corp_Ch12_09

corp_Ch12_09 - CLASS NOTES WEEK III BMA Ch.11 Investment...

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IRPGEN424 Corporate Finance Alex Kane 1 CLASS NOTES WEEK III BMA Ch.11 Investment Strategy and Economic Rents
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IRPGEN424 Corporate Finance Alex Kane 2 The Punch Lines “A good strategy positions the firm to generate the most value from its assets and growth opportunities.” “ … they should ask some probing questions about the possible sources of economic gains.” “Are your CF forecasts realistic? That is, do they result form a realistic potential for economic rents” (Economic rents = return above market rates) “What effects will your competitors’ actions have on the NPV of your investments?” The last question goes to the heart of the meaning of “strategy”
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IRPGEN424 Corporate Finance Alex Kane 3 Strategy Strategy is contingent behavior = optimize conditional on competitive behavior. This requires to figure out the optimal strategy of competitors -- the hardest task The difference between social and natural sciences is the need to deal with strategic behavior of subjects (agents) -- which is why social sciences are harder and less developed
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IRPGEN424 Corporate Finance Alex Kane 4 Determinants of economic rents Current pressures from competition: Product market Substitutes Bargaining power of customers and suppliers Barriers to entry (likelihood of new competitors) A commoditized market, where competition is near perfect (sellers see a perfectly elastic demand), is devoid of rents NPV from staying may be still positive, but there’s no NPV from getting in (see the Marvin example)
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IRPGEN424 Corporate Finance Alex Kane 5 Position within industry With globalization (entry more likely), source of economic rents would be the position within the industry
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This note was uploaded on 05/06/2010 for the course IRPS IRGN 410 taught by Professor Kane during the Fall '09 term at UCSD.

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corp_Ch12_09 - CLASS NOTES WEEK III BMA Ch.11 Investment...

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