.
The acquiring firm can achieve control of the target firm only if enough of the target firm’s
shareholders are willing to sell.
3. Integrating the business: If a merger is achieved, various departments within the two
companies may need to be restructured
4. Post merger evaluation: After the merger, the firm should periodically assess the merger’s
costs and benefits. Were the benefits as high as expected? Did the merger involve
unanticipated costs?
In some cases, managers of a target firm may not approve of the takeover attempt by the acquiring
firm. They may view the potential acquiring firm as a shark approaching for the kill (takeover).
Defensive tactic against takeover:
1. convince shareholders to retain their shares
2. private placement of stock: By selling shares directly (privately) to specific institutions, the
target firm can reduce the acquiring firm’s chances of obtaining enough shares to gain a
controlling interest.
3. find a more suitable company (called a white knight) that is willing to acquire the firm and
rescue it from the hostile takeover efforts of some other firm.
Ina leveragedbuyout,orLBO,agroupof investors purchaseacompany(orasubsidiaryof acompany)
with borrowed funds.
A divestiture is the sale of an existing business by a firm. Firms may have several motives for
divestitures.
1. a firm may divest(sell) businessesthatare notpart of its core operations sothat it can focus
on what it does best
2. to obtain funds
Workingcapital management involves the managementofa firm’s short term assets and liabilities.
A firm’s short-termassetsinclude cash,short termsecurities,accountsreceivable,andinventory.Its
short-termliabilitiesincludeaccountspayableandshort-termloans.Workingcapital managementcan
be segmented into:
1. Liquiditymanagement:Firmsthat are liquidhave adequateaccesstofundstopay billswhen
they come due. Liquidity management involvesthe management of short-term assets and
liabilities to ensure adequate liquidity. To remain liquid, firms may maintaincash and short-
term securities.
Firms normally attempt to limit their holdingsof cash and short-term securities so that they
can use their funds for other purposes that generate higher returns. They can be liquid
without holding cash and short-term securities if theyhave easy access to borrowed funds.
Most firms have a line of credit with one or more banks, which is an agreement that allows
access to borrowed funds upon demand over some specified period
2. Account Receivable management:Accountsreceivable managementsetsthe limitsoncredit
available to customers and the length of the period in which payment is due.
3. Inventory management:Inventorymanagementdeterminesthe amountof inventorythatis
held. Managers attempt to hold just enough inventory to avoid stockouts, without tying up
funds in excess inventories

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Resume Introduction to Business 4th edition (BAB 12 - 17)

  • 1. Chapter 12 Products can be classified as: 1. Convenience products: Purchased frequently, such as milk, soda, newspaper 2. Shoppingproducts:Notpurchasedfrequently.Consumerscompare thepricesbeforetheybuy it. Such as furniture and appliance 3. Specialty products: Need special effort to purchase. Based on personal experience, not an comparative things. Such as Iphone, rolex, jaguar Product line:Relatedproductsofferbysinglefirm.Suchascoke,Dietcoke,andsprite,are the product line at The Coca-Cola Company. Product mix: Most firms tend to expand their product mix to identify customer needs. Such as Amazon.com originally focused on selling books. Then they add up electronics, toys, music, etc. Advances in technology have enabled firms to improve their convenience and products. Such as buying ticket online, book, etc. Product life cycle: 1. Introduction: Introduce the product and make sure that consumers aware about it. Price skimming: Settingahighprice fora productif no othercompetingproductsinthe same market 2. Growth: Sales of products increase rapidly. The price of the product may be lowered once they enter the market 3. Maturity: Competing products have entered the market and sales of the products level off because of the increased competition Anticipation: Giving discount, change product design 4. Decline: Sales of a product decline. Either because of reduced consumer demand or the increased competition in the market. Marketing efforts are usually targeted toward a particular target market, which is a group of individuals or organizations with similar traits who may purchase a particular product. Target market is classified as: 1. Consumer market: Exist for various product and service, such as camera, clothes 2. Industrial market: What industry needs, such as plastic, steel Some products (such as tires) can serve consumer markets or industrial markets Factors that affect consumer preferences and affect the target market: 1. Demographics: characteristics of the human population 2. Geography: Surfboards to Bali 3. Economicfactors: Duringa recessionaryperiod,the demandformosttypesof goodsdeclines. When the economy becomes stronger, firms have more flexibility to raise prices 4. Social values:the demandforcigarettesandwhiskeyhasdeclinedasconsumershavebecome more aware of the dangers to health from using these products.
