Growth Companies Marketing Focus: Corporate Financial Strategy

Chapter 8
Growth companies marketing focus
Corporate Financial Strategy

Growth companies: contents
 Learning objectives
 Financial strategy for a growth business
 Growth companies require a marketing focus
 Growth equity carries different risks to start-up equity
 Capital asset pricing model
 Dividend growth model
 Project risk and return
 Foregone low-risk opportunities
 Rights issue
 Bonus issue
Corporate Financial Strategy 2

Learning objectives
1. Explain how the life cycle model relates to a company in the growth
stages of its life.
2. Critique the financial strategy adopted by a growth company, making a
decision as to which aspects of the life cycle model are relevant to its
circumstances, and why.
3. Appreciate some of the assumptions behind the Capital Asset Pricing
Model, and their flaws.
4. Calculate the theoretical impact of rights issues, bonus issues and
share splits, and understand their likely effect on corporate value.


 Growth Company
 What Is a Growth Company?
 A growth company is any company whose business generates
significant positive cash flows or earnings, which increase at significantly
faster rates than the overall economy. A growth company tends to have
very profitable reinvestment opportunities for its own retained earnings.
Thus, it typically pays little to no dividends to stockholders opting instead
to put most or all of its profits back into its expanding business.
 Understanding Growth Company
 Growth companies have characterized the technology industries. The
quintessential example of a growth company is Google, which
has grown revenues, cash flows, and earnings substantially since.

 its initial public offering (IPO). Growth companies such as Google are
expected to increase their profits markedly in the future; thus, the market
bids up their share prices to high valuations. This contrasts with mature
companies, such as utility companies, which tend to report stable
earnings with little to no growth.
 Growth companies create value by continuing to expand above-average
earnings, free cash flow, and spending on research and development.
Growth investors are less worried about the dividend growth, high price-
to-earnings ratios, and high price-to-book ratios that growth companies
face because the focus is on sales growth and maintaining industry
leadership. Overall, growth stocks pay lower dividends than value
stocks because profits are reinvested in the business to drive earnings
growth.
 Bull Markets Are Ideal Conditions for Growth Companies

 What is market focus?
 A market-focused company is one that has imbedded in all of its
managers powerful planning processes and tools to continuously focus
and re-focus critical cash flow and human resources on a changing
portfolio of market opportunities that create long term cash flow. To
some, this may seem self-evident. However, I offer two sobering
thoughts: Firstly, the examples above show that many global companies
formerly thought unbeatable are losing their market focus. Secondly,
many of these same companies have literally hundreds of MBA’s from
the best business schools the world in management positions. Clearly,
at the critical conceptual and operational levels, many managers are
having difficulty understanding, creating and managing market focus.
Further, many of these managers have problems creating and managing
the critical conditions necessary in their company for achieving and
sustaining market focus. It clearly presents a very difficult task.

What is a market-focused product winner?
The overriding objective of a market-focused company is to make sure
that every product in the portfolio at every level of the company is a
current or potential winner. At any moment, this is unlikely to happen in
any company’s entire product portfolio. However, the great market-
focused companies are constantly driving toward it. More importantly,
managers in market-focused companies are very tough on products and
portfolios that

Financial strategy for a growth business
Business risk High
Financial risk Low
Source of funding Growth equity investors
Dividend policy Nominal payout ratio
Future growth prospects High
Price/earnings multiple High
Current profitability (eps) Low
Share price Growing but volatile

Growth companies require a marketing focus
0
Time
Focus on building market share in order to be a major

player by the time it starts to mature

Growth equity carries different risks to start-up equity
Required
return
Start-up
equity,
provided
by venture
capital
Growth
equity,
often
provided
by IPO
Perceived risk

Capital asset pricing model
𝐾𝑒 = 𝑅𝑓 + 𝛽( 𝑅𝑚 − 𝑅𝑓 )

′

𝐾𝑒 𝑖𝑠 𝑠h𝑎𝑟𝑒h𝑜𝑙𝑑𝑒𝑟 𝑠 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑟𝑒𝑡𝑢𝑟𝑛

𝑅𝑓 𝑖𝑠 𝑟𝑖𝑠𝑘 − 𝑓𝑟𝑒𝑒 𝑟𝑎𝑡𝑒
𝛽 𝑖𝑠 𝑠𝑒𝑛𝑠𝑖𝑡𝑖𝑣𝑖𝑡𝑦 𝑜𝑓 𝑠h𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒 𝑡𝑜𝑚𝑎𝑟𝑘𝑒𝑡 𝑚𝑜𝑣𝑒𝑚𝑒𝑛𝑡𝑠

( 𝑅𝑚 − 𝑅𝑓 ) 𝑖𝑠 𝑚𝑎𝑟𝑘𝑒𝑡 𝑟𝑖𝑠𝑘 𝑝𝑟𝑒𝑚𝑖𝑢𝑚

Project risk and return
Project A should be
accepted, as it
Project
expected generates more return
return than its cost of capital.
B
Project B should be
A rejected, as it
generates less return
than its cost of capital
Company Project risk

overall risk
factor

Foregone low-risk opportunities
Minimum return
Foregone
low-risk
opportunities
Company Project risk

overall risk
factor

Rights issue
 In a rights issue, existing shareholder have the right to subscribe for new
shares in proportion to their existing holding
 For example, a 1 for 4 issue at 45p means that for every 4 shares held,
the shareholder has the right to buy one extra share at 45p
 If the shareholder chooses not to take up the rights, they are sold by the
company in the market, and the shareholder receives the net proceeds
 The theoretical post-rights price can be calculated. The actual post-
rights price will differ from this due to investors’ views on the information
released at the time of the issue
Theoretical post-rights price

Market capitalisation before the rights issue
+ Proceeds of rights issue
÷ Total number of shares in issue post-rights

Bonus issue
 In a bonus issue, retained profits are capitalised to give new shares to

the shareholders, in proportion to their existing holdings
 The par value of the shares remains the same
 No new cash is received by the company
 The theoretical price after the bonus issue can be calculated. The actual
price will differ from this due to investors’ views on the information
released at the time of the issue
Theoretical price after the bonus issue

Market capitalisation before the issue
÷ Total number of shares in issue after the bonus issue

Growth Companies Marketing Focus: Corporate Financial Strategy

Uploaded by

Copyright:

Available Formats

Growth Companies Marketing Focus: Corporate Financial Strategy

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Growth Companies Marketing Focus: Corporate Financial Strategy

Uploaded by

Copyright:

Available Formats

Chapter 8

Growth companies marketing focus

Corporate Financial Strategy

Corporate Financial Strategy 2

Corporate Financial Strategy 3

Corporate Financial Strategy 4

Corporate Financial Strategy 5

Corporate Financial Strategy 6

Corporate Financial Strategy 7

Business risk High

Financial risk Low

Source of funding Growth equity investors

Dividend policy Nominal payout ratio

Future growth prospects High

Price/earnings multiple High

Current profitability (eps) Low

Share price Growing but volatile

Corporate Financial Strategy 8

Focus on building market share in order to be a major

Corporate Financial Strategy 9

Corporate Financial Strategy 10

Corporate Financial Strategy 11

Company Project risk

Corporate Financial Strategy 12

Company Project risk

Corporate Financial Strategy 13

Theoretical post-rights price

Corporate Financial Strategy 14

 In a bonus issue, retained profits are capitalised to give new shares to

Theoretical price after the bonus issue

Corporate Financial Strategy 15

You might also like