FINANCIAL STRATEGY

Dr George Katechos

LECTURE OUTLINE
(FINANCIAL STRATEGY: CORPORATE LIFE CYCLE I)

The life cycle of a business

Life Cycle in General From Start up to Decline

The risk perspectives of a starting up company

Business Risk Perspective Financial Risk Perspectives

The funding perspectives of a starting up firm

Structure @ starting up Sources of funds Profitability & Market issues

THE LIFE CYCLE OF A BUSINESS

CORPORATE FINANCIAL STRATEGY FOR SME

Life Cycle of a Business: Start Up Growth Mature Decline

THE LIFE CYCLE OF A BUSINESS

CORPORATE FINANCIAL STRATEGY FOR SME

Maturity Decline

Growth

Introduction
Time

THE RISK PERSPECTIVES

RISK PERSPECTIVES FOR SME

Business Risk Very High Will Product Work ? Will Product be Accepted ? Will Market Share be Sufficient ?: Cover Costs Will Market Share be Acceptable ?: Cost Reduction

THE RISK PERSPECTIVES

RISK PERSPECTIVES FOR SME

Business Risk Launch Own Product v Buy Existing Product: Launch Own Product: Expensive Buy Existing Product: Less Expensive

THE RISK PERSPECTIVES

RISK PERSPECTIVES FOR SME

Business Risk Position of Product(s) on Product Life Cycle: Own Product Existing Bought In Product

THE RISK PERSPECTIVES

RISK PERSPECTIVES FOR SME

Business risk

Operational gearing

Fixed costs

Demand elasticity

THE RISK PERSPECTIVES

RISK PERSPECTIVES FOR SME

Financial Risk

Should be kept very low

Preferably no Debt Financing:

Need to keep financial risk low Need to Retain Cash: Interest Capital Contractual Liabilities

THE RISK PERSPECTIVES

RISK PERSPECTIVES FOR SME

Advantage in Capital Structure ?: Modigliani & Miller Cost of Financial Distress Tax Shield ?
Equity Funding Most Appropriate: Permanent Financing Discretion on Dividend

THE FUNDING PERSPECTIVES OF A STARTING UP FIRM

FUNDING PERSPECTIVES FOR SME

Structure @ starting up

Private Limited Company: Provides Separate Legal Entity Provides Comparatively Easy Sale Listed Public Limited Company too Exposed to Market Private Companies have Close Association between Owners and Company

THE FUNDING PERSPECTIVES OF A STARTING UP FIRM

FUNDING PERSPECTIVES FOR SME

Difficulty in Finding Investors

High Return Expected due to High Risk Venture Capital Funding Probable

THE FUNDING PERSPECTIVES OF A STARTING UP FIRM

FUNDING PERSPECTIVES FOR SME

Venture Capital Companies Business Angels

Private Equity Investor

Users of Redundancy Packages or other Capital Receipts Corporate Venturing

THE FUNDING PERSPECTIVES OF A STARTING UP FIRM

FUNDING PERSPECTIVES FOR SME

Provide Capital to Fund High Risk Needs

Require High Return Adopt Portfolio Approach Often Provide Business Expertise

THE FUNDING PERSPECTIVES OF A STARTING UP FIRM

FUNDING PERSPECTIVES FOR SME: DIVIDEND POLICY

Nil Dividend Policy

Need to Conserve Cash

Additional Funding Expensive

No / Low Retained Earnings

Return by Capital Gains

Tax Inefficiency of Dividend as a Reward to Investors

THE FUNDING PERSPECTIVES OF A STARTING UP FIRM

FUNDING PERSPECTIVES FOR SME: FUTURE GROWTH PROSPECTS

Very High
Value of Company is Present Value of Future Cash Flows Venture Capitalists have 3 5 year Horizon

PROFITABILITY & MARKET ISSUES

PRICE / EARNINGS RATIO MULTIPLE

Price / Earnings Ratio Multiple

Associated with High Earnings Growth Relationship of Earnings to Share Price Surrogate Share Price for Private Limited Companies

PROFITABILITY & MARKET ISSUES

PRICE / EARNINGS RATIO MULTIPLE

Current Profitability

Nominal / Negative Reason for High P/E Ratio Effect on Dividend Policy Need to Finance Early Losses

PROFITABILITY & MARKET ISSUES

PRICE / EARNINGS RATIO MULTIPLE

Maturity Launch Growth Maturity Steady State Decline

P/E Multiple 40 20 10 7 4

Current EPS 2p 4.5p 10.0p 14.3p 12.5

Market Price 80p 90p 100p 100p 50p

PROFITABILITY & MARKET ISSUES

PRICE / EARNINGS RATIO MULTIPLE

Share Price

Rapidly Growing / Volatile Associated with P/E Ratio Based on Market Confidence

PROFITABILITY & MARKET ISSUES

PRICE / EARNINGS RATIO MULTIPLE

Maturity

Annual Required Return (Ke) 40% 25% 15% 12%

Generated by: Dividend Yield Capital Growth 0% 2% 12% 18% 40% 23% 3% -6%

Launch Growth Maturity Decline

FEATURES OF FIRST STAGES IN BUSINESS LIFE CYCLE

CORPORATE FINANCIAL STRATEGY FOR SME

Business Risk Financial Risk

Very High Very Low

Business Structure Source of Funding Dividend Policy Future Growth Prospects

Price / Earnings Multiple Current Profitability Share Price

Private Limited Company Non-Market Nil Payout Ratio Very High

Very High Nominal / Negative Rapidly Growing / Volatile

CASH POSITIONS FOR NEW FIRMS

FTSE AIM HIGH TECH RESEARCH 2007

ALTERNATIVE INVESTMENT MARKET (AIM) GROWTH

AVERAGE FUNDRAISING ON IPOS

Source: London Stock Exchange 2007

ANY QUESTIONS