  • 2. E-marketing refers to the use of the Internet to execute the design, pricing, distribution, and promotion of products. E-marketing is part of e-commerce, which is the use of electronic technologyto conduct business transactions Most new products are simply improvements of existing products. Existing products become obsolete, or less useful than in the past, because: 1. fashion obsolescence 2. technological obsolescence Many firms prefer to make product decisions that are more innovative than those of their competitors. To obtain more insight on what consumers want, firms use marketing research, which is the accumulation and analysis of data in order to make a particular marketing decision. A key to developing or improving new products is to receive feedback on existing or experimental products. Many firms rely on e-marketing to support their product development. Firms can use the Internet for marketing research in several ways, such as: 1. comment from customer throughout email 2. contact customer to give feedback 3. send out samples of an experimental product to customers Firms invest funds in research and development (R&D) to design new products or to improve the products theyalreadyproduce. To protect theirideas,firmsapplyfor patents, whichallow exclusive rights to the production and sale of a specific product. Negative of patent: 1. quite tedious and may require a 20- to 40-page description of the product 2. Expensive Steps to create new products: 1. Developproductidea:As firmsattempttoimprove existingproductsorcreate new products, theymustdetermine whatwillsatisfycustomers,suchassurvey.Or customer’s information 2. Access the feasibility of the product idea: by estimating the costs and benefits 3. Design and test the product 4. Distribute and promote the product: through various marketing techniques 5. Post-auditthe product: the actual costsandbenefitsshouldbe measuredandcomparedwith the costs and benefits that were forecasted earlier Product differentiation is the effort of a firm to distinguish its product from competitors’ products Methods used to differentiate the product: 1. Product design 2. Packaging 3. Branding A trademark is a brand’s form of identificationthat is legally protected from use by other firms. For example, “Coke” is often used to refer to any cola drink
  • 3. Family branding is the branding of all or most products produced by a company, such as The Coca- Cola Company sells Coca-Cola, Diet Coke individual branding assign a unique brand name to different products or groups of products. For example, Procter & Gamble produces Tide, Bold, and Era. Products can be classified as: 1. Producer brand: reflect the manufacturer of the products. These brands are usually well known because they are sold to retail stores nationwide 2. Store brand: reflectthe retail store where the productsare sold. Store brandproductsdonot have as much prestige aspopularproducerbrands;however,theyoften have a lower price. 3. Generic brand: products that are not branded by the producer or the store co-branding, in which firms agree to offer a combination of two noncompeting products at a discounted price. For example, collaboration between ovo and grab. Customers will get discount if they use ovo for the transaction Firms set the prices of their products by considering the following: 1. Cost of production cost-based pricing: estimating the per-unit cost of producing a product and then adding a markup 2. Supply of inventory Most manufacturers and retailers tend to reduce prices if they need to reduce their inventory. 3. Competitors’ prices Firms commonly consider the prices of competitors when determining the prices of their products. They can use various pricing strategies to compete against other products a. Penetrationpricing:the strategyof settingalowerprice thanthose of competingproductsto penetrate a market price-elastic: the demand for a product is highly responsive to price changes price-inelastic: the demand for a product is not very responsive to price change b. Defensive pricing:the strategyof reducinga product’sprice todefend(retain) market share predatory pricing: the strategy of lowering a product’s price to drive out new competitors c. prestige pricing: the strategy of using a higher price for a product that is intended to have a top-of-the-line image fixedcosts: operatingexpensesthatdonotchange inresponse tothe numberof products produced variable costs: costsoperatingexpensesthatvarydirectlywiththe numberof productsproducedthat vary with the quantity produced The break-even point is the quantity of units at which total revenue equals total cost. contribution margin: the difference between price and variable cost per unit In addition to setting the price of a product, firms must decide whether to offer:
  • 4. 1. Discounting 2. Sales prices For example,retail stores tend to put some of their products on sale in any given week. This strategynot onlyattractscustomerswhomay have beenunwillingtopurchase those productsat the full price, but it also encourages them to buy other products while they are at the store. 3. Credit terms Chapter 13 Direct channel: the situation when a producer of a product deals directly withcustomers.Example: Land’s End that produces clothing and sells some clothing directly to customers PRODUCER - > CUSTOMER Advantage of direct channel: 1. When manufacturers sell directly to customers, they have full control over the price to be charged to the consumer. Conversely, when they sell their products to marketing intermediaries, they do not control the prices charged to consumers. Marketingintermediaries:firmsthatparticipate inmovingthe productfromthe producertowardthe customer 2. the producer can easily obtain firsthand feedback on the product Disadvantage of direct channel: 1. Company needs more employees to avoid intermediaries 2. More expenses to promote 3. the manufacturermayhave to sell its products on credit whensellingtocustomersdirectly. By selling to intermediaries, it may not have to provide credit. One level channel: one marketing intermediary is betweenthe producer and the customer. Some marketing intermediaries (called merchants) become owners of the products and then resell them. For example,wholesalersactasmerchantsbypurchasingproductsinbulkandresellingthemtoother firms. PRODUCER -> RETAILER - > CUSTOMER Other marketing intermediaries, called agents, match buyers and sellers of products without becoming owners. Two level channel: two marketing intermediaries are between the producer and the customer PRODUCER -> WHOLESALER - > RETAILER - > CUSTOMER Whenfirms can avoid a marketingintermediary,theymaybe able to earn a higherprofit perunit on theirproducts,buttheywill likely sell asmallerquantityunlesstheyuse othermarketing strategies. Factors That Determine the Optimal Channel of Distribution:
