1. Chapter 5 Financial strategies over the life cycle
Corporate Financial Strategy 4th edition
Dr Ruth Bender
Chapter 5 Financial strategies over the life cycle

2. Financial strategies over the life cycle: contents
Learning objectives
Life cycle model
Shake-out period
Portfolio matrix incorporating product life cycle [with names]
Portfolio matrix incorporating product life cycle [with pictures]
Unknowns decrease over the life cycle
Net cash flows at different stages of development
Modified Ansoff matrix
Financial strategy changes over the life cycle
Cost of capital in a divisional structure

3. Learning objectives
Understand what financial strategy is, and how it can add value.
Explain why shareholder value is created by investments with a positive net present value.
Appreciate how the relationship between perceived risk and required return governs companies and investors.
Differentiate the different models of measuring shareholder value.
Explain why share price is not necessarily a good proxy for company value.
Outline how agency theory is relevant to corporate finance.

4. Life cycle model Launch Growth Maturity Decline Sales Cash flows
Launch
Growth
Maturity
Decline
Sales
Time
Cash flows
Profits

5. Shake-out period
Anticipated sales forecast used to justify capacity increases
Sales / capacity
Overcapacity position
Actual sales level
Historical fast growth in sales
Time

6. Portfolio matrix incorporating product life cycle
High
Star ?
Rate of market growth
Funding
Cash cow
Dog
Low/negative
High
Low
Relative market share
Based on Boston Consulting Group

7. Portfolio matrix incorporating product life cycle
High
Rate of market growth
Funding
Low/negative
High
Low
Relative market share
Based on Boston Consulting Group

8. Unknowns decrease over the life cycle
LAUNCH
Product risk
Market acceptance
Market share
Size of market at maturity
Length of maturity period
Maintenance of market share
Rate of eventual decline
GROWTH
Market share
Size of market at maturity
Length of maturity period
Maintenance of market share
Rate of eventual decline
MATURITY
Length of maturity period
Maintenance of market share
Rate of eventual decline
DECLINE
Rate of eventual decline

9. Net cash flows at different stages of development
GROWTH
Cash inflow
Sales High
Cash outflow
Marketing, fixed assets,
Working capital, etc. High
Net cash flow ?
Cash flow starts negative, becoming neutral or positive
LAUNCH
Cash inflow
Sales Low
Cash outflow
R&D, launch Marketing,
fixed assets, etc. High
Net cash flow Negative
MATURE
Cash inflow
Sales High
Cash outflow
Ongoing cost base Low
Net cash flow Positive
DECLINE
Cash inflow
Sales Low
Cash outflow
Maintenance Low
Net cash flow Negative
Cash flow starts positive, becoming neutral

10. Modified Ansoff matrix
Products
Existing
Related
New
Core business growth strategy
Existing
Customer-led growth strategy
Markets
Product-led growth strategy
Related
Diversification strategy
New

11. Financial strategy changes over the life cycle
GROWTH
Business risk high
Financial risk low
Funding equity (float)
Dividend payout nominal
Growth high
P/E high
Eps low
Share price growing & volatile
LAUNCH
Business risk very high
Financial risk very low
Funding equity (venture capital)
Dividend payout nil
Growth very high
P/E very high
Eps nominal
Share price growing &
highly volatile
MATURITY
Business risk medium
Financial risk medium
Funding debt
Dividend payout high
Growth medium / low
P/E medium
Eps high
Share price stable with
limited volatility
DECLINE
Business risk low
Financial risk high
Dividend payout total
Growth negative
P/E low
Eps declining
Share price declining & volatile

12. Cost of capital in a divisional structure
This extract from the financial report of Henkel shows that divisions with different risk profiles are given different WACCs
Source: Henkel 2012 financial statements, page 54