Assessing Growth Opportunities

Assessing growth opportunities involves planning new businesses, downsizing, or terminating older businesses.



Intensive growth -- corporate management's first course of action should be a review of opportunities for improving existing businesses.

Integrative growth -- a businesses sales and profits may be increased through backward, former, a horizontal integration within its industry.

Diversification growth -- several types of diversification are possible -- new products, new technology, marketing synergies with existing product lines, new groups of customers, etc.

downsizing and divesting older businesses -- week businesses require a disproportionate amount of managerial attention



Organization -- consists of its structures, policies, and corporate culture

corporate culture -- the shared experiences, stories, beliefs, and norms that characterize an organization

scenario analysis -- consists of developing plausible representations of the firm's possible future to make different assumptions about forces driving the market include different uncertainties



SWOT analysis -- the overall evaluation of a company strengths, weaknesses, opportunities, and threats. It involves monitoring the external and internal marketing environment.



marketing opportunity -- an area of need or interest in which there is a high probability that a company can profitably satisfy that need.

There are three main sources of market opportunities:

1. supplying something that is in short supply
2. supplying an existing product or service in a new or superior way
3. creation of a totally new product or service

Opportunity examples:

• hybrid products
• buying process convenience
• meeting information needs
• product or service customization
• introducing new capabilities
• faster service or product delivery
• offering product at lower cost

Market opportunity analysis (MOA) -- an evaluation of opportunities to determine the attractiveness and probability of success:

• can the benefits involved in the opportunity be articulated convincingly to a defined target market?
• Can the target market be located in reached within cost effective media and trade channels?
• Does the company possessor have access to critical capabilities and resources needed to deliver the customer benefits?
• Can a company deliver the benefits better than any actual or potential competitors?
• Well the financial rate of return meet or exceed the companies required threshold for investment?

Environmental threat -- a challenge posed by an unfavorable trend or development that would lead, and the absence of defensive marketing action, to lower sales or profits



Goal Formulation

most business units pursue a mix of objectives including profitability, sales rose, market share improvement, risk containment, innovation, and reputation. The business unit sets these objectives and then manages by objectives (MBO).



For on MBO system to work, the unit's objectives must meet four criteria:

1. goals must be arranged hierarchically, from the most to the least important
2. objectives should be stated quantitatively whenever possible
3. goals should be realistic
4. objectives must be consistent

Other important trade-offs:

• short-term profit versus long-term growth
• deep penetration of existing markets versus developing new markets
• profit goals versus nonprofit goals
• high growth versus low risk

Strategy -- a game plan for achieving goals

strategic group -- firms pursuing the same strategy directed to the same target market



many strategic alliances take the form of marketing alliances. These fall into four major categories:

1. product or service alliances -- 1 company licenses another to produce its product, or two companies jointly market their complementary products or new product
2. promotional alliances -- 1 company agrees to Cary he promotion for another company's product or service
3. logistics alliances -- 1 company offers logistical services for another companies product
4. pricing collaborations -- 1 or more companies joined in a special pricing collaboration

Marketing plan -- a written document that summarizes what the marketer has learned about the marketplace and indicates how the firm plans to reach its marketing objectives



Contents of the Marketing Plan

• executive summary and table of contents
• situation analysis
• marketing strategy
• financial projections
• implementation controls

Marketing Plan criteria

• is the plan simple?
• Is the plan specific?
• It is the plan realistic?
• Is the plan complete?

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corporate and division strategic planning

marketing plan -- the central instrument for directing and coordinating the marketing effort. The marketing plan operates at two levels: strategic and tactical

strategic marketing plan -- lays out the target markets in the value proposition that will be offered, based on analysis of the best market opportunities

tactical marketing plan -- specifies the marketing tactics, including product features, promotion, merchandising, pricing, sales channels, and service



All corporate headquarters undertake four planning activities:

1. defining the corporate mission
2. establishing strategic business units
3. assigning resources to each SBU
4. assessing growth opportunities

To define its mission, a company should address Peter Drucker's classic questions:

• What is our business?
• Who is the customer?
• What is of value to the customer
• what will our business be?
• What should our business be?

Mission statements -- provides employees with a shared sense of purpose, direction, an opportunity. The statement guides geographically dispersed employees to work independently and yet collectively toward realizing the organization's goals



Mission statement have three major characteristics:

1. focus on a limited number of goals
2. stress the company's major policies and values
3. define the major competitive spheres within which the company will operate

Industry -- the range of industries in which a company will operate

products and applications -- the range of products and applications company will supply

competence -- the range of technological and other core competencies that a company will master of leverage

market segment -- the type of market or customers of the company will serve

vertical -- the number of channel levels from all material to final product and distribution in which a company will participate

geographical -- the range of regions, countries, or country groups in which a company will operate



Three dimensions to the business:

1. customer groups
2. customer needs
3. technology

Strategic business units (SBUs) have three characteristics:

1. it is a single business or collection of related businesses that can be planned separately from the rest of the company
2. it has its own set of competitors
3. it has a manager who is responsible for strategic planning and profit performance who controls most of the factors affecting profit
   
   

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The core

core business processes:

• the market sensing process -- all the activities involved in gathering market intelligence, disseminating it within the organization, and acting on the information
• the new offering realization process -- all the activities involved in researching, developing, and launching new high-quality offerings quickly and within budget
• the customer acquisition process -- all the activities involved in defining target markets and prospecting for new customers
• the customer relationship management process -- all the activities involved in building deeper understanding, relationships, and offerings to individual customers
• the fulfillment management process -- all the activities involved in receiving and approving orders, shipping the goods on time, and collecting payment

Core competency has three characteristics:

1. it is a source of competitive advantage in that it makes a significant contribution to perceive customer benefits
2. it has applications in a wide variety of markets
3. it is difficult for competitors to imitate

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The V's of marketing

3 V's approach to marketing:

1. define the value segment or customers (and his/her needs)
2. define the value proposition
3. define the value network that will deliver the promised service

another view

1. value defining process -- market research and company self-analysis
2. value developing process -- new product development, sourcing strategy, and vendor selection
3. value delivering processes -- advertising and managing distribution

The value chain



Value chain -- a tool for identifying ways to create more customers value



Primary activities in the value chain:

• inbound logistics -- bringing materials into the business
• operations -- converting materials into final products
• outbound logistics -- shipping out final products
• marketing and sales
• service

Support activities in the value chain:

• procurement
• technology development
• human resource Management
• firm infrastructure

The holistic marketing framework is designed to address three key marketing questions:

1. value exploration -- how can a company identify new value opportunities?
2. Value creation -- how can a company officially create more promising new value offerings?
3. Value delivery -- how can a company used its capabilities and infrastructure to deliver the new value offerings more efficiently?