  • 5. 1. Ease of transporting: If a product can be easilytransported,the distributionchannel ismore likely to involve intermediaries. If the product cannot be transported, the producer may attempt to sell directly to consumers. 2. Degree of standardization: Products that are standardized are more likely to involve intermediaries. When specifications are unique for each consumer, the producer must deal directly with consumers. 3. Internet orders: Firmsthat fill ordersover the Internettendto use a directchannel because their website serves as a substitute for a retail store Any firm that uses a marketing intermediary must determine a plan for market coverage, or the degree of product distribution among outlets, can be classified as: 1. Intensive distribution:isusedtodistributeaproduct acrossmostorall possible outlets.Firms that use intensivedistribution ensure that consumers will have easy access to the product. + Easy access - Many outlet will not accept some products if consumers are unlikely to purchase 2. Selective distribution: the distribution of a product through selected outlets. Such as computer only sold at computer outlet + Being sold if there is a demand for the products or employees have the expertise to sell it -products are not accessible 3. Exclusive distribution: the distribution of a product through only one or a few outlets. Such as luxury items + Prestigious products -limited customers Marketing research can help a firm determine the optimal type of coverage by identifying where consumers desire to purchase products or services. transportation used to distribute products: 1. Truck: they can reach any destination on land (for short distance) 2. Rail: useful for heavy products (for long distance) 3. Air: relatively inexpensive for light items such as computer chips and jewelry. For a large amount of heavy products such as steel or wood, truck or rail is a better alternative 4. Water: For some coastal or port locations 5. Pipeline: For products such as oil and gas, but limited for a few products Negative effects of lengthy distribution 1. Will take longer to reach the customer 2. will alsoresultinalengthyperiodfromthe timethe firminvestsfundstoproduce the product until it receives revenue from the sale of the product. Streamline the channel of distribution (so that the final product reaches customers more quickly)  PREVIOUS ( Distribution center - > Regional warehouse -> Customer)  RESTRUCTURED (Distribution center - > Customer)
  • 6. Electronic business has streamlined the distribution by providing information on websites so that customers can compare prices and quality of products. When firms sell their products directly to customers without using retail stores, they can improve their efficiency. They may be able to sell their product at a lower price as a result the distributionof products relieson production. If any step inthe productionprocessbreaksdown and lengthens the production period, products will not be distributed on a timely basis. Retailers serve as valuable intermediaries by distributing products directly to customers Most retailers can be described by the following characteristics: 1. Number of outlets: An independent retail store has only one outlet, whereas a chain has more than one outlet 2. Quality of service: A full-service retail store generally offers much sales assistance to customersandprovidesservicingif needed,suchaselectronicstore. A selfserviceretail store does not provide sales assistance or service and sells products that do not require much expertise, such as supermarket. 3. Varietyofproducts offered:A specialtyretail store specializesinaparticulartype of product, such as sporting goods, furniture. A variety retail store offers numerous types of goods, including clothes, household appliances + specialty store: Prestige -specialty store: not as convenient for customer 4. Store vs non store: types of non store retailers are mail-order retailers (receives orders throughthe mail or overthe phone), websites(the firmdoesnothave to sendout catalogs), and vending machines (often accessible at all hours) Wholesalers are intermediaries that purchase products from manufacturers and sell them to retailers Wholesalers offer five key services to manufacturers: 1. Warehousing: Wholesalers purchase products from the manufacturer in bulk and maintain these products at theirown warehouses.Thus,manufacturersdonot needto use theirown space to store the products 2. Sales expertise: Once a wholesaler persuades retailers to purchase a product, it will periodicallycontactthe retailersto determine whetherthey needto purchase more of that product 3. Deliverytoretailers:Wholesalersare responsiblefordeliveringproducts tovariousretailers. Therefore, manufacturers do not need to be concerned with numerous deliveries. Instead, they can deliver in bulk to wholesalers. 4. Assumption to credit risk: When the wholesaler purchases the products from the manufacturer andsellsthemtoretailersoncredit.The manufacturerdoesnotneedtoworry about the credit risk of the retailers 5. Information: Wholesalers often receive feedback from retailers and can provide valuable information to manufacturers Wholesalers offer five key services to retailers:
