Business skills Flashcards
What are Porter’s 5 forces?
They are 5 dimensions used to examine a particular industry.
1) Threat of new entrants- depends on whether their are barriers to entry, such as large capital requirements, etc.
2) Bargaining Power of Buyers - standard product, volume purchases, little or no switching costs
3) Bargaining power of suppliers - supplier power high when inputs are important, suppliers are few, products branded or switching costs
4) Threat of Substitutes- substitution of other products by customers, or doing without - issues: building customer loyalty and brand image
5) Competitive rivalry- increases during mature stage of product life cycle and undifferentiated product
What is a PEST analysis
A framework for analyzing your business environment by considering:
1) Political Factors
2) Economic Factors
3) Socio-Cultural Factors
4) Technological Factors
Also can add Legal and Environmental Factors for PESTLE acronym
How is Evestar impacted by a downgrade of their bonds to junk status?
1) cost of borrowing increases - junk bonds seen as having higher default risk - In 2016, Evestar paid 8% interest $T20m/$T$250m, as they come up for redemption, they will have to be replaced by bonds with a higher yield, typically at least 3% more. Higher interest rates will strain the cash flows and post tax profits of Evestar
2) Bonds are no longer investment-grade, institutional investors like pension funds are not allowed by law to have them in their portfolios, and will have to sell off, causing bond prices to fall
3) Liquidity problems if bonds are not renewed - may be difficult to find new investors - may have to cut dividend to redeem bonds according to schedule, also work on collecting the $26m in receivables.
4) If Evestar fails to redeem the bonds, the bond holders could liquidate Evestar’s assets on which the bonds are secured
5) Change in nature of bond holders - investors who buy junk bonds want to see improvements in the fundamentals of the company behind the bond, Which means Evestar will come under closer scrutiny
6) Fall in share price - the downgrade is bad news for the equity markets who will view this as bad prospects for Evestar, share price will be impacted because investors will recognize potential for falling profits and liquidity
7) Other credit may be more difficult to raise- lenders of credit may be less willing to extend credit if they believe Evestar has credit problems
What are the benefits of Evestar coming up with a new show to replace ‘The Cavern’?
1) new show could boost viewing #s
2) avoids rising costs of cavern
3) avoids risk of crumbling geology of cavern
4) different format may help develop revenue from spinoffs and voting
5) may attract new segments of viewers, which could widen the appeal to advertisers and be a selling point
What are ways to reduce risks of new series to replace ‘The Cavern’?
1) Do a pilot episode to test viewer responses
2) Rent don’t buy any heavy equipment needed
3) Prepare a cost schedule and budget for new show
4) Employ consultants to handle unfamiliar aspects of new show
5) Make sure medics are on site to reduce risk to contestants and crew
6) Adjust show format to avoid specific risks
What are sources of additional equity for Evestar?
1) increase retentions by cutting the dividend - in 2016, Evestar paid 95.8% of its profit out as dividend - this T$69 in dividends paid equates to 27.6% of the debt. If they cut the dividend, cash reserves would rise, which could be used to redeem some of the debt.
2) Issue more shares to existing shareholders- they would have to be convinced to commit more funds and increase their exposure to the risks of Evestar, would reduce dividend payout per share, but profits would rise by interest saved
3) Issue shares to new shareholders - would require a public prospectus, share price would have to be discounted to market price to make them attractive to investors
What are the implications of getting additional equity into Evestar?
1) impact of dividend policy on share price - Evestar has had a very generous dividend policy which has attracted the sort of investor looking for large dividends - these cash-seeking shareholders may likely sell their shares, reducing share price. Plus, cutting the dividend signals that management expect profits to fall further, which will also reduce share price.
2) Dilution of existing shareholders - At present Denny owns 7%, 93% is owned by other shareholders. Issuing new shares will reduce the percentage is shares held by Denny and others, This impacts not only their share of dividend, but may also affect their ability to vote on resolutions and appoint board members
3) Dilution of shares may cause change of power on board - for example new shareholders may wish to see more rigorous corporate governance, and to separate Denny’s role by appointing an independent Chairman
How can Evestar’s shareholders be convinced to invest in more shares?