Value exploration

developing a strategy requires understanding of the relationships among three spaces.

1. the customer's cognitive space -- reflects existing and latent needs and includes dimensions such as the need for participation, stability, freedom, and change
2. the company's competency space -- can be described in terms of breadth-- brought versus focused scope of business; and depth -- physical versus knowledge-based capabilities
3. the collaborators resource space -- involves horizontal partnerships, where companies choose partners based on their ability to exploit related market opportunities, and vertical partnerships, were companies choose partners based on their ability to serve their value creation

value creation

to exploit a value opportunity the company needs value creation skills.

Marketers need to:

• identify new customer benefits from the customers view
• utilize core competencies from its business domain
• select and manage business partners from its collaborative networks

To craft new customer benefits marketers must understand:

• what the customer thinks about
• what the customer wants
• what the customer does
• what the customer worries about
• who and what the customers admire
• who and what the customers interact with
• who and what influences the customers

Business realignment may be necessary to maximize core competencies. It involves three steps:

1. defining/redefining the business concept
2. shaping/reshaping the business scope
3. positioning/positioning the company's brand identity

Value delivery

company must become proficient at:

• customer relationship management -- allows the company to discover who its customers are, how they behave, and what they need and want
• internal resource management -- integrates major business processes for effective responses
• business partnership management -- allows the company to handle complex relationships with its trading partners to source, process, and deliver products
  
  

Marketing management -- Chapter 2

developing marketing strategies and plans



The value delivery process involves choosing (or identifying), providing (or delivering), and communicating superior value. The value chain is a tool for identifying key activities that create value and costs in a specific business.



Strong companies develop superior capabilities in managing core business processes such as new product realization, inventory management, and customer acquisition and retention. Managing these core process of effectively means creating a market network in which the company works closely with all parties in the production and distribution chain, from suppliers of raw materials to retail distributors. Companies no longer compete -- marketing networks do.



According to one view, holistic marketing maximizes value exploration by understanding the relationships between the customers cognitive space, the companies competence space, and the collaborators resource space; maximizes value creation by identifying new customer benefits from the customers cognitive space, utilizing core competencies from its business domain, and selecting and managing business partners from its collaborated networks; and maximizes value delivery by becoming proficient at customer relationship management, internal resource management, and business partnership management.



Market oriented strategic planning is the managerial process of developing and maintaining a viable fit between the organization's objectives, skills, and resources and it's changing market opportunities. The aim of strategic planning is to shape the company's businesses and products said that they yield target profit and growth. Strategic planning takes place at four levels: corporate, division, business unit, and product.



The corporate strategy establishes the framework within which the divisions and business units prepare their strategic plans. Setting a corporate strategy entails for activities: defying the corporate mission, establishing strategic business units (SBUs), assigning resources to each SBU based on its market attractiveness and business strength, and planning new businesses and downsizing older businesses.



Strategic planning for individual businesses entails the following activities:

defining the business mission

analyzing external opportunities and threats

analyzing internal strengths and weaknesses

formulating goals

implementing the program's

and gathering feedback in exercising control.



Each product level with in a business unit must develop a marketing plan for achieving its goals. The marketing plan is one of the most important outputs of the marketing process.

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Marketing management -- Chapter 1

defining marketing for the 21st century



Marketing -- needing needs profitably



Marketers frequently asked questions

1. How can we spot and choose the right market segments?

2. How can we differentiate our offerings?

3. How should we respond to customers who buy on price?

4. How can we compete against lower-cost, lower-priced competitors?

5. How far can we go in customizing our offering for each customer?

6. How can we grow our business?

7. How can we build stronger brands?

8. How can we reduce the cost of customer acquisition?

9. How can we keep our customers loyal for longer?

10. How can we tell which customers are more important?

11. How can we measure the payback from advertising, sales promotion, and public-relations?

12. How can we improve sales force productivity?

13. How can we establish multiple channels and yet manage channel conflict?

14. How can we get the other company departments to be more customer oriented?



Marketing management -- the art and science and choosing target markets and getting, keeping, and growing customers through creating, delivering, and communicating superior customer value



exchange -- the process of obtaining a desired product from someone by offering something in return

for exchange potential to exist -- 5 conditions must be satisfied:

1. There are at least two parties

2. Each party has something that might be of value to the other

3. Each party is capable of communication and delivery

4. Each party is free to accept or reject the exchange offer

5. Each party believes it is appropriate or desirable to deal with the other party



Transaction -- a trade of values between two parties

transfer -- a shift of ownership of an item from one party to another



10 types of entities marketed

1. Goods

2. Services

3. Events

4. Experiences

5. Persons

6. Places

7. Properties

8. Organizations

9. Information

10. Ideas



Marketer -- someone who seeks a response from another party

marketplace -- physical shops and stores

market space -- Digital storefronts such as the Internet

meta market -- a cluster of complementary products and services are closely related in the minds of consumers, often spread across a diverse set of industries



The 10 rules of radical marketing

1. The CEO must own the marketing function. CEOs of radical marketers never delegate marketing responsibility.

2. The marketing department must start small and flat and stay small and flat.

3. Get face-to-face with people who matter most -- the customers.

4. Use market research cautiously. Radical marketers prefer grass-roots techniques.

5. Higher only passionate missionaries, not marketers.

6. Love and respect customers as individuals, not as numbers on a spreadsheet.

7. Create a community of consumers.

8. Rethink the marketing mix.

9. Celebrate common sense and compete with larger competitors through fresh and different marketing ideas.

10. Be true to the brand.



Relationship marketing -- building mutually satisfying long-term relationships with key parties

marketing network -- unique to each company, consists of the Company and its supporting stakeholders with him it has built mutually profitable business relationships



From a managerial point of view, marketing is the process of planning and executing the conception, pricing, promotion, and distribution of ideas, goods, and services to create exchanges that satisfy individual and organizational goals. Marketing management is the art and science of choosing target markets and getting, keeping, and growing customers through creating, delivering, and communicating superior customer value.



