U.S. Business - A Brief History
Purpose: Show historically how businesses have maximized shareholder wealth. Give a context and perspective so we can understand businesses today better.
Disclaimer: A quick, top line review that over simplifies.
Good News! Always has, and will be, about
*****Early U.S. Economy
Agriculturally based economy
- Very few rich, many, many poor
- Little or no savings and disposable income
As result of industrial revolution with mix of economic, political and cultural changes, we saw a dramatic change in the U.S. economy and how busine
1920 - 1929: The Roaring Twenties
Significant growth in the production of goods
Employment fairly strong and consistent
Growing savings, disposable income and investment
Cycle of prosperity (the first for the U.S.)
1929 Stock Market Crash
- Initiates the "Great Depression
*****1929 - 1941: The Great Depression
Cycle of depression
Very low production
No/low savings disposable income and investment
Agriculture economy also suffering
Advances continue in technology
U.S Government intervention in economy
Spending, social safety nets, regulations
**the beginning of
1941 - 1945: The War Economy
Size and scope of wars and impact
Record employment - men and women
Record production and capacity utilization
Record savings - no place to spend!
Innovation and technological advances
*****1945 - 1960: Economic Boom
****
2 leading factors =Huge pent - up demand coupled with record savings(no where to spend money)
**. Start of the "Production Era"
Dramatic growth in middle class / suburbs. The Baby Boomer Generation
Production can barely keep pace with demand
Early de
60's & 70's: The Marketing Era
Solved supply (demand) issue - new challenge is now how to MSW?
Shift in focus to marketing and creating strong Brand names - the 4 P's
Keep growth in value by constant flow of new products
Retailers start to flex muscles
1980's: M&A and Service ERA
Strong focus on mergers and acquisitions as a means for value creation
Need for financial and legal skills
Service economy is thriving - time and convenience critical for consumers
Birth of PC's and emerging ability and need for international presence (wo
1990's: The Dot.Com ERA
The Internet is "born" and E commerce explodes
The Dot.Com boom and bubble burst
Strong emphasis on knowledge capital
Growth in International business continues to expand - enabled by political and technological changes
Huge influx of capital into stock m
*****2000's: International & Crisis Mgmt.
Crisis and crashes - 9/11:
On the first day of NYSE trading after 9/11, the market fell 684 points, a 7.1% decline, setting a record for the biggest loss in exchange history for one trading day. closed until the 17th. estimated 1.4 trillion dollars in val
*****Dow Jones Industrial Average
WSJ made it up. Dow and Jones were editors. Took 30 stocks every single day. Index = 100. The number doesn't mean anything it's just about how much change=up or down. 2007=14,000 2009=7,000
Stock Market made up of 30 companies that represent the U.S. mark
S&P 500
standard and pours (biggest sector) 500 of the biggest stocks(measured in sales each year) Started at 100. Today it is at 1,512.
Walmart 600billion =worlds largest. UHG=states biggest
Nasdaq
smaller, mid size, start up companies, Index 100. 1,000's of stocks. Using technology to do the work.
*****What is the #1 goal for business?
* maximize shareholders wealth.
1.Max=most wealth
2.shareholders= owners/buy share and become owner/ 1share=onevote for BOD->CEO. (1. sole proprietorship=entrepreneur, 2. partnership, 3. corporation=separate legal entity, stand alone firm, either public o
****
sole proprietorship and partnerships adv and
** disadv
adv=
1. ease of formation
2. subject to few regulations
3. no corporate income taxes
Disadv.
1. limited life
2.***
main disadv to SP
UNLIMITED liability (you are responsible!!)
3. difficult to raise capital
4. could go into your personal assets
****
corporations adv and
* disadv
adv=
1. unlimited life
2. easy to transfer ownership
3. limited liability
4. ease of raising capital
disadv.
