2- Lecture Notes 2

2- Lecture Notes 2 - Strategy Analysis Corporate Strategy...

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    Strategy Analysis
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    Multi-business organizations in the economy Why multi-product firm can be an efficient choice of  organizational form? Higher transaction cost in market place Product process involves specialized assets not easily available in  the marketplace Market imperfection such as information and incentive problems Less costly inside an organization Less communication cost (confidentiality, creditability) Reducing costs of enforcing agreement between subunits  Share valuation non-tradable and/or non-divisible assets Other concerns Lack of expertise Decentralization decreases goal congruence Corporate Strategy Analysis
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    Corporate Strategy Analysis Value creation in multi-business corporate  strategy is hard in practice Diversified U.S. companies trade at a discount Empire building v.s. Maximizing shareholder value Incentive misalignment Inadequate disclosure about segments leads to  difficulty in market valuation Acquisition of unrelated businesses often fails to  create value Value creation through divisional spin-offs and  asset sales (increase corporate focus)
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    Financial Analysis   Financial statement analysis is based on comparisons. Time series analysis Cross-sectional analysis Compare Ratios to Benchmark
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    Financial Statement Analysis   Financial statement analysis is based on comparisons. Time series analysis Comparison with similar companies Examines a single company to identify trends over time.
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    Financial Statement Analysis   Financial statement analysis is based on comparisons. Time series analysis Comparison with similar companies Company A Company B Provides insights concerning a company’s relative performance.
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    Ratio and Percentage  Analyses     Ratio  analysis, or  percentage   analysis, is used to express the  proportionate relationship between  two different amounts.
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    Common Size Financial Statements (Component Percentages)  Express each item on a particular statement  as a percentage of a single  base amount . Total assets on the balance sheet Net sales on the income statement
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    Common Size Financial  Statements Example     The comparative income statements  of Clover Corporation for 2001 and  2000 appear on the next slide.      Prepare common size income  statements where net sales equal  100%.
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    Common Size Financial  Statements CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31, 2001 and 2000 2001 Percent 2000 Net Sales 494,000 $ 100.00% 450,000 $ 100.00% Cost of merchandise sold 140,000 127,000 Gross profit 354,000 $ 323,000 $ Operating expenses 270,000 249,000 Income from operations 84,000 $ 74,000 $ Other expense 4,000 4,000 Income before income tax 80,000 $ 70,000 $ Income tax expense (20%) 16,000 14,000 Net income 64,000 $ 56,000 $
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    CLOVER CORPORATION Comparative Income Statements
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2- Lecture Notes 2 - Strategy Analysis Corporate Strategy...

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