Marketers are skilled at managing demand: they seek to influence the level, timing, and composition of demand. Marketers are involved in marketing many types of entities. They also operate in four different marketplaces: consumer, business, global, and nonprofit.



Businesses today faced a number of challenges and opportunities, including globalization, the affects of advances in technology, and deregulation. They have responded by changing the way they conduct marketing in very fundamental ways.



There are five competing concepts under which organization can choose to conduct their business:

1. The production concept

2. The product concept />3. The selling concept

4. The marketing concept

5. The holistic marketing concept



The holistic marketing concept is based on development, design, and implementation of marketing programs, processes, and activities that recognize their breadth and interdependencies. Holistic marketing recognizes that everything matters with marketing and that a broad, integrated perspective is often necessary. />Four components of holistic marketing are:

1. Relationship marketing

2. Integrated marketing

3. Internal marketing

4. Socially responsible marketing



Marketing management has experienced a number of shifts in recent years as companies seek marketing excellence.



The set of tasks necessary for successful marketing management includes:

developing marketing strategies and plans

connecting with customers

Building Strong Brands

shaping the market offerings

delivering and communicating value

capturing marketing insight and performance

creating successful long-term growth

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unit 5 summary

Management of Working Capital

Managers handle key short-term decisions facing their companies on a regular basis. Specifically, the management of working capital - or current assets, and management of short-term financing. Management of Working Capital Working capital is another name for current assets- assets that can be liquidated rather quickly. Examples include cash, inventory, and receivables. We also have what is called Net Working Capital (NWC); or current assets minus current liabilities. NWC is a measure of solvency and financial strength of an enterprise. One of a manager’s main tasks is to set effective working capital policies for her/his business. Such policies set optimum levels for key current asset items such as cash, inventory and receivables. They also map out ways that such items will be financed. Finally, working capital policy helps to design and implement certain administrative actions that are necessary for the effective operation of a business such as collection actions and credit extension to new customers. Cash Management If there is one single management function that ties together all the short-term decisions within a given company, it is this: cash management - or more specifically, the task of preparing and implementing cash budgets. A detailed cash budget maps out the cash status (deficit or surplus) for a company during a forecast period - say over the next 12 months. By looking at a cash budget, a manager can tell how much money will be needed and when. Once this is an identified and known element, then management can start thinking about the ways future needs could be financed. Management, for example, may ask for a bank loan, issue short-term notes, or even enter into strategic partnerships with its suppliers. In short, we can see how central cash budget is to a sound working capital policy. Receivables and Inventory Accounts receivable and inventories are among the main balance sheet items that could tie up a company’s limited funds - funds that could be used elsewhere for more productive purposes. Given all funds have a cost; such mismanagements can certainly hurt the bottom line at any company. As such, managers need to watch such accounts very closely and take corrective actions if required. For example, one reason for inflated receivables may be due to late payment by some customers. In this case, the company’s credit policy toward late-payers needs to be re-examined and enforced or in case of inventory, just in time systems may need to be considered. Short Term Financing Businesses rely on short-term financing from external sources for two reasons; profits may simply not be high enough to keep up with the rate at which the company is buying new assets, and many firms would rather borrow the money at the outset and make their purchases on time rather than wait to save enough money from net profits to make their desired purchases. The most prevalent forms of short-term financing available to businesses are loans from banks and other institutions, trade credit, and commercial paper. While short-term financing is usually a cheaper option than long-term financing, it is also a riskier option. Unlike long-term financing, the loans come due soon, the lender may not be willing to renew financing on favorable terms, and short-term interest rates may rise unexpectedly. In short, finance is important to business people and the financial decisions a manager makes about how to raise, spend, and allocate money can affect every aspect of a business. In other words, financial managers need always be aware of the organization’s long-term and short-term financial needs and make reasoned, ethical, and sound decisions to add value to the firm.

Managerial finance -- Chapter 15 -- summary

Current liabilities represent an important and generally inexpensive source of financing for a firm. The level of short-term (current liabilities) financing employed by a firm affects its probability and risk. Accounts payable are on inexpensive, spontaneous source of short-term financing. They should be paid as late as possible without damaging the firm's credit rating. This strategy will shorten the firm's cash conversion cycle and reduce its investment in operations. If vendors offer cash discounts, the firm must consider the economics of giving up versus taking the discount. Accruals, another spontaneous liability, should be maximized because they represent free financing. Notes payable, which represent negotiated short-term financing, can be obtained from banks on a unsecured basis. They should be obtained at the lowest cost under the best possible terms. Large, well-known firms can obtain unsecured short-term financing through the sale of commercial paper. On a secured basis, the firm can obtain loans from banks or commercial finance companies, using either accounts receivable or inventory as collateral.

The financial manager must obtain the right quantity and form of current liabilities financing so as to provide the lowest cost funds with the least risk. Such a strategy should positively contribute to the firm's goal of maximizing the stock price.

The major spontaneous source of short-term financing is accounts payable, which result from credit purchases of merchandise. They are the primary source of short-term funds. Credit terms may differ with respect to the credit., cash discount, cash discoun period, and beginning of credit period. Cash discounts should be given up only when a firm in need of short-term funds must pay an interest rate on borrowing that is greater then the cost of giving up the cash discount.

Stretching accounts payable
Stretching accounts payable can lower the cost of giving up a cash discount. Accruals, which result primarily from wage and tax obligations, are virtually free.

Interest rates
Banks of the major source of unsecured short-term loans to businesses. The interest rate on those loans is applied to the primary of interest by a risk premium and may be fixed or floating. It should be evaluated by using the effective annual rate. Whether interest is paid when the load lecturers or in advance affects the right. Bank loans may take the form of a single payment note, a line of credit, or a revolving credit agreement.

Commercial paper
Commercial paper is on unsecured IOU issued by firms with high credit standing. International sales and purchases expose firms to exchange rate risk. Such transactions are larger and of longer maturity than domestic transactions, and they can be financed by using a letter of credit, by borrowing and the local market, or through dollar denominated linens from international banks. On transactions between subsidiaries, "netting" can be used to minimize foreign exchange fees and other transaction costs.

Secured short-term loans
Secured short-term lines are those for which the lender requires collateral -- typically, current assets such as accounts receivable or inventory. Only a percentage of the book value of acceptable collateral is advanced by the lender. These loans are more expensive than unsecured loans. Commercial banks and commercial finance companies make secured short-term loans. Both pledging and factoring involved the use of accounts receivable to obtain needed short-term funds.