  • 7. 1. Warehousing:Wholesalers maymaintainsufficientinventorysothatretailerscanordersmall amounts frequently 2. Promotion:Wholesalerssometimespromote theirproducts,andthese effortsmayincrease the sales of those products by retail stores 3. Display: Some wholesalers setupa displayof the products for the retailers.The displaysare often designed to attract customers’ attention but take up little space 4. Credit: Wholesalers sometimes offer products to retailers on credit 5. Information: Wholesalerscan informretailersaboutpoliciesimplementedbyotherretailers regardingthe pricingof products,special sales,orchangesinthe hourstheirstoresare open. Some firmsuse vertical channel integration,inwhichtwoor more levelsof distributionare managed by a single firm. This strategy can be used by: 1. Manufacture: Manufacturersmaydecidetoverticallyintegratetheiroperationsbyestablishing retail stores 2. Retailer: a retailer may consider producing its own products Chapter 14 Promotion:the actof informingorremindingconsumersaboutaspecificproductorbrand.Promotion can alsoremindconsumersthat the productexists.Promotionmayalsobe usedona long-termbasis to protect a product’s image and retain its market share. The promotion mix isthe combinationof promotionmethodsthatafirmusesto increase acceptance of its products. The four methods of promotion are: 1. Advertising:is a nonpersonal salespresentationcommunicatedthroughmediaornonmedia forms to influence a large number of consumers. Brand advertising is a nonpersonal sales presentation about a specific brand. Comparative advertising is intended to persuade customers to purchase a specific product by demonstrating a brand’s superiority by comparison with other competing brands. Reminderadvertisingisintendedtoremindconsumersof aproduct’sexistence.Itiscommonlyused for products that have already proved successful and are at the maturity stage of their life cycle. Institutional advertising is a nonpersonal sales presentation about a specific institution. (such as Toyota, Daihatsu) Industry advertising is a nonpersonal sales presentation about a specific industry. (such as milk, mango) Types of adv: a. Newspaper: for local customer b. Magazine: for nationwide c. Radio: for local customer. Plus there is music or other content on radio that can attract the customer d. Television:Audiovisual,expensive.Infomercials,orcommercialsthatare televisedseparately rather than within a show. Infomercials typically run for 30 minutes or longer and provide detailed information about a specific product promoted by the firm. For local/national e. Internet: For national
  • 8. f. E-mail: Many firms send e-mail messages to their customers to promote products. For national g. Direct mail: For national/local h. Telemarketing: uses the telephone for promoting and selling products. For local i. Outdoor ads: are shown on billboards and signs. For local j. Transportation ads: are often displayed on forms of transportation, such as buses and the roofs of taxi cabs. For local k. Specialty Ads:, such as T-shirts, hats, and bumper stickers. For local/national 2. Personal selling:isa personal salespresentation usedto influence one or more consumers. Personal selling is commonlyused to sell expensive products, especially when the products require personal service for customers. Salespeople performs the following steps:  Identify the target market  Contact potential customer  Make the sales presentation  Answer question  Close the sale  Follow up sales manager: an individual who manages a group of sales representatives 3. Sales promotion: is the set of activities that is intended to influence consumers. Sales promotion strategies: a. Rebates: is a potential refund by the manufacturer to the consumer. When manufacturers desire to increase product demand, they may offer rebates rather than lowering the price charged to the retail store. b. Coupons: a promotional device used in newspapers, magazines, and ads to encourage the purchase of a product c. Sampling: offeringfree samplestoencourage consumersto try a new brand or product.the free sample is intended to achieve brand loyalty, or the loyalty of consumers to a specific brand over time. d. Displays: Products are placed in a prominent area in stores. e. Premiums:Gifts or prizes are provided free to consumers who purchase a specific product. 4. Public relations: actions taken with the goal of creating or maintaining a favorable public image types of public relations strategies: a. Special events b. Newsreleases:abrief writtenannouncementaboutafirmprovidedbythatfirmtothe media c. Press conferences: an oral announcement about a firm provided by that firm to the media Firms must consider the characteristics of their target market and their promotion budget when determining the optimal promotion mix 1. Target market
  • 9. pull strategy:firmsdirecttheirpromotiondirectlyatthe targetmarket,andconsumersinturn request the product from wholesalers or producers push strategy: producersdirecttheirpromotionof aproductat wholesalersorretailers,who in turn promote it to consumers 2. promotion budget: the amount of funds that have been set aside to pay for all promotion methods over a specified period The promotion budget for a specific product is influenced by the following characteristics: a. Phase of the product life cycle: Introduction: to inform the customer (many promotions) In growth: To inform and remind Maturity/decline: to remind (not that much) b. Competition: Kalo banyak yang iklan, kita jadi pen iklan biar bertahan di pasaran c. Eco condition Chapter 15 Firms use accounting to report their financial condition, support decisions, and control business operations 1. Reporting: One accounting task is to report accurate financial data. Bookkeeping is the recording of a firm’s financial transactions. Firms are required to periodically report their revenue,expenses,andearningstothe Internal Revenue Service (IRS) sothat theirtaxescan
  • 10. be determined. The type of accounting performed for reporting purposes is called financial accounting. Publiclyownedfirmsare requiredto periodicallyreporttheirfinancialcondition forinvestorswho either already own the firm’s stock or may purchase it in the future. If theyconclude that the price of the stock will rise substantiallyinthe future,they maybuy the stock. If the financial statements indicate that the firm has performed poorly, investors will not buy the firm’s stock, and existing shareholders may decide to sell their stock. Firms also report their financial condition to existing and prospective creditors. The creditors assess firms’ financial statements to determine the probability that the firms will default on loans. Creditorsthat considerproviding short-termloans assessfinancial statementsto determine the firm’s liquidity(abilityto sell existingassets). Creditorsthat considerproviding long-termloans may assess the financial statements to determine whether the firm is capable of generating sufficientincomeinfutureyearstomake interestandprincipal paymentsonthe loan far intothe future. 