Intro: this is critical because a bad approach can cause shareholders to blame management for problems, and panic and sell shares
1) Explain the consequences of increased debt costs - lower profits, higher share price volatility - present additional equity funding as a way to restore credit rating back to investment grade and avoid interest increases
2) Present business plan to increase profits and maintain dividend per share - Evestar has been claiming that it doesn’t need add’l equity, yet it continues to rely on debt, shareholders will want to be convinced that additional equity will lead to higher dividends in the medium term - show them a business plan and financial forecast that will deliver this
3) Propose reform in corporate governance - Denny White appears to be a hindrance in the shareholders having more say in the management and policies of Evestar, they may be more interested in increasing their holdings if he is removed as Chairman.
4) Appeal to their sense of duty - without their additional investment, Evestar’s future is uncertain. Popular shows would be lost, there would be job losses for the staff, lost opportunities for contestants.
What are a couple of ways besides increasing equity that Evestar can reduce its reliance on debt?
1) Improve collections on receivables - Evestar has T$26m in receivables and only T$10m of payables. Bringing these in line would release $16m in funds.
2) Sale and leaseback of assets - Evestar has T$304m in tangible assets- These assets could be sold to a finance house and leased back, with the proceeds of the sale being used to redeem debts.
What would be some approaches Evestar could use to value a business like Bonchant? Which approach is most suitable?
There are 3 basic ways to value a business, the Asset based valuation method, the Earnings based valuation method, and the Cash Flow based method.
1) Asset based methods are generally not relevant in valuing a business that is a going concern, especially when they have substantial intangible assets. Bonchant’s intangibles are 19% of its total assets.
2) Earnings based method - this method takes post-tax profits and multiplies them by an appropriate P/E ratio, for example the market sector P/E ratio, or Evestar’s P/E ratio. Value of Company = Total Post-Tax Earnings X P/E ratio. Bonchant already has a share price on the market and will not accept less than present share price, but rather will expect a bid premium to sell to Evestar.
3) Cash Flow based method - superior method because the discounted value of future cash flows represents the wealth of shareholders, however it may be difficult to gain access to Bonchant’s accounts and forecast these cash flows. Also they may be difficult to estimate due to Bonchant’s reliance on renewed contracts and the success of new programs.
4) other considerations- Bonchant could be worth more than these approaches if it can be shown that by owning Bonchant, Evestar can boost both its own forecasted profits and cash flows and those of Bonchant’s by combining operation (synergies
of operations), Evestar must avoid paying too much, yet if there are rival bidders for Bonchant that may drive the price up.
5) Most suitable method would be Earnings based approach- use a share price higher than present share price of Bonchant, expect Bonchant’s board will seek premium bid during negotiations - therefore determine beforehand maximum acceptable price for Bonchant
Benefits of buying Bonchant
1) Reduce competition- owning Bonchant means less risk of being undercut by Them in competitive bids
2) Increase market power - bigger player covering both high priced and budget programs, can offer a wider variety of programming
3) Quicker access to new market of budget reality TV - the digital channels Evestar does not currently sell to
4) Diversification of risk by reducing Evestar’s reliance on the 4 major broadcasters, Income will be received from more than 1 sector of the market
5) Potential gain for Evestar’s shareholders - synergies could result in gaining earnings with a higher present value than the price paid for Bonchant
Risks of buying Bonchant
1) risks of increasing debt to buy Bonchant
2) little knowledge of Budget programs may result in poor decisions
3) Buying Bonchant means increasing reliance on reality TV market which may be declining due to growing concerns about vulnerability of contestants and possible viewer fatigue
4) Potential of paying too much for Bonchant and losing shareholder value
5) Managerial problems - cost overruns due to not being familiar with low budget programming, high costs of integrating companies, redundancies, integrating IT systems, capital equipment
6) possibility of poor health and safety procedures or disruptions due to Bonchant not using secure studio locations and relies on access to the public for some of its shows
