1、t the costs from the revenues and adjust for taxes. You now have the annual cash flows generated from the bar. How long do you anticipate this bar being around? Cigar bars are a trend. In any case pick some number for the expected life (4-5 years). The discount rate should be a rate representative o
2、f WACCs of similar businesses with the same risk. Perhaps 20%. This gives you a value of: Value = CF1/1.2 + CF2/(1.2)2 + . + Cfn/(1.2)n Page 15 CABLE TELEVISION COMPANY Q: Your client is a small holding company that owns three cable television companies in the Northeast: Rochester, NY, Philadelphia
3、and Stamford, CT. Each of these three companies is profitable, and each has been experiencing steadily growing sales over the past few years. However, the management feels that the Northeast is not the fastest growing area of the country, and, therefore, acquired another cable television company in
4、Tucson, Arizona a little over a year ago. Despite every effort of management, the Tucson companys sales have been stagnant, and the company has been losing money. How would you analyze this situation, and what could be the cause of the poor performance of the Tucson cable company? To be divulged gra
5、dually: The Tucson area is smaller than Philadelphia, but larger than Rochester and Stamford. Tucson is also growing at 12% per year on average. Per capita income is higher than in Philadelphia and the same as in Rochester and in Stamford. Operating costs in Tucson are essentially the same as in the
6、 other markets. The cost of programming is based on number of subscribers and is equal across the nation. Operating costs are composed of variable items: sales staff, maintenance, administration and marketing. Only maintenance is higher that in the other markets, due to the larger land area serviced
7、. Fixed costs relate to the cable lines, which is a function of physical area covered. The Tucson company has attempted marketing efforts in the past, such as free Disney programming for one month, free HBO for one month, free hookup, etc. These programs have been modeled after the other three marke
8、ts. Cable penetration rates in the three Northeastern markets average 45%. The penetration rate in Tucson is 20%. These rates have been steady over the past three years in the Northeast. The penetration rate in Tucson has only risen by 2% in the past three years in Tucson. There is only one real sub
9、stitute good for cable television: satellite dishes. However, many communities are enacting legislation that limits their usage in Tucson. They are also prohibitively expensive for most people. Solution: The real error of management results from their failure to recognize another “substitute” good:
10、no cable television at all; television reception is far better in the desert Southwest than in Northeastern cities. The lower penetration rate is most likely a result of different climate conditions and lower interference in Arizona. Page 16 CHILLED BEVERAGES You are consulting for the manager of a
11、division of a large consumer products company. Her division produces fruit juices in three forms, all marketed under the same name: chilled (found in the milk section of the supermarket, usually), juice boxes, and frozen concentrate. This division has sales of $600 million per year. The entire compa
12、ny has sales of over $20 billion. The chilled segment represents $120 million in sales per year. While juice boxes and frozen concentrate are profitable, chilled juices are only breaking even in good quarters and losing money in bad quarters. She has received a proposal from upper management to sell
13、 the chilled juices business. What would you advise that she do? To be divulged gradually: Chilled beverages is a $5 billion dollar industry nationwide. There are two large players that have 40% and 25% of the market, respectively. Your clients market share, 12%, makes her third in the industry. The
14、 best available information indicates that the two market leaders are profitable. The two market leaders are able to fund more advertising and more promotion, trade and couponing that your client. The market leaders produce pure orange juice and blends that are based on citrus juices. Your product u
15、ses more elaborate blends of juices, usually with a base of pear or peach juice (95% of the inputs) and flavored with cranberries, bananas, mangoes, etc. (the other 5% of the inputs). Pear and peach juice are about the same price as orange juice, but the other flavorings cost about twice as much. Th
16、e market for chilled juices is essentially mothers with school age children. This is a highly price sensitive market that loves coupons, promotions, etc. Brand name is important in this market, as in juice boxes and frozen concentrate, as mothers tend to prefer highly reliable products for their chi
17、ldren. However, the brand premium must be in line with other branded products. Therefore, all branded juices tend to sell in the same price range. One plant in California produces all of the product, chilled, juice boxes and frozen. It would be difficult to find another use for the plant without a m
18、ajor conversion. Solution: There are three choices: Sell the chilled juice business. This would, however, affect the juice and frozen concentrate businesses, as there are both advertising and manufacturing synergies. Sell all of the juice business. This may be more feasible, as the buyer could captu
19、re the synergies, but would not be too likely to turn the business around. The selling price is likely to be low. Keep the chilled juice business and rework the ingredients and costs. This turns out to be the most feasible option, as evidenced by the success of the competitors. Page 17 DISTILLED SPI
20、RITS You are consulting for a major United States producer of distilled spirits. Their primary products are a line of mid- priced vodkas and two brands of mid-range rum. Over the past few years, the business has become less and less profitable. What could be causing this: Other information: The spli
21、t of product sold has consistently been 60% vodka / 40% run over the past few years. The selling prices of the two lines are essentially the same. Overall sales are growing at about 3 to 5% per year, the same as the industry average for these product lines. An analysis of the costs reveals the follo
22、wing: Production Costs have remained constant Advertising Costs have remained constant on average Distribution Costs have increased significantly The products are sold throughout the country. In 27 states, where alcohol is sold in privately managed supermarkets and liquor stores, “open” states, shel
23、f space is extremely expensive and trade promotions are critical. Such stores are also becoming less and less willing to hold inventory, which is increasing distribution costs by requiring more frequent deliveries. In the other 23 states, liquor is only sold through state regulated liquor stores. Di