2. Decision support: For example, a firm’s financial managers may use historical revenue and cost information for budgeting decisions. The type of accounting performed to provide information to help managers make decisions is referred to as managerial accounting. 3. Control: by providing information to support decisions, managerial accounting helps managers maintain control. By reviewing financial information, managers monitor the performance of individuals,divisions,andproducts. Anotheraccountingtaskusedforcontrol is auditing, which is an assessment of the records that were used to prepare the firm’s financial statements.Internal auditorsspecializein evaluatingvariousdivisionswithinafirm to ensure that they are operating efficiently. Private accountants provide accounting services for the firms where they are employed. Although they usually have an accounting degree, they do not have to be certified. Publicaccountants provide accountingservicesforavarietyof firms fora fee.Alicense isrequired to practice public accounting. Accountants who meet specific educational requirements and pass a national examination are referred to as certified public accountants (CPAs). Publicly traded firms are required to have their annual financial reports audited by an independent accounting firm of public accountants, known as an independent auditor. The auditor’s role is to certifythatthe financial reports are accurate andwithinthe generallyacceptedreportingguidelines. a firm’s board of directors representsthe shareholders,itcantry to preventthe firm from providing misleadingfinancial reports. However,some boards do not effectively represent the stockholders. the most important regulatory changes to ensure accurate financial disclosure are the result of the Sarbanes-Oxley Act of 2002. The most important financial statements are the income statement and the balance sheet. 1. The income statementindicatesthe firm’srevenue,costs,andearningsoveraperiodof time (such as a quarter or year) Net sales reflect the total sales adjusted for any discounts. Cost of goods sold is the cost of the materialsusedtoproduce the goodsthat were sold. Gross profit is equal to netsalesminusthe cost
  • 11. of goodssold. Operating expenses are composed of sellingexpenses andgeneral andadministrative expenses earnings before interest and taxes (EBIT) is gross profit minus operating expenses. Earnings before taxes earningsbefore interestandtaxesminusinterestexpenses.Netincome (earningsafter taxes) earnings before taxes minus taxes 2. The balance sheetreportsthe bookvalueof all thefirm’sassets,liabilities,andowner’sequity at a given point in time. Anything owned by a firm is an asset. Anything owed by a firm is a liability. Basic accounting equation Assets = Liabilities + Owner’s Equity current assets:assetthat will be convertedintocashwithinone year.Fixedassets:assetsthatwillbe usedbya firm formore than one year. Depreciation:areductioninthe value of fixedassetstoreflect deteriorationin the assets over time. Accounts payable: money owed by a firm for the purchase of materials.Notespayable:short-termloanstoafirmmade bycreditorssuchasbanks.Owner’sequity: includesthe par(or stated) value of all common stock issued,additional paid-incapital,andretained earnings
  • 12. A firm’s financial managers can use the financial statements to assess the financial condition of the firm. Animportantpartof thisassessmentis ratioanalysis,anevaluationof therelationshipsbetween financial statement variables. Firms can assess their financial characteristics by comparing their financial ratios with those of other firms in the same industry. Financial ratios are commonly classifiedaccordingtothe characteristicstheymeasure.These include the following: 1. Measuresofliquidity:Liquidityreferstoafirm’sabilitytomeetshort-termobligations.A high degree of liquidity can enhance the firm’s safety, but an excessive degree of liquidity can reduce the firm’s return. 2. Measuresof efficiency:Efficiencyratiosmeasure howefficientlyafirm manages its assets. 3. Measuresoffinancial leverage:Financial leverage representsthe degreeto whichafirm uses borrowed funds to finance its assets. Firms that borrow a large proportion of their funds have a high degree of financial leverage. Debt-to-EquityRatio: A measure of the amount of long-termfinancingprovidedbydebtrelative to equity
  • 13. Timesinterestearnedratio measuresthe abilityof afirm to coveritsinterestpayments 4. Measuresof profitability Netprofit margin: a measure of netincome as a percentage of sales Return on assets (ROA) measuresa firm’snetincome as a percentage of the total amountof assetsutilizedbythe firm Return on equity(ROE) measuresthe returntothe commonstockholders(netincome) asa percentage of theirinvestmentinthe firm;earningsasa proportionof the firm’sequity
  • 14. Ratio analysisisusefulfordetectingafirm’sstrengthsandweaknesses.Nevertheless,ithas some limitations, which can result in misleading conclusions, such as comparing some firms with an industry average can be difficult because the firms operate in more than one industry. Chapter 16 Debt financing: the act of borrowingfunds.The interestmustbe paidonthe loan.The higherthe interestpaidina givenmonth,the higher are the firm’s expenses, and the lower are its profits. The common methods of debt financing: 1. Borrowing from financial institutions Commercial banksare the biggestlenderstobusinesses.Theyare knownfortheirlow loanrates and their useful advice to businesses that borrow from them. Before a commercial bank will provide a loan, however, it will want to be certain that the business is capable of generating enough cash each month to cover its loan payments. Firms that need to borrow may be asked to pledge a portion of their assets as collateral to back the loan. The rate of interesttypicallychargedonloanstothemostcreditworthyfirmsthatborrow is called the prime rate. When firms need funds, they must choose between a fixed-rate loan and a floating-rate loan. Firms that expect interest rates to rise consistently over the five-year periodwill prefer a fixed- rate loansothattheycan avoidthe upwardadjustmentsonafloating-rate loan.Firmsthatexpect interestratestodeclineorremainstable overthe five-yearperiodwill preferafloating-rate loan.