Inventory
Inventory can be used as short-term loan collateral under a floating lien, a trust receipt arrangement, or a warehouse receipt loan.

Managerial finance -- Chapter 15

current liabilities management
terms

Spontaneous liabilities -- financing that arises from the normal course of business; the two major short-term sources of such liabilities are accounts payable and accruals
unsecured short-term financing -- short-term financing obtained without pledging specific assets as collateral
accounts payable management -- management by the firm of the time that you lapses between its purchase of raw materials and its mailing payment to the supplier
cost of giving up a cash discount -- the implied rate of interest paid to delay payment of an account payable for additional number of days
stretching accounts payable -- paying bills as late as possible without damaging the firm's credit rating
accruals -- liabilities for services received for which payment has yet to be made
short-term, self liquidating loan -- an unsecured short-term loan in which the use to which the borrowed money is put provides the mechanism through which the loan is repaid
prime rate of interest -- the lowest rate of interest charged by leading banks on business loans to their most important business borrowers
fixed rate loan -- a loan with a rate of interest that is determined at a set increment above the prime rate and at which it remained fixed until maturity
floating-rate loan -- a loan with a rate of interest initially set at an increment above the prime rate and allowed to float or very, above prime as the prime rate varies until maturity
discount loans -- loans on which interest is paid in advance by being deducted from the amount borrowed
single payment note -- a short-term, one-time loan made to a borrower to needs funds for specific purpose for a short period
line of credit -- on agreement between a commercial bank in the business specifying the amount of unsecured short-term borrowing the bank will make available to the firm over a given period of time
operating change restrictions -- contract shall restrictions that a bank may impose on a firm's financial condition or operations as part of a line of credit agreement
compensating balance -- a required checking account balance equal to a certain percentage of the amount borrowed from a bank under a line of credit or revolving credit agreement
annual cleanup -- the requirement that for a certain number of days during the year borrowers under a line of credit carry a zero loan balance
revolving credit agreement -- a line of credit guaranteed to a borrower by a commercial bank regardless of the scarcity of money
commitment fee -- the fee that is normally charged on a revolving credit agreement; it often applies to the average on used portion of the borrower's credit line
commercial paper -- a form of financing consisting of short-term, unsecured promissory notes issued by firms with a high credit standing
letter of credit -- a letter written by a company's bank to the Company's foreign supplier, stating that the bank guarantees payment of an invoice to mount if all the underlying agreements are met
secured short-term financing -- short-term financing that has specific assets pledged as collateral
security agreement -- the agreement between the borrower and the lender that specifies the collateral held against a secured loan
percentage advance -- the percentage of the book value of the collateral that constitutes the principle of a secured loan
commercial finance companies -- lending institutions that make only secured loans -- both short-term and long-term -- to businesses
pledge of accounts receivable -- they use of a firm's accounts receivable as security, or collateral, to obtain a short-term loan
lien -- a publicly disclosed legal claim on loan collateral
nonnotification basis -- the basis on which a borrower, having pledged an account receivable, continues to collect the account payments without notifying the account customer
notification basis -- the basis on which an account customer his account has been pledged is notified to remit payment directly to the lender
factoring accounts receivable -- the outright sale of accounts receivable at a discount to a factor or other financial institution
factor -- a financial institution that specializes in purchasing accounts receivable from businesses
nonrecourse basis -- the basis on which accounts receivable are sold to a factor with the understanding that the factor accepts all credit risks on the purchased accounts
floating inventory lien -- a secured short-term loan against inventory under which the lender's claim is on the borrowers inventory in general
trust receipt inventory loan -- a secured short-term one against inventory under which the lender advances 80 - 100% of the cost of the borrowers relatively expensive inventory items in exchange for the borrowers promised to repay the lender, with accrued interest, immediately after the sale of each item of collateral
warehouse receipt loan -- a secured short-term loan against inventory under which the lender receives control of the pledged inventory collateral, which is stored by a designated warehousing company on the lender's behalf

Managerial finance -- Chapter 14 -- summary

It is important for a firm to maintain a reasonable level of net working capital. To do so, it must balance the high profit and high risk associated with low levels of current assets and high levels of current liabilities against the low profit and low risk that result from high levels of current assets of low levels of current liabilities. A strategy that achieves a reasonable balance between profits and liquidity should positively contribute to the firm's value.

Similarly, the firm should manage its cash conversion cycle by turning inventory quickly; collecting accounts receivable quickly; managing mail, processing, and clearing time; and paying accounts payable slowly. The strategies should enable the firm to manage its current accounts efficiently and to minimize the amount of resources invested in operating assets.

The financial manager can manage inventory, accounts receivable, and cash receipts to minimize the firm's operating cycle investment, thereby reducing the amount of resources needed to support its business. Employing the strategies, and managing accounts payable in cash disbursements so as to shorten the cash conversion cycle, should minimize the negotiated liabilities needed to support the firm's resource requirements. Active management of the firm's working capital and current assets should positively contribute to the firm's goal of maximizing its stock price.

The cash conversion cycle
The cash conversion cycle has three components:
1. Average age of inventory
2. Average collection period
3. Average payment period
The length of the cash conversion cycle determines the amount of time resources are tied up in the firm's day-to-day operations. The firm's investment in short-term assets often consists of both permanent and seasonal funding requirements. The seasonal requirements can be financed using either an aggressive (low-cost, high risk) financing strategy or a conservative (high cost, low risk) financing strategy. The firm's funding decision for its cash conversion cycle ultimately depends on management's disposition toward risk and the strength of the firm's banking relationships. To minimize its reliance on negotiated liabilities, the financial manager seeks to:
1. Turn over inventory as quickly as possible
2. Collect accounts receivable as quickly as possible
3. Manage mail, processing, and clearing time
4. Pay accounts payable as slowly as possible.
Use of the strategies should minimize the length of the cash conversion cycle.

Inventory management
The viewpoints of marketing, manufacturing, and purchasing managers about the appropriate levels of inventory tend to cause higher inventories than those deemed appropriate by the financial manager. For commonly used techniques for effectively managing inventory to keep its level low are;
1. The ABC system
2. the economic order quantity (EOQ) model
3. The just-in-time (JIT) system
4. Computerized systems for resource control -- MRP, MRP II, and ERP.

International inventory managers place greater emphasis on making sure that sufficient quantities of inventory are delivered where and when needed, and in the right condition, then on ordering the economically optimal quantities.

