BSAD 102 Mike’s Bikes Business Simulation St. Francis Xavier University Professor Neil Maltby

Carpe Diem: A Time of Decision Gather ye rosebuds while ye may, Old time is still a-flying; And this same flower that smiles today, Tomorrow will be dying. Robert Herrick (1648) St. Francis Xavier University

Overview The Year Ahead St. Francis Xavier University The President of your firm has retired and you have now assumed full control. Your design team has announced the completion of three new bike designs. Your first major decision is to decide whether to invest in one of the new designs. You also have full control of financing the firm Issuing bonds Issuing/repurchasing shares and paying dividends. St. Francis Xavier University

Concepts New Product Development St. Francis Xavier University Key factors for successful products Unique, superior product Strong market orientation International orientation Why do new products fail? Not delivering what is promised Poor marketing research Technical problems Insufficient marketing effort Bad timing St. Francis Xavier University

Launching New Product Development re: Mike’s Bikes Is there an opportunity for a new bike? Scenario report Your company’s positioning (price, awareness/public relations, quality, distribution) vs competitors (see next slide)  good forecast? Cost (development and marketing) Do you have the resources – financial position and capacity Opportunity cost Foregone benefits of the next best alternative What are you going to do with your mountain bike? Keep, re-design ($) or abandon? St. Francis Xavier University

Launching Positioning Map St. Francis Xavier University Projecting competitive launches St. Francis Xavier University High Price Open Market Space A D A B F G Mountain Road Youth C C D D X Open Market Space E E Low Price

Decision New Product Development re: Mike’s Bikes Product Marketing Adv 1 (existing) Pricing & Promotion Development maintain current design, redevelop or abandon Product slot (empty) Note costs, design specifications, and SCUs St. Francis Xavier University

Application Financing re: Mike’s Bikes St. Francis Xavier University How much money do you have? How much money do you need? Bike launch(es) Marketing to customers and vs competitors Which method of raising money meets your short-term and long-term needs? St. Francis Xavier University

Concepts Financing Debt financing through selling bonds A bond is a: Certificate indicating the owner has lent money to the issuer of the bond Contract of indebtedness issued by a corporation that promises payment of regular interest payments and the principal amount at a specific future time Source of long-term financing (long term obligation) Advantage – no loss of ownership (bondholders are creditors); opportunity to generate funds to invest in profitable ventures Disadvantage – increase debt and market’s perception of risk St. Francis Xavier University

Application Issuing Bonds St. Francis Xavier University Financial Management Bonds Bond issue limit – 50% of assets less existing bonds Note interest rates, amount (listed on I/S) and repayment date Higher levels of debt will increase your D/E ratio and could result in lower SHV because the market (and your investors) perceive your firm to be riskier St. Francis Xavier University

Concepts Equity St. Francis Xavier University Financing through issuing/repurchasing equity Equity financing is another form of long-term financing Equity financing is the sale of shares of ownership in the corporation Dilutes concentration of ownership, therefore firms “manage” the number of outstanding shares via issuing and repurchasing Dividends Payment made out of a firm’s earnings to its investors (shareholders) St. Francis Xavier University

Application Issuing Equity St. Francis Xavier University Financial Management Equity Firms that need money may consider issuing Equity Equity issue limit – 50% of issued shares to a limit of $5,500,000 Firms that have money may consider repurchasing Equity and/or issuing dividends to shareholders Equity repurchase limit – 10% of issued shares to a limit of $1,100,000 Dividend limit – 50% of retained earnings to a limit of $3.61/share St. Francis Xavier University

Application Managing SHV with Equity St. Francis Xavier University Dividends Firms that issue dividends inflate their SHV beyond the impact of net income Earnings per Share Firms that increase their Earnings per Share inflate their SHV beyond the impact of net income St. Francis Xavier University Net 1,000,000 # of shares 1,100,000 900,000 EPS $1 per share $0.91 per share $1.11 per share

Next Have your decisions input by 4pm Friday Next Class Prepare for discussion the Maple Leaf Hardware case.  Review the past performance of Maple Leaf Hardware Ltd. What have been the major sources of financing and the major uses (both short and long-term)? Has Maple Leaf Hardware been financially successful? Prepare projected income statement for the next two years.  St. Francis Xavier University