  • 15. Several differenttypesofbusinessloans are  to support ongoingbusinessoperations  term loan, whichisusedto finance the purchase of fixedassetssuchas machinery.The maturityona termloanis typicallybetween3and 10 years.  line of credit,whichallowsthe firmto borrow up to a specifiedamountof moneywithina specifiedperiodof time. The Small BusinessAdministration(SBA) backsloansprovidedbylenderstosmall businesses undervariousprograms.Whena loanis backedbythe SBA, a financial institutionismore willing to lendbecause itislessexposedtothe riskthat the businesswill be unable torepaythe loan. 2. Issuing bonds: long-term debt securities (IOUs) purchased by investors. Some large firmsprefertoissue bondsratherthanobtainloansfromfinancialinstitutionsbecause the interestrate maybe lower. Bondholdersare creditors,notowners,of the firmthatissuedthe bonds. The par value of a bond is the amount that the bondholders receive at maturity. When a firm planstoissue bonds,itcreatesan indenture,whichisalegal documentthatexplainsitsobligations to bondholders. Secured bonds are backed by collateral, whereas unsecured bonds are not backed by collateral. The indenture also states whether the bonds have a call feature, which provides the issuing firm with the right to repurchase the bonds before maturity. The interestrate paidon bonds isinfluencednotonlyby prevailinginterestratesbut alsoby the issuing firm’s risk level. Firms that have more risk of default must provide higher interest to bondholders to compensate for the risk involved. Bondholders may attempt to limit the risk of default by enforcing protective covenants, which are restrictionsimposedonspecificfinancial policiesof the firm.The purpose of these covenants istoensure thatmanagers donotmake decisionsthatcouldincrease the firm’srisk andtherefore increase the probabilityof default.Forexample,some protective covenantsmay restrictthe firm from borrowing beyond some specified debt limit until the existing bonds are paid off. 3. Issuingcommercial paper:short-termdebtsecuritynormallyissuedbyfirmsingoodfinancial condition. The issuance of commercial paper is an alternative to obtain loans directly from financial institutions. 4. Impact of the debt financing level on interest expenses: When firms borrow money excessively, they have large annual interest payments that are difficult to cover 5. Common Creditors That Provide Debt Financing  Commercial banksobtaindepositsfromindividualsanduse thefundsprimarilytoprovide business loans.  Savingsinstitutions (alsocalled“thriftinstitutions”)alsoobtaindepositsfromindividuals and use some of the deposited funds to provide business loans. Although savings institutions lendmostof theirfunds to individuals whoneedmortgage loans,theyhave increased their amount of business loans in recent years.  Finance companies typicallyobtainfundsbyissuingdebtsecurities(IOUs)and lendmost of their funds to firms. In general, finance companies tend to focus on loans to less establishedfirmsthat have a higherriskof loandefault.The finance companiescharge a higher rate of interest on these loans to compensate for the higher degree of risk.
  • 16.  Pension funds receive employee and firm contributions toward pensions and invest the proceeds for the employees until the funds are needed. They commonly invest part of their funds in bonds issued by firms  insurance companies receive insurance premiums from selling insurance to customers and invest the proceeds until the funds are needed to pay insurance claims  Mutual fundsare investmentcompaniesthatreceivefundsfromindividualinvestors.the mutual funds pool the amounts and invest them in securities. Mutual funds can be classified by the type of investments that they make. Some mutual funds (called bond mutual funds) investthe fundsreceivedfrominvestorsinbondsthatare issuedbyfirms. The common methods of equity financing (the act of receiving investment from owners) are: 1. Retaining earnings: A firm can obtain equity financing by retaining earnings rather than by distributingthe earningstoitsowners. Dividendpolicyisthe decisionregardinghow muchof the firm’s quarterlyearningsshouldbe retained(reinvestedinthe firm) versusdistributedas dividends to owners. Two characteristics that can influence the dividend policy are:  Shareholder expectation: A firm’s shareholders may expect to receive dividends if they have historically been receiving them. If the firm discontinues or reduces the dividend payment, shareholders could become dissatisfied.  Firm’s financingneeds:A firm that has no needforadditional fundsmaydistribute most of its earnings as dividends. 2. Issuing stock: Common stock is a security that represents partial ownership of a particular firm. Only the owners of common stock are permitted to vote on certain key matters concerning the firm. Preferred stock is a security that represents partial ownership of a particular firm and offers specific priorities over common stock. Preferred stockholders normally do not have voting rights Firmscan issue stock privatelytoa venture capital firm, whichis a firm composedof individuals who invest in small business. These individuals act as investors in firms rather than as creditors. They expect a share of the businesses in which they invest. Their investments typically support projects that have potential for high returns but also have high risk. If asmall privatelyheldbusinessdesirestoobtainadditionalfunds,itmayconsideran initialpublic offering (IPO) of stock (also called “going public”),which is the first issue of stock to the public. Insurance companies and pension funds commonly purchase large amounts of stocks issuedby firms. In addition, stock mutual funds (investment companiesthat invest pooled funds received from individual investors in stocks) purchase large amounts of stocks issued by firms. IPOs have some disadvantages. First, firms that go public are responsible for informing shareholders of their financial condition. Second, when a small business attempts to obtain funding from the public, it may have difficulty convincing investors that its business plans are feasible. Third, the firm’s ownership structure is diluted.Once shares are sold to the public, the proportionofthe firm ownedbythe original ownersisreduced. Fourth,investmentbanks charge high fees for advising and placing the stock with investors. Once a firm has issued stock to the public, it lists its stock on a stock exchange. This allows the investors to sell the stock they purchased from the firm to other investors over time.The stock
