not imp Implementing Strategies-Finance _ Actg. Issues.pptx

Unit 8
Implementing Strategies:
Finance and Accounting Issues
Source: David, Fred R. & David, Forest R, 16th. Edition (©2017)
Strategic Management. Pearson Education Inc., USA

Learning Objectives
8.1 Determine an appropriate capital structure for the firm
by performing EPS/EBIT analysis to compare the relative
attractiveness of debt versus stock as a source of capital to
implement strategies.
8.2 Develop projected financial statements to reveal the
impact of recommendations with associated costs.
8.3 Determine the cash value of the firm, or a division of the
firm, using four corporate evaluation methods.
8.4 Discuss financial ratios, initial public offerings (IPOs), and
issuing bonds as strategic decisions.
Strategic Management. Pearson Education Inc., USA 2

Figure 8.1 The Comprehensive, Integrative
Strategic-Management Model
Source: Fred R. David, “How Companies Define Their Mission,”
Long Range Planning 22, no. 3 (June 1988): 40. 3

Finance/Accounting Issues
• Determine capital structure
• acquire needed capital to implement strategies
• Perform EPS/EBIT analysis
• Develop projected financial statements
• Show expected impact of recommendations
• Perform corporate valuation
• In the event an offer is received or a rival firm is to be
acquired
• Analyze financial ratios
• Manage initial public offerings (IPOs), cash levels, and
corporate bonds

Capital Structure
• The proportion of debt to equity on a balance sheet is
often referred to as a firm’s capital structure.
• Performing an EPS/EBIT analysis is a common way to
determine the appropriate capital structure needed.

Accounting Terms Explained
• EPS is earnings per share, which is net income divided by
number of shares outstanding.
• EBIT is earnings before interest and taxes, also called
operating income.
• Shares outstanding is similar to shares issued (shares
issued also include treasury stock).
• Shares authorized are the number of shares a firm has
approval to issue in total.
• EBT is earnings before tax.
• EAT is earnings after tax.

EPS/EBIT Analysis
• A widely used technique for determining whether debt,
stock, or a combination of the two is the best alternative
for raising capital to implement strategies.
• Involves an examination of the impact that debt versus
stock financing has on EPS under various expectations for
EBIT, given specific recommendations (strategies to be
implemented).
• The analysis involves a 4-step process.

Table 8.1 P&G Input Data
Needed for EPS/EBIT Analysis
P&G Input Data The Number
$ Amount of Capital Needed $5,000 million
EBIT Range $10,000 to $18,000 million
Interest Rate 5%
Tax Rate 23%
Stock Price $94.17
# Shares Outstanding 2,550 million

Table 8.2 P&G Computations in Performing
EPS/EBIT Analysis (in millions, except the EPS row)

Figure 8.2 P&G’s EPS/EBIT Chart

Table 8.3 Limitations/Considerations
Associated with EPS/EBIT Analysis
1. Flexibility
2. Dilution of ownership
3. Timing
4. Leveraged situation
5. Continuity
6. EBIT ranges
7. Dividends

Projected Financial Statements
• Projected Financial Statements
• allow an organization to examine the expected results
of various actions and approaches
• allow an organization to compute projected financial
ratios under various strategy-implementation
decisions

Performing Projected Financial Analysis
1. Prepare the projected income statement before the balance
sheet.
2. Use the percentage-of-sales method to project cost of goods
sold (CO G S) and the expense items in the income statement.
3. Calculate the projected net income.
4. Subtract from the net income any dividends to be paid for that
year.
5. Project the balance sheet items, beginning with retained
earnings and then forecasting stockholders' equity, long-term
liabilities, current liabilities, total liabilities, total assets, fixed
assets, and current assets (in that order).
6. Use the cash account as the plug figure.
7. List commentary (remarks) on the projected statements.

Corporate Valuation
• Corporate valuation is not an exact science; value is
sometimes in the eye of the beholder.
• The valuation of a firm’s worth is based on financial facts,
but common sense and good judgment enter into the
process.
• Different valuation methods will yield different totals for
a firm’s worth.
(Continued)

Corporate Valuation
Methods:
• The Net Worth Method
• Total Shareholders’ Equity (SE) minus (Goodwill +
Intangibles)
• The Net Income Method
• Net Income × Five
• Price-Earnings Ratio Method
• (Stock Price ÷ EPS) × NI
• Outstanding Shares Method
• Number of Shares Outstanding × Stock Price

Table 8.12 Company Worth Analysis for P&G (in millions)
The Input Data
Shareholder’s Equity $55,778
Net Income $15,326
Stock Price $94.17
EPS $6.01019
Number of Shares Outstanding 2,550
Goodwill $44,699
Intangibles $24,187
The Four Valuation Methods
Stockholders’ Equity − (Goodwill + Intangibles ($13,108)
Net Income × 5 $76,630
(Share Price/EPS) × Net Income $240,134
Number of Shares Outstanding × Share Price $240,134
Method Average $135,947

Financial Ratio Analyses
Financial ratios are examined based on:
1. How they change over time
2. How they compare to industry norms
3. How they compare with key competitors

IPOs and Corporate Bonds
• Go public with an IPO
• “Going public” means selling off a percentage of a
company to others to raise capital; this action dilutes
the owners’ control of the firm.
• Issue corporate bonds
• This is analogous to going to the bank and borrowing
money, except that with bonds, the company obtains
funds from investors rather than banks.

Figure 8.3 How to Gain and
Sustain Competitive Advantages

Disclaimer
The information provided in this module is derived from Pearson
Education Inc., USA, and other sources. All information is provided in
good faith for educational purposes only. Iqra University claims no
ownership of this information, and will not be liable for any claims
arising thereof, now or in the future.

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