Credit selection
Credit selection techniques determined which customer's creditworthiness is consistent with the firm's credit standards. Two popular credit selection techniques are the five C's of credit and credit scoring. Changes in credit standards can be evaluated mathematically by assessing the effects of a proposed change on profits from sales, the cost of accounts receivable investment, and bad debt costs.

Cash discounts
Changes in credit terms -- the cash discount, the cash discount period, and the credit. -- can be quantified similarly to changes in credit standards. Credit monitoring, the ongoing review of accounts receivable, frequently involves use of the average collection period and an aging schedule. A number of popular collection techniques are used by firms.

Float
Float refers to funds that have been sent by the payor but are not yet usable funds to the payee. The components of float our mail time, processing time, and clearing time. Float occurs in both the average collection period and the average payment period. One technique for speeding up collections to reduce collection float is a lockbox system. A popular technique for slowing payments to increase payment of float is controlled disbursing.

The goal for managing operating cash is to balance the opportunity cost of nonearning balances against the transaction cost of temporary investments. Firms commonly used depository transfer checks (DTCs) ,ACH transfers, and wire transfers to transfer lockbox receipts to their concentration banks quickly. Zero balance accounts (ZBAs) can be used to eliminate nonearning cash balances and corporate checking accounts. Marketable securities are short-term, interest-earning, money market instruments used by the firm to earn a return on temporarily idle funds. They may be government or nongovernment issues.

Managerial finance -- Chapter 14 -- terms

working capital and current assets Management

Short-term financial management -- management of current assets and current liabilities
working capital -- current assets, which represent the portion of investments that circulates from one form to another in the ordinary conduct of business
networking capital -- the difference between the firm's current assets and its current liabilities; can be positive or negative
profitability -- the relationship between revenues and costs generated by using the firm's assets, both current and fixed, and productive activities
risk (of technical insolvency) -- the probability that a firm will be unable to pay its bills as they come due
technically insolvent -- describes a firm that is unable to pay its bills as they come due
operating cycle (OC) -- the time from the beginning of the production process to the collection of cash from the sale of the finished product
cash conversion cycle (CCC) -- the amount of time a firm's resources are tied up; calculated by subtracting the average payment. From the operating cycle
permanent funding requirement -- a constant investment in operating assets resulting from constant sales over time
seasonal funding requirement -- an investment in operating assets that varies over time as result of cyclic sales
aggressive funding strategy -- a funding strategy under which the firm funds at seasonal requirements was short-term debt and its permanent requirements of long-term debt
conservative funding strategy -- a funding strategy under which the firm funds both its seasonal and its permanent requirements with long-term debt
ABC inventory system -- inventory management technique that divides inventory into three groups -- A,B, and C, in descending order of importance and level of monitoring, on the basis of the dollar investments in each
two bin method -- on sophisticated inventory monitoring technique that is typically applied to C group items and involves reordering inventory when one of two bins is empty
economic order quantity (EOQ) model -- inventory management technique for determining an item's optimal order size, which is the size that minimizes the total of its order costs and carrying costs
order costs -- the fixed clerical costs of placing and receiving an inventory order
carrying costs -- the variable costs per unit of holding an item in inventory for specific period of time
total cost of inventory -- the sum of order costs and carrying costs of inventory
reorder point -- the point at which to reward her inventory, expressed as days of lead time X daily usage
safety stock -- extra inventory that is held to prevent stock outs of important items
just in time (JIT) system -- inventory management technique that minimizes inventory investment by having materials arrive at exactly the time they are needed for production
materials requirement planning (MRP) system -- inventory management technique that applies EOQ concepts and computer to compare production needs to available inventory balances in a terminal and order should be placed for various items on a product's bill of materials
manufacturing resource planning II (MRP II) -- a sophisticated computerized system that integrates data from numerous areas such as finance, accounting, marketing, engineering, and manufacturing and generates production plans as well as numerous financial and management reports
enterprise resource planning (ERP) -- a computerized system that electronically integrates external information about the firm suppliers and customers with the firm's departmental data so that information on all available resources, human and material, can be instantly obtained in a fashion that eliminates production delays and controls costs
credit standards -- the firm's minimum requirements for extending credit to a customer
five Cs of credit -- the five key dimensions -- character, capacity, capital, collateral, and conditions -- used by credit analysts to provide a framework for in-depth credit analysis
credit scoring -- a credit selection method commonly used with high-volume/small dollar credit requests; relies on a credit score determined by applying statistically derived weights to a credit applicants scores on key financial and credit characteristics
credit terms -- the terms of sale for customers who have been extended credit by the firm
Cash discount -- a percentage deduction from the purchase price; available to the credit customer who pays its account within a specified time
Cash discount period -- the number of days after the beginning of the credit period during which the Cash discount is available
credit period -- the number of days after the beginning of the credit period until full payment of the account is due
credit monitoring -- the ongoing review of a firm's accounts receivable to determine whether customers are paying according to the stated credit terms
aging schedule -- a credit monitoring technique that breaks down accounts receivable into groups on the basis of their time and origin; it shows the percentages of the total accounts receivable balance that have been outstanding for specified periods of time
float -- funds that have been sent by the payor but are not yet usable funds by the payee
mail float -- the time delay between when payment is placed in the mail and what is received
processing float -- the time between receipt of a payment and its deposit into the firm's account
clearing float -- the time between deposit of a payment and when spendable funds become available to the firm
lockbox system -- a collection procedure in which customers mail payments to a P.O. Box that is emptied regularly by the firm's bank, which processes the payments and deposits them in the firm's account. This system speeds up collection time by reducing processing time as well as mail and clearing time
controlled disbursing -- the strategic use of mailing points and bank accounts to lengthen mail float and clearing float, respectively
Cash concentration -- the process used by the firm to bring lockbox and other deposits together into one bank, often called the concentration bank
depository transfer check (DTC) -- an unsigned check drawn on one of the firm's bank accounts and deposited in another
ACH (automated clearinghouse) transfer -- preauthorized electronic withdrawal from the payor's account in deposit into the payee's account via a settlement among banks by the automated clearinghouse
wire transfer -- an electronic communication that, via bookkeeping entries, removes funds in the payor's bank and deposits them in the payee's bank
zero balance account (ZBA) -- a disbursement account that always has an end of day balance of zero because the firm deposits money to cover checks drawn on the account only as they are presented for payment each day

Unit 4 Summary

Capital Budgeting, Valuation and Capital Structure

Now that we have examined the main concepts and tools in finance, we are ready to discuss how managers analyze and carry out key financial decisions at their respective enterprises. Decisions are either long term or short term. In this presentation we focus on the main long term decisions facing companies; capital budgeting decisions, valuation issues and capital structure choices.