  • 17. exchange servesasasecondarymarketoramarketwhere existingsecuritiescanbe tradedamong investors. Thus, investors have the flexibility to sell stocks that they no longer wish to hold. DEBT AND EQUITY FINANCING METHODS A public offering of securities (such as bonds or stocks) represents the selling of securitiesto the public. A firm that plansa publicofferingof securitiescanreceive helpfrominvestmentbanks, there are: 1. Origination:Investmentbanks advise firmson the amountof stocksor bondstheycan issue. 2. Underwriting: When securities offerings are underwritten, the investment bank guarantees a price to the issuing firm, no matter what price the securities are sold for. The investment bank may attempt to sell the securities on a best-efforts basis; in this case, it does not guarantee a price to the issuingfirm. For large issuesof securities,the investmentbankmay create an underwriting syndicate, which is a group of investment banks that share the obligations of underwriting the securities. 3. Distribution: The issuing firm must register the issue with the Securities and Exchange Commission(SEC).It providesthe SEC witha prospectus,whichis a documentthat discloses relevantfinancial informationaboutthe securities(such as the amount) and about the firm. Some firms may preferto use a private placement,in whichthe securitiesare soldto one or a few investors. Firms that issue securities incur flotation costs, which include fees paid to investmentbanksforadvice andfor sellingthe securities,printingexpenses,andregistration fees. to debt financing and equity financing, firms may obtain funds from: 1. Financing from suppliers
  • 18. 2. Leasing: Some firmspreferto finance the use of assetsby leasing,or rentingthe assets for a specified period of time. These firms rent the assets and have full control over themover a particularperiod.Theyreturntheassetsatthe timespecifiedintheleasecontract.Manyfirms that lease assets cannot afford to purchase them. All firms must decide on a capital structure, or the amount of debt versus equity financing. The use of debt (such as bank loans or bonds) as a source of funds is desirable because the interest paymentsmade bythe firmonitsdebtare tax-deductible.A higherlevelof debtresultsinahigher level of interest payments each year, which can make it difficult for a firm to cover all its debt payments. Many firms revise theircapital structure in response tochangesin economicconditions,suchas economicgrowthandinterestrates.If economicgrowthdeclinesandtheirearningsdecline,they mayreduce theirdebtbecauseitismore difficulttocoverinterestpayments.When interestrates decline, firms may increase their debt because the interest payments will be relatively low. How the Capital Structure Affects the Return on Equity The firm’s return on equity or ROE (measured as earnings divided by owner’s equity). Remedies for debt problem 1. Extension:If a firm is havingdifficultycoveringthe paymentsitowes,itscreditorsmayallow an extension, which provides additional time for the firm to generate the necessary cash to cover its payments. 2. Composition: If the failing firm and its creditors do not agree on an extension, they may attempt to negotiate a composition agreement,which specifies that the firm will provide its creditors with a portion of what they are owed. 3. Private liquidation: creditors may informally request that a failing firm liquidate (sell) its assets and distribute the funds received from liquidation to them
  • 19. 4. Formal remedies: If creditors cannot agree to any of the informal remedies, the solutionto the firm’s financial problems will be worked out formally in the court system. The formal remedies are either reorganization or liquidation under bankruptcy. Reorganization of a firm can include the terminationof some of its businesses,anincreased focus on its other businesses, revisions of the organizational structure, and downsizing. Liquidation value: the amount of funds that would be received as a result of the liquidation of a firm. Liquidation under bankruptcy: If the firm and its creditors cannot agree on some informal agreement,andif reorganizationisnotfeasible,the firmwill file forbankruptcy. A law firmis appointed to sell off the existing assets and allocate the funds received to the creditors. Secured creditors are paid with the proceeds from selling off any assets serving as their collateral. The interestrate onfundsto be borrowedisinfluencedbythe supplyof loanable funds(providedby depositors) and the demand for those loanable funds by borrowers. Factors that can affect interest rates: 1. Monetary policy 2. Economic growth 3. Expected inflation 4. Saving behavior Chapter 17 Firms continuallyevaluate potential projectsin which they may invest, such as the construction of a new building or the purchase of a machine. They think about the capital budgeting which is a comparisonof the costsand benefitsof aproposedprojecttodeterminewhetheritisfeasible. Firms planacapital budget,oratargetedamountof fundstobeusedforpurchasingassetssuchasbuildings, machinery, and equipment that are needed for long-term projects. Interestrates determine the costof borrowedfunds.A change ininterestratescanaffectthe costof borrowing as well as the project’s feasibility. Classification of capital expenditures: 1. Expansionof current business: If the demandforafirm’sproductsincreases,afirminvestsin additional assets (such as machinery or equipment) to produce a large enough volume of products to accommodate the increased demand. 2. Development of new business: When firms expand the line of products that they produce and sell, they need new facilities for production 3. InvestmentinAssetsThat Will Reduce Expenses:Firmsreplace oldmachinesandequipment to capitalize on new technology, which may allow for lower expenses over time The process of capital budgeting: 1. Proposing new projects 2. Estimating cash flows of projects 3. Determining whether projects are feasible In some cases,the evaluationinvolvesdecidingbetweentwo projectsdesignedforthe same purpose. When only one of the projects can be accepted, such projects are referred to as
