Copyright by Paradigm Publishing, Inc. INTRODUCTION TO BUSINESS CHAPTER 17 Expanding the Business

Copyright by Paradigm Publishing, Inc.

INTRODUCTION TO BUSINESS

CHAPTER 17

Expanding the Business



Investment Decisions• Capital budgeting: a comparison of the

costs and benefits of a proposed project to determine whether it is feasible.

• How Interest Rates Affect Investment Decisions

• Capital Budget: a targeted amount of funds to be used for purchasing assets such as buildings, machinery, and equipment that are needed for long term projects.

Investment Decisions

Businesses need financing in order to invest in new office buildings, new machinery, or new equipment. A firm’s investments are constrained by its capital budget, which is typically influenced by how much funding it can obtain. Some firms lease their workplace space so that they do not need to make such a large investment.




• Classification of Capital Expenditures– Expansion of Current Business– Development of New Business– Investment in Assets that will Reduce

Expenses


Businesses commonly invest funds in technologically advanced machinery so that they can reduce expenses. They will purchase new machinery if they believe that the cost is less than the amount of money saved by using this machinery to produce products.



Capital Budgeting Tasks• Proposing New Projects

• Estimating Cash Flows of Projects

• Determining Whether Projects are Feasible– Mutually exclusive: the situation in which only

one of two projects designed for the same purpose can be accepted.

– Independent project: a project whose feasibility can be assessed without consideration of any others.

Capital Budgeting Tasks

The proposal and assessment of a project typically involve projections of the revenue, cost, and earnings to be generated by the project. Various employees may be asked to offer their input on the estimated expenses associated with the project.



Capital Budgeting Tasks

• Implementing Feasible Projects

• Monitoring Projects That Were Implemented

• Summary of Capital Budgeting Tasks


Mergers and Other Forms of Restructuring

• Types of Mergers– Merger: two firms are merged (or combined)

to become a single firm owned by the same owners (shareholders).

– Horizontal merger: the combination of firms that engage in the same types of business.

– Vertical merger: the combination of a firm with a potential supplier or customer.

– Conglomerate merger: the combination of two firms in unrelated businesses.



• Corporate Motives for Mergers– Immediate Growth– Economies of Scale– Managerial Expertise– Tax Benefits

• Merger Analysis– Identify Potential Merger Prospects

Illustration of How an Acquisition Can GenerateEconomies of Scale




– Evaluate Potential Merger Prospects– Make the Merger Decision

• Merger Procedures– Financing the Merger– Tender Offer: a direct bid by an acquiring firm

for the shares of a target firm.– Integrating the Businesses– Postmerger Evaluation


Mergers commonly require negotiations by representatives of the two companies.




• Defense Against Takeover Attempts– White knight: a more suitable company that is willing

to acquire a firm and rescue it from the hostile takeover efforts of some other firm.

• Leveraged Buyouts: the purchase of a company (or a subsidiary of a company) by a group of investors with borrowed funds.

• Divestitures: sales of an existing business by a firm.


Short-Term Investment Decisions

• Working capital management: the management of a firm’s short-term assets and liabilities.

• Liquidity Management– Liquid: having access to funds to pay bills

when they come due.– Liquidity management: the management of

short-term assets and liabilities to ensure adequate liquidity.


Short-Term Investment Decisions– Treasury bills: short-term debt securities

issued by the U.S. Treasury.– Line of credit: an agreement with a bank that

allows a firm access to borrowed funds upon demand over some specified period.

• Accounts Receivable Management: sets the limits on credit available to customers and the length of the period in which payment is due.


Short-Term Investment Decisions

• Working capital management: the management of a firm’s short-term assets and liabilities.

• Liquidity Management– Liquid: having access to funds to pay bills

when they come due.– Liquidity management: the management of

short-term assets and liabilities to ensure adequate liquidity.


Short-Term Investment Decisions– Treasury bills: short-term debt to securities

issued by the U.S. treasury.– Line of credit: an agreement with a bank that

allows a firm access to borrowed funds upon demand over some specified period.

• Accounts Receivable Management: sets the limits on credit available to customers and the length of the period in which payment is due.

• Inventory Management: determines the amount of inventory that is held.

Next Time

• Chapter 10 • Study with your team for the final exam.

• When is it???

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Copyright by Paradigm Publishing, Inc. INTRODUCTION TO BUSINESS CHAPTER 17 Expanding the Business