Capital Budgeting

Capital Budgeting (CB) decisions are probably among the most important tasks faced by the management of any type of business. New product launches, new marketing campaigns, plant modernization, business expansions or contraction, are examples of CB tasks. Basically, the whole subject of CB could be collapsed into a single question: “Should a project under consideration be accepted or rejected?” To answer this vital question effectively, we need to be familiar with CB techniques such as payback, net present value (NPV), and internal rate of return (IRR) methods. In addition to being able to apply these methods to any CB situation, we also need to be able to determine the relevant cash flows (CFs) for all projects under consideration.

Briefly then, each project has three types of cash flows: initial CFs; operating CFs; and terminal CFs. Generally speaking, initial CFs are negative in nature -they are the costs of getting the project off the ground (cash outflows). The other two, operating and terminal CFs are positive (cash inflows). Although finding operating CFs is can be complex, we can define an operating (or periodic) cash flow as the sum of periodic net income after taxes plus periodic depreciations.

Valuation

It is almost impossible to think of any financial decision that does not depend on valuation. In fact, valuation lies at the heart of any CB decision.

Consider NPV for example. NPV is essentially about valuation - valuing cash flows. Furthermore, valuation techniques are used to “price” all sorts of decisions - from recruitment decisions (stock options and compensation plans) to buying, selling, and expanding businesses; and from launching new units to shutting down plants and operations. Generally, we may value the right-hand side of the balance sheet - stocks and bonds- or the left-hand side - the assets. Additionally, valuation could be based on current market dynamics -market-value-based, or past and historical figures - book-value-based. Normatively, finance requires always looking to the future for making present day decisions. As a result, market-based valuations that are built upon projected future cash flows are the norm.

Capital Structure

“Bottom lines”, and consequently market values, are also affected by the extent to which companies use debt to finance their assets. The structure of debt and equity within a business - in effect, the right hand side of the balance sheet - is known as capital structure(CS). CS becomes a key decision issue for management because as companies start using more and more debt, they become more and more risky. Such risk is referred to as financial risk. Management should move toward an “optimum” CS.

Another risk that affects the “bottom line” has to do with the extent to which a business utilizes fixed assets in its operations. This latter phenomenon gives rise to operating risk - also known as operating leverage. The higher the proportion of fixed assets in a balance sheet, the higher the risk the company faces. How do we explain this phenomenon? In times of economic downturn, companies will find it difficult to recover large fixed expenses.

Financial management -- Chapter 12 -- summary

The amount of leverage (fixed cost assets or funds) employed by a firm directly affects its risk, return, and share value. Generally, higher leverage raises risk and return, and lower leverage reduces risk and return. Operating leverage is concerned with the level of fixed operating costs; financial leverage focuses on fixed financial costs, particularly interest on debt and any preferred stock dividends. The firm's financial leverage is determined by its capital structure. Because of its fixed interest payments, the more debt a firm employees relative to its equity, the greater its financial leverage.

The value of the firm is clearly affected by its degree of operating leverage and by the composition of its capital structure. The financial manager must therefore carefully consider the types of operating and financial costs it concurs, recognizing that with greater fixed costs comes higher risk. Major decisions with regard to both operating cost structure and capital structure must therefore focus on their impact on the firm's value. Only those leverage and capital structure decisions that are consistent with the firm's goal of maximizing its stock price should be implemented.

Effects of changing costs
Leverage results from the use of fixed costs to magnify returns to a firm's owners. Capital structure, the firm's mix of long-term debt and equity, affects leverage and therefore the firm's value. Breakeven analysis measures the level of sales necessary to cover total operating costs. The operating breakeven point may be calculated algebraically, by dividing fixed operating costs by the difference between the sale price per unit and variable operating cost per unit, or it may be determined graphically. The operating breakeven point increases with increased fixed and variable operating costs and decreases than increase in sale price, and vice versa.

Leverages
Operating leverage is the use of fixed operating costs by the firm to magnify the effects of changes in sales on EBIT. The higher the fixed operating costs, the greater the operating leverage. Financial leverage is the use of fixed financial costs by the firm to magnify the effects of changes in EBIT on EPS. The higher the fixed financial costs, the greater the financial leverage. The total leverage of the firm is the use of fixed costs -- both operating and financial -- to magnify the effects of changes in sales on EPS.

Non-US firms and capital structure theory
Debt capital and equity capital make up a firm's capital structure. Capital structure can be externally assessed by using financial ratios -- debt ratio, Times interest earned ratio, and fixed payment coverage ratio. Non-US companies try to have much higher degrees up indebtedness then do their US counterparts, primarily because US capital markets are much more developed.

Research suggests that there is an optical capital structure that balances the firm's benefits and costs of debt financing. The major benefit of debt financing is the tax shield. The costs of debt financing include the probability of bankruptcy; agency costs imposed by lenders; and asymmetric information, which typically causes firms to raise funds in a pecking order so as to send positive signals to the market and thereby enhance shareholder wealth.

Optimal capital structure
Zero growth valuation model defines the firm's value as its net operating profit after taxes (NOPAT), or after-tax EBIT, divided by its weighted average cost of capital. Assuming that NOPAT is consistent, the value of the firm is maximized by minimizing its weighted average cost of capital (WACC). The optimal capital structure is one that minimizes the WACC. Graphically, the firm's WACC exhibit a U-shaped, whose minimum value defines the optimal capital structure that maximizes owner wealth.

EBIT-EPS
the EBIT-EPS approach evaluates capital structures in light of the returns they provide the firm's owners and their degree of financial risk. Under the EBIT-EPS approach, the preferred capital structure is the one that is expected to provide maximum EPS over the firm's expected range of EBIT. Graphically, this approach reflects risk in terms of the financial breakeven point and the slope of the capital structure line. The major shortcoming of EBIT-EPS analysis is that it concentrates on maximizing earnings (returns) rather than owner's wealth, which considers risk as well as return.

Return and risk of alternative capital structures
The best capital structure can be selected by using a valuation model to leak return and risk factors. The preferred capital structure is the one that results in the highest estimated share value, not the highest EPS. Other important non-quantitative factors must also be considered when making capital structure decisions.