1. *
double taxation
*
2. cost of set up and report filing
My congressman
Betty McCollum
****MSW + Business Plan
**Creates a road map for your business
Need to create a busines plan that is reflected upon MSW that includes ops, HR, r&d, mgmt, finance, mktg. This encompasses the customers and the external environment.
1. employees need to understand
2. the plan has t
Markets
All businesses need capital->cash.
Evolution of Facebook
facebook created- sole proprietor/partners-corporation->i need a business plan= $$ - > IPO (initial public offering) goes public at $39 ->goes to company to invest in the busines plan. I went to stock market to make $. Investors just buying and selling ba
basic financial statements
Income statement/ balance sheet/ cash/ retained earnings
SEC created this to keep a fairness throughtout financial statements.
law that you have to come up with financial statements each quarter to public
GAAP
*****What is an Income statement
most widely used.
-over a period of time
-make sure you read title ex-in thousands
-measures how much profit (net income)
Cost Goods Sold= direct costs
operating income=how much income from day to day operations
EBIT= earnings b4 interest and taxes
*****A
*****how do you measure shareholders wealth? (2 ways a company creates wealth for shareholers)
dividends (not on income statement)
&
share price appreciation
*pay dividends from net income
**if high NI, have more $$ to pay dividends
Balance Sheet
measures financial health, evaluate financial stability at a specific time
-read title=in thousands.
-specific date
- assets =good stuff->buy assets to MSW
-liabilities= debt. owe ppl $
equity=ownership-measure amount of investment shareholders have made
statement of cash flow
where we get our cash. and where our cash went.
cash from operating activities=$ comes in from day 2 day operations
cash from investing=cash out from investments we're making
cash from financing=cash in or out from financing (loan? dividends?)
statement of retained earnings
shows $ you kept from shareholders $.
ending r/e should be greater than beginning r/e
bullish vs. bearish
bullish=good
bearish=bad
liquidity ratios =x,x
help us understand if we have enough to pay our bills after we convert our assest to cash
asset management = x,days,x
how good are we at managing? cash, accounts, etc.
debt management
in business, debt isn't good or bad - it's what you do with it. -> it increases RISK -> going bankrupt.
Getting $ from bank is cheaper than getting money from shareholers.
profitability = all %
how good are we at turning our sales into profit.
The better we are--more MSW
market
what is the external market say about the value of a company.
*always about the valuation
What 2 things should always be done in conjunction with any ratio analysis.
1. benchmark / need to find a relavent comparison (competitors)
2. trend out the ratios over time.
**be aware of seasonality!
How do we measure cash? / Value of any asset?
value(cash)= [present value [PV]] of all FUTURE {guess} [free cash flows [FCF]]
Free Cash Flows
not the same as profit -or- case -or- net income. The cash available to distribute to investors both debt and equity investors after running your day to day operations
more the better
Lump Sum
Call your cash at once
*
Solve for PV, FV, n or i
*
Compounding= solving for FV
Discounting=solving for PV
Annuity
Per month/equal periodic payments
*
Solve for PMT
Uneven cash flows
different amounts everytime
use npv!
(interest rate, n, {xxx,xxx,xxx})
Tips
1. compare business' on present value
2. PV always goes in negative (spend $ first)
3. Make units constant!
What are some limitations/issues with ratio analysis?
Diversified Companies - Seasonality - Book vs. Market
3) What are some other "qualitative" elements that should be considered?
Competition, Economy, Key Customers, Suppliers, Products, Technology
****Cash is King! 3 questions that should be asked about cash flow when doing any financial analysis
1.how much - to invest / to return?
2. when am I going to get the cash?
3. what is the risk associated with it?
*****Can a company show negative net income but still create shareholder wealth
Yes,
Take out a loan, and pay out dividends
*****What is a financial market? Give an example.
a financial market is a plcae where funds are exchanged. People and organizations wanting to borrow money are brought together with those who have surplus funds in the financial markets.
Capital Markets: the markets for intermediate or long term debt and