24、stribution costs in these states is much lower, as there are far fewer outlets to service and central warehouses for the state-run stores. Advertising of alcohol is much more tightly regulated, and therefore, advertising spending is lower. Solution: A greater and greater share of the volume is being
25、 sold in the “open” states, with sales in these states increasing at about 10% per year. Sales in the regulated states are actually decreasing. Because the regulated states are less expensive to serve, and therefore, more profitable, the fact that they represent a shrinking portion of the total has
26、caused total profits to decline. CHEWING GUM MARKET How would you estimate the size of the annual U.S. chewing gum market? Check your answer for reasonableness. A typical approach: Estimate the number of people who chew gum: of the 300 million population, 15% are between the ages of 10 and 20, the h
27、eaviest users, for a total of 45 million. Estimate that these people chew two packs per week, for annual sales of 4,500 million packs. For the other users over age 20, (70% of the 300 million population, or 210 million) estimate a usage rate of one half pack per week, for a total of 5,250 packs per
28、year. Total packs per year is 9,750. To check for reasonableness, figure the dollar sales that these packs represent: at 25 cents per pack, annual sales would be $2.4 billion, a reasonable figure. Page 18 FRENCH PIZZA MARKET Pizza Hut has recently entered the home pizza delivery business in Paris. T
29、he market for home delivery is currently dominated by Spizza Pizza. Pizza Hut has asked your consulting firm to help it analyze issues that will determine its likelihood of success in the Parisian Pizza market. First, what information would you need and second, how would you analyze the pizza delive
30、ry market? Possible Information Needs: An estimate of the size of the Parisian home pizza delivery market. This could be obtained by knowing the population of Paris (6 million) and making some educated guesses about factors that determine pizza market size. You may also want to know the size of Spiz
31、za, the current competitor, including sales, number of stores, and proportion of Paris that is currently served by Spizza. Other useful information: market segments targeted and served by Spizza; market segments that are neglected by Spizza; what type of product do they offer; what do they charge fo
32、r their product; what is the cost structure of their business and what products are most profitable. Method of analysis: The best method of analysis would start by determining if any part of the market is not well served currently by Spizza. Determine what are the needs of any neglected market, and
33、understand if your client could profitably serve this market. Also, try to understand the likely competitive response of Spizza to your clients entry. How will you defend your position if Spizza decides to fight for market share? GOLFBALL MARKET ENTRY You are visiting a client who sells golf balls i
34、n the United States. Having had no time to do background research, you sit on the plane wondering what is the annual market size for golf balls in the U.S. and what factors drive demand. Your plane lands in fifteen minutes. How do you go about answering these questions? Typical solution: Golf ball s
35、ales are driven by end-users. The number of end users: take the population of 300 million; assume that people between 20 and 70 play golf (about 2/3 of the population, or 200 million) and estimate what proportion of these people ever learn to play golf (guess 1/4) which reduces the pool to 50 millio
36、n. Now, estimate the frequency of purchase. If the average golfer plays twenty times per year, and requires two balls per time, thats forty balls per person. Multiply that times the 50 million, resulting in a 2 billion ball market. Page 19 OVERSEAS CONSTRUCTION An overseas construction firm wants to
37、 expand by establishing a presence in a growing U.S. regional market. How should it go about doing this? What factors are critical for its success? SuggesThe Market Forces of Supply and Demand Chapter 4 Copyright 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of a
38、ny part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777. Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc. The Market Forces of Supply and Demand uSupply and demand are the two words that e
39、conomists use most often. uSupply and demand are the forces that make market economies work. uModern microeconomics is about supply, demand, and market equilibrium. Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc. Markets uA market is a group of buyers and sellers of a particu
40、lar good or service. uThe terms supply and demand refer to the behavior of people . . . as they interact with one another in markets. Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc. Markets u Buyers determine demand. u Sellers determine supply. Harcourt, Inc. items and derive
41、d items copyright 2001 by Harcourt, Inc. Market Type: A Competitive Market A competitive market is a market. . . with many buyers and sellers. that is not controlled by any one person. in which a narrow range of prices are established that buyers and sellers act upon. Harcourt, Inc. items and derive
42、d items copyright 2001 by Harcourt, Inc. Competition: Perfect and Otherwise uProducts are the same uNumerous buyers and sellers so that each has no influence over price uBuyers and Sellers are price takers Perfect Competition Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc. Co
43、mpetition: Perfect and Otherwise uMonopoly uOne seller, and seller controls price uOligopoly uFew sellers uNot always aggressive competition Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc. Competition: Perfect and Otherwise uMonopolistic Competition uMany sellers uSlightly di
44、fferentiated products uEach seller may set price for its own product Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc. Demand Quantity demanded is the amount of a good that buyers are willing and able to purchase. Harcourt, Inc. items and derived items copyright 2001 by Harcour
45、t, Inc. Law of Demand The law of demand states that there is an inverse relationship between price and quantity demanded. Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc. Demand Schedule The demand schedule is a table that shows the relationship between the price of the good a
46、nd the quantity demanded. Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc. Demand Schedule Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc. Determinants of Demand uMarket price uConsumer income uPrices of related goods uTastes uExpectations Harcourt, Inc. items and derived items copyrig