Financial management -- Chapter 12

leverage and capital structure
terms

Leverage -- results from the use of fixed cost assets or funds to magnify returns to the firm's owners
capital structure -- the mix of long-term debt and equity maintained by the firm
breakeven analysis -- indicates the level of operations necessary to cover all costs and the profitability associated with various levels of sales
operating breakeven point -- the level of sales necessary to cover all operating costs
operating leverage -- the potential use of fixed operating costs to magnify the effects of changes in sales on the firm's earnings before interest and taxes
degree of operating leverage (DOL) -- the numerical measure of the firms operating leverage
financial leverage -- the potential use of fixed financial costs to magnify the effects of changes in earnings before interest and taxes on the firms earnings per share
degree of financial leverage (DFL) -- the numerical measure of the firm's financial leverage
total leverage -- the potential use of fixed costs, both operating and financial, to magnify the effects of changes in sales on the firms earning per share
degree of total leverage (DTL) -- the numerical measure of the firms total leverage
pecking order -- a hierarchy of financing that begins with retained earnings, which is followed by debt financing and finally external equity financing
asymmetric information -- the situation in which managers of a firm have more information about operations and future prospects than do investors
signal -- a financing action by management that is believed to reflect its view of the firms stock value; generally, debt financing is viewed as a positive signal that management believes the stock is "undervalued," and a stock issue is viewed as a negative signal that management believes the stock is "overvalued"
optimal capital structure -- the capital structure at which the weighted average cost of capital is minimized, thereby maximizing the firm's value
EBIT-EPS approach -- an approach for selecting the capital structure that maximizes earnings per share (EPS) over the expected range of earnings before interest and taxes (EBIT)
financial breakeven point -- the level of EBIT necessary to just cover all fixed financial costs

Financial management -- Chapter 11 -- summary

The cost of capital is an extremely important rate of return used by the firm in the long-term decision process, particularly in capital budgeting decisions. It is the expected average future cost to the firm of funds over the long run. Because the cost of capital is the pivotal rate of return used in the investment decision process, its accuracy can significantly affect the quality of these decisions.

Even with good estimates of project cash flows, the application of NPV and IRR decisions techniques, and adequate consideration of project risk, a poorly estimated cost of capital can result in the destruction of shareholder value. Underestimation of the cost of capital can result in the mistaken acceptance of poor projects, whereas over estimation can cause good projects to be rejected. In either situation, the firm's action could be detrimental to the firm's value. By applying the proper techniques to estimate the firm's cost of capital, the financial manager can improve the likelihood that the firm's long-term decisions will be consistent with the firm's overall goal of maximizing stock price (owner wealth).

Cost of capital
The cost of capital is the rate of return the firm must earn on its investments to maintain its market value and attract needed funds. It is affected by business and financial risks, and is measured on an after-tax basis. A weighted average cost of capital should be used to find the expected average future cost of funds over the long run. The specific costs of the basic sources of capital (long-term debt, preferred stock, retained earnings, and common stock) can be calculated individually.

Determine the cost of long-term debt and preferred stock
The cost of long-term debt is the after-tax cost today of raising long-term funds through borrowing. Cost quotations, calculation, or approximation can be used to find a before tax cost of debt, which must then be tax adjusted. The cost of preferred Stock is the ratio of the preferred stock dividend to the firm's net proceeds from the sale of preferred stock.

Calculating the cost of common stock equity and conversion to cost of retained earnings
The cost of common stock equity can be calculated by using the constant growth valuation (Gordon) model or the CAPM. The cost of retained earnings is equal to the cost of common stock equity. Adjustment and the cost of common stock equity to reflect underpricing implication costs is necessary to find the cost of new issues of common stock.

WACC & EVA
The firm's WACC reflects the expended average future cost of funds over the long run. It combines the costs of specific types of capital after weighting each of them by its proportion. The theoretically preferred approach uses target weights based on market values. Economically value added (EVA) is a popular measure that uses the WACC to determine whether a proposed investment is expected to make a positive contribution to the owner's wealth.

Determining breakpoints
As total new financing increases, the costs of the various types of financing will increase, raising the firm's WACC. The WMCC is the firm's WACC associated with its next dollar of total new financing. Break points represent the level of total new financing at which the cost of one of the financing components rises, causing an upward shift in the WMCC. The WMCC schedule relates to the WACC to each level of total new financing.

WMCC & IOS
The IOS ranks currently available investments from best to worst. It is used with the WMCC to find the level of financing/investment that maximizes owner wealth. The firm accepts projects up to the point at which the marginal return on its investment equals is weighted marginal cost of capital.

Managerial finance -- Chapter 11

the cost of capital
terms

Cost of capital -- the rate of return that a firm must earn on the projects in which it invests to maintain its market value and attract funds
business risk -- the risk to the firm of being unable to cover operating costs
financial risk -- the risk to the firm of being unable to cover required financial obligations (interest, lease payments, preferred stock dividends)
target capital structure -- the desired optimal mix of debt and equity financing that most firms attempt to maintain
cost of long-term debt -- the after-tax cost today of raising long-term funds through borrowing
net proceeds -- funds actually received from the sale of the security
flotation costs -- the total costs of issuing in selling a security
cost of preferred stock -- the ratio of the preferred stock dividend to the firm's net proceeds from the sale of preferred stock; calculated by dividing the annual dividend, by the net proceeds from the sale of the preferred stock
cost of common stock equity -- the rate at which investors discount the expected dividend of the firm to determine its share value
constant growth valuation (Gordon) model -- assume is that the value of a share of stock equals the present value of all future dividends (assumed to grow at a constant rate) that it is expected to provide over an infinite time horizon
capital asset pricing model (CAPM) -- describes the relationship between the required return, and the nondiversifiable risk of the firm as measured by the beta coefficient
cost of retained earnings -- the same as the cost of on equivalent fully subscribed issue of additional common stock, which is equal to the cost of common stock equity
costs of new issue of common stock -- the cost of common stock, net of underpricing and associated flotation costs
underpriced -- stock sold at a price below its current market price
weighted average cost of capital (WACC) -- reflects the expected average future cost of funds over the long run; found by weighting the cost of each specific type of capital by its proportion in the firm's capital structure
book value weights -- weights that use accounting values to measure the proportion of each type of capital in the firm's financial structure
market value weights -- weights that use market values to measure the portion of each type of capital in the firm's financial structure
historical weights -- either book or market value weights based on actual capital structure proportions
target weights -- either book or market value weights based on desired capital structure proportions
economic value added (EVA) -- a popular measure used by many firms to determine whether an investment contributes positively to the owner's wealth; calculated as the difference between an investments net operating profit after taxes (NOPAT) and the cost of funds used to finance the investment, which is found by multiplying the dollar amount of the funds used to finance the investment by the firm's weighted average cost of capital (WACC)
weighted marginal cost of capital (WMACC) -- the firm's weighted average cost of capital (WACC) associated with its next dollar of total new financing
breakpoint -- the level of total new financing at which the cost of one of the financing components rises, thereby causing an upward shift in the weighted marginal cost of capital (WMACC)
weighted marginal cost of capital (WMCC) schedule -- graph that relates the firm's weighted average cost of capital to the level of total new financing
investment opportunities schedule (IOS) -- a ranking of investment possibilities from best (highest return) to worst (lowest return)