  • 20. mutuallyexclusive.Whenthe decisionof whethertoadoptone projecthasnobearingonthe adoption of other projects, the project is said to be independent project. 4. Implementing feasible projects 5. Monitoring projects that were implemented A firm may invest in another company by purchasingall the stock of that company. This results in a merger, in which two firms are merged (or combined) to become a single firm owned by the same owners (shareholders). Merger can be classified as: 1. Horizontal merger: isthe combinationof firmsthat engage inthe same typesof business. Ex: Commercial bank 2. Vertical merger: is the combination of a firm with a potential supplier or customer 3. Conglomerate merger:isthe combinationof twofirmsinunrelatedbusinesses.Ex:Astraand Gramedia Corporate Motives for Mergers: 1. Immediate growth 2. Economicsofscale:Productsthatexhibiteconomiesof scalecanbe producedatamuchlower cost per unit if a large amount is produced. A merger may allow a firm to combine two production facilities and thereby achieve a lower production cost per unit. 3. Managerial expertise 4. Tax benefits:Firmsthatincur negative earnings(losses)are sometimesattractive candidates for mergers because of potential tax advantages. Although the losses of the acquired firm have occurredprior to the acquisition,theyreduce the taxableearningsof the newlymerged corporation When a firm plans to engage in a merger or acquisition, it must conduct: 1. Identifyingpotential mergerprospects: Firmsattempttoidentifypotential mergerprospects that may help them achieve their strategic plan 2. Evaluate potentialmergerprospects:Once mergerprospectshave beenidentified,theymust be analyzed thoroughly, using publicly available financial statements 3. Make the merger decision Some firms that continuously acquire or sell businesses may employ their own investment banking department to handle many of the necessary tasks. Most tasks can be classified into 1. Financing the merger: A merger normally requiresa substantial amountof long-term funds, as one firmmaypurchase the existingstockof anotherfirm.Inacommonmethodof financing a merger, a firm issues more of its own stock to the public 2. Tenderoffer: Whentwofirmscannotcome toterms,the acquiringfirmmayattemptatender offer. This is a direct bid by the acquiring firm for the shares of the target firm. The acquiring firm must decide the price at which it is willing to purchase the target firm’s shares and then officially extend this tender offer to the shareholders. The tender offer normally represents a premium of 20 percent or more above the prevailing market price, whichmay be necessarytoencourage the shareholdersof the targetfirm to sell theirshares. The acquiring firm can achieve control of the target firm only if enough of the target firm’s shareholders are willing to sell.
  • 21. 3. Integrating the business: If a merger is achieved, various departments within the two companies may need to be restructured 4. Post merger evaluation: After the merger, the firm should periodically assess the merger’s costs and benefits. Were the benefits as high as expected? Did the merger involve unanticipated costs? In some cases, managers of a target firm may not approve of the takeover attempt by the acquiring firm. They may view the potential acquiring firm as a shark approaching for the kill (takeover). Defensive tactic against takeover: 1. convince shareholders to retain their shares 2. private placement of stock: By selling shares directly (privately) to specific institutions, the target firm can reduce the acquiring firm’s chances of obtaining enough shares to gain a controlling interest. 3. find a more suitable company (called a white knight) that is willing to acquire the firm and rescue it from the hostile takeover efforts of some other firm. Ina leveragedbuyout,orLBO,agroupof investors purchaseacompany(orasubsidiaryof acompany) with borrowed funds. A divestiture is the sale of an existing business by a firm. Firms may have several motives for divestitures. 1. a firm may divest(sell) businessesthatare notpart of its core operations sothat it can focus on what it does best 2. to obtain funds Workingcapital management involves the managementofa firm’s short term assets and liabilities. A firm’s short-termassetsinclude cash,short termsecurities,accountsreceivable,andinventory.Its short-termliabilitiesincludeaccountspayableandshort-termloans.Workingcapital managementcan be segmented into: 1. Liquiditymanagement:Firmsthat are liquidhave adequateaccesstofundstopay billswhen they come due. Liquidity management involvesthe management of short-term assets and liabilities to ensure adequate liquidity. To remain liquid, firms may maintaincash and short- term securities. Firms normally attempt to limit their holdingsof cash and short-term securities so that they can use their funds for other purposes that generate higher returns. They can be liquid without holding cash and short-term securities if theyhave easy access to borrowed funds. Most firms have a line of credit with one or more banks, which is an agreement that allows access to borrowed funds upon demand over some specified period 2. Account Receivable management:Accountsreceivable managementsetsthe limitsoncredit available to customers and the length of the period in which payment is due. 3. Inventory management:Inventorymanagementdeterminesthe amountof inventorythatis held. Managers attempt to hold just enough inventory to avoid stockouts, without tying up funds in excess inventories