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To meet the changes of development of the online market, in particular shopping via smart phones and tablets, Highflyer Sport Plc shall consider the marketing director opinion. Company online expansion by set up the internet based “mail order” operation, known as “eSport”, which is investment into distance selling continues in low price to attract people.
To achieve the conversion, consistently improve site visibility online and how it ranks in online searches are very important.
Example: In year 2012, Adidas “eCommerce” launch Adidas brands consumer with: WWW.ADIDAS.COM. The website integrates the adidas brands website and the brands e-shop together in one place. (Adidas group, 2012, p.77)
Traditional cash flow analysis (payback) and the accounting rate of return (ROI) fail to consider the time value of money. The internal rate of return (IRR) considers the time value of money and is frequently referred to as the time adjusted rate of return. The IRR is defined as the discount rate that makes the present value of the cash inflows equal to the present value of the cash outflows in a capital budgeting analysis, where all future cash flows are discounted to determine their present values.
The relationships are presented below. The cost of capital represents the minimum desired rate of return (i.e., a weighted average cost of debt and equity capital).
The net present value (NPV) is the difference between the present value of the expected cash inflows and the present value of the expected cash outflows. (James R. Martin, n.d.)
If NPV = 0, the project will neither increase nor decrease value of the company and non-monetary benefits may instead be considered before a decision is made.
If NPV > 0, the project should be accepted as it will increaseprofitand therefore value of the company. InvestingAswer,Inc. (2001-2015)
In these three cases the relationships between the NPV, IRR and Cost of Capital are illustrated in the following table along with the decisions based on the cash flow perspective.
Capital Budgeting Decision
NPV < 0
IRR< Cost of Capital
Reject the investment from the cash flow perspective. Other factors could be important.
IRR= Cost of Capital
Provides the minimum return. Probably reject from the cash flow perspective. Others factors could be important.
NPV > 0
IRR> Cost of Capital
Screen in for further analysis. Other investments may provide better returns and capital should be rationed, i.e., go to the most profitable projects. Others factors could be important.
The NPV of a capital budgetingproject indicates the expected impact of the project on the value of the firm. Projects with a positive NPV are expected to increase the value of the firm. Mark A. Lane, PH.D. (2002 – 2015)
Internal Rate of Return (IRR) and Net Present Value (NPV) are complementary measures of Discounted Cash Flow (DCF). They have essentially equivalent utility. IRR is not inferior to NPV as traditionally claimed. Using both measures gives better results than using either alone. Ray Martin. (1982-1997).
There are two ways for a company to raise capital through equity and debt. Equity investors get possession in the company but do not have a guaranteed return. Issuing stock is the most obvious way to raise funds using equity
In fact, it is using the shareholders money to raise fund, increasing the value of their equity holdings. Therefore, we should think of both retained earnings and newly-issued shares as examples of equity financing.
Debt financing is borrowing; investors get a promise of fixed future payments, but do not have any ownership. Borrowing can be done through a financial intermediary, such as a bank, or directly by issuing bonds.
There is a third category of assets, sometimes called hybrid securities, that is between equity and debt. Examples include warrants, convertible bonds and preferred stock. They all have some features that seem like equity and other features that seem like debt. Firms are finding it increasingly attractive to use these hybrid instruments. (James P. Dow, Jr.
Company retained earnings have direct influence to the dividends amounts.
Profit re-invested retained earnings distribute as dividend to shareholders.
Use retained earnings to raise new equity for new investments, preferably to pay higher dividends. (FAO, 1997) is as below:
i) Do not influence the control ownership of the Company as compare to issue new shares (Jim Riley, 2015)
ii) The use of retained earnings to avoids the cost of issue new shares.
iii) Retained earnings as a source of funds does not lead to a payment of cash.
iv) Do not have the outsider and shareholders take part will easier to passed the project
Venture Capitalist and Business Angel
Venture capitalist categories as very wealthy individuals (business angels) or companies (Venture capitalists) specially invest in potential developing companies.
Venture capitalists may need 25%–49% of the equity and a chair on the
board to easier monitoring their investment. But they do not want to take over management of their investment. (Ken Garrett, 2011).
In return the venture capitalist gets some say in the running of the company as well as a share in the profits made.
Examples of venture capitalists (who are also called private equity firms) are Advantage Capital Limited, Braveheart Ventures, Permira and Hermes Private Equity. Aashwin. (2006).
- Financial institutions
Financial institutions such as banks, credit unions and other financial institution offer a various of short and long-term finance solutions. The products include business loans, lines of credit, overdraft facilities, asset financing, invoice financing and equipment leases.
Bonds Bonds consider as a special method of debt financing this is due to debt instrument is issued by the company with the speciï¬c the interest rate. The company will pay back the principal (maturity date). The price paid for the bond at the time it is issued is called its face value. Normally used for raise fund for a speciï¬c project. (Don Hofstrand, 2013)
When a company issues a bond it guarantees to pay back the principal (face value) plus interest. From a ï¬nancing perspective, issuing a bond offers the company the opportunity to access financing without having to pay it back until it has successfully applied the funds.. However, because bonds are a debt instrument, they are ahead of equity holders for company assets. (Don Hofstrand, 2013)
Some Corporate bond offer entrenched call option that permit issuer to redeem the bonds before the maturity date. However other bonds, such as convertible bonds have are allow investors to convert the bond into equity. (Boundless, 2014)
Diversification of product
Purpose of diversification is to discover investment to diverse product from different market. (FMG Suite, 2015).This means that Companies sell new product to new market.
An economic of scope defined reduction in the long-run average and marginal cost, due to the similar production where the provision of one product reduces the cost of the other product. Adidas, the production of sports related products like sports shoes, apparels, sport equipment, accessories, fitness services and so on. Refer to Appendix 1
Management structure, administrative systems, research and development, marketing capabilities, manufacturing and distribution capabilities are very effective in carrying out functions for more than one product.
Nowadays, customer seeks for style fashion trends, athlete looking for greatest equipment. To maximize consumer needs, Adidas adopt a multi brands strategy, to grabs opportunities from various prospective. In this way, each brand is able to keep a unique identity and focus on its core competencies, while simultaneously providing Adidas with a range of product to increasing leverage in Marketplace.
The motives of diversifications are:
- Risk spreading
- Value Creation
Depending on the direction of company diversification, the different types are:
- Horizontal Diversification(Strategy-Train, 2009)
Produce new product foe current market
Eg: Adidas offer a service “personal training” irrelevant to their core of business. The miCoach program available over the Adidas website. Customers choose between training plan such as de-stress or learn how run.
- Vertical Diversification(Strategy-Train, 2009)
Move into firm customer’s or supplier’s business
- Concentric Diversification(Jefferson & Associates, Inc., 2009)
New product closely related to current product in new market
Eg: Adidas sell the deodorant and shower gel in drugstores and supermarkets.
- Heterogeneous (conglomerate) diversification(Jefferson & Associates, Inc., 2009)
New product in new market
In future, increase the eSport opportunity with a more cross channel approach, not only full sales potential but also untapped potential through new technologies.
However, the source of finance chosen will depend on the following factors:-
- Purpose – what the finance is to be used for
- Time Period – how long the finance will be needed for
- Amount – how much money the business needs
- Ownership and Size of the business
The corporate strategy of product diversification and innovation leadership will help diversified in product offering and brand portfolio.