Managerial finance -- Chapter 10 -- summary

Not all capital budgeting projects have the same level of risk as the firm's existing portfolio of projects. In addition, mutually exclusive projects often possess differing levels of risk. The financial manager must therefore adjust projects for differences in risk when evaluating their except ability. With Al such adjustment, management could mistakenly accept projects that destroy shareholder value or could reject projects that create shareholder value. To ensure that neither of these outcomes occurs, the financial manager must make sure that only those projects that create shareholder value are recommended.

Risk adjusted discount rates (RADRs) provide a mechanism for adjusting the discount rate said that it is consistent with the risk-return preferences of market participants and thereby with excepting only value creating projects. Procedures for comparing projects with unequal lives, procedures for explicitly recognizing real options embedded in capital projects, and procedures for selecting projects under capital rationing and able the financial manager to refine the capital budgeting process farther. These procedures, along with risk adjustment techniques, should enable the financial manager to make capital budgeting decisions that are consistent with the firm's goal of maximizing stock price.

Recognizing risk
the cash flows associated with capital budgeting projects typically have different levels of risk, and the acceptance of a project generally affects the firms overall risk. Thus it is important to incorporate risk considerations in capital budgeting. Various behavioral approaches can be used to get a feel for the level of the project risk, whereas other approaches explicitly recognize project risk in the analysis of capital budgeting projects.

Risk in capital budgeting is the degree of variability of cash flows. Finding the breakeven cash inflow and estimating the probability that it will be realized make up one behavioral approach for assessing capital budgeting risk. Sensitivity analysis and scenario analysis are also behavioral approaches for capturing the variability of cash inflows and NPVs. Simulation is a statistically based approach that results in a probability distribution of Project returns.

Unique risks
although the basic capital budgeting techniques are the same for multinational and purely domestic companies, firms that operate in several countries must also deal with exchange-rate and political risks, tax law differences, transfer pricing, and strategic issues.

RADRs
the risk of a project whose initial investment is known with certainty is embodied in the present value of its cash inflows, using NPV. Two opportunities to adjust the present value of cash inflows for risk exist -- adjust the cash inflows or adjust the discount rate. Because adjusting the cash inflows is highly subjective, adjusting discount rates is more popular. The RADRs use a market-based adjustment of the discount rate to calculate NPV. The RADR is closely linked to CAPM, but because real corporate assets are generally not traded in an efficient market, the CAPM cannot be applied directly to capital budgeting. Instead, firms develop some CAPM- type relationship to leak a projects risk to its required return, which is used as the discount rate. Often, for convenience, firms will rely on total risk as an approximation for relevant risk when estimating require Project returns. RADRs are commonly used in practice, because decision-makers prefer rates of return and find an easy to estimate and apply.

ANPVs
the ANPV approach is the most efficient method of comparing ongoing, mutually exclusive projects that have unequal usable lives. It converts the NPV of each unequal lived project into an equivalent annual amount -- it's ANPV. The ANPV can be calculated using financial tables, a financial calculator, or a spreadsheet. The project with the highest ANVP is best.

Real options
Real options are opportunities that are embedded in capital projects that allow managers to alter their cash flow and risk in a way that affects project except ability (NPV). By explicitly recognizing real options, the financial manager can find a project strategic NPV. Some of the more common types of real options are abandonment, flexibility, growth, and timing options. The strategic NPV improves the quality of the capital budgeting decision.

Capital rationing exists when firms have more acceptable independent projects and they can fund. Although, in theory, capital rationing should not exist, in practice it commonly occurs. Its objective is to select from all acceptable projects the group that provides the highest overall net present value and does not require more dollars than our budget. The two basic approaches for choosing projects under capital rationing are the internal rate of return approach and the net present value approach. The NPV approach better achieve the objective of using the budget to generate the highest present value of inflows.

Managerial finance -- Chapter 10

risk and refinements in capital budgeting
terms

Risk (in capital budgeting) -- the chance that a project will prove unacceptable or, more formally, the degree of variability of Cash flows
breakeven cash inflow -- the minimum level of cash inflow necessary for a project to be acceptable, that is, in any NPV >$0
scenario analysis -- a behavioral approach that evaluates the impact on the firm's return of simultaneous changes in a number of variables
simulation -- a statistics based behavioral approach that applies predetermined probability distributions and random numbers to estimate risky outcomes
exchange rate risk -- the danger that an unexpected change in the exchange rate between the dollar in the currency in which the project's cash flows are denominated will reduce the market value of that project cash flow
transfer prices -- prices that subsidiary's charge each other for the goods and services traded between them
risk adjusted discount rate (RADR) -- the rate of return that must be earned on a given project to compensate the firm's owners adequately -- that is, to maintain or improve the firm's share price
annualized net present value (ANPV) approach -- and approach to evaluating unequal-lived projects that converts the net present value of unequal-lived, mutually exclusive projects into an equivalent annual amount (in NPV terms)
real options -- opportunities that are embedded in capital projects that enable managers to alter their cash flows and risk in a way that affects project acceptability (NPV), also called strategic options
internal rate of return approach -- an approach to capital rationing that involves graphing Project IRRs in descending order against the total dollar investment to determine the group of acceptable projects
investment opportunities schedule (IOS) -- the graph that plots project IRRs and ascending order against the total dollar investment
net present value approach -- an approach to capital rationing that is based on the use of present values to determine the group of projects that will maximize owners wealth