BUSINESS VALUATION Business valuation is a process and a set of procedures used to determine the economic value of an owner's interest

in a business. Business valuation is often used to estimate the selling price of a business, resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among the business assets, establish a formula for estimating the value of partners' ownership interest for buy -sell agreements, and many other business and legal disputes. Standard and Premise of Business Value Before the value of a business can be measured, the valuation assignment must specify the reason for and circumstances surrounding the business valuation. These are formally known as the business value standard and premise of value. Business valuation results can vary considerably depending upon the choice of both the standard and premise of value. For example, a business buyer and seller may bargain to establish the value of business assets that approaches the fair market value standard. However, the value conclusions based on the going concern premise and that of assemblage of business assets may be quite different. One reason is that an operating business creates value by means of its ability to coordinate its capital, human and management resources to produce economic income. The same set of assets not currently used to produce income is generally worth less. Reasons for Business Valuation Business people may need to conduct business valuation for a n umber of reasons including sale, estate tax planning, estate tax valuation, divorce, business purchase price allocation, collateral documentation, litigation and documenting that a sales price is equitable. Elements of business valuation Economic conditions A business valuation report generally begins with a description of national, regional and local economic conditions existing as of the valuation date, as well as the conditions of the industry in which the subject business operates. A common source of economic information for the first section of the business valuation report is the Federal Reserve Board's Beige Book, published quarterly by the Federal Reserve Bank. State governments and industry associations often publish useful statistics describing reg ional and industry conditions. Financial Analysis The financial statement analysis generally involves common size analysis, ratio analysis (liquidity, turnover, profitability, etc.), trend analysis and industry comparative analysis. This permits the valuat ion analyst to compare the subject company to other businesses in the same or similar industry, and to discover trends affecting the company and/or the industry over time. By comparing a company's financial statements in different time periods, the valuation expert can view growth or decline in revenues or expenses, changes in capital structure, or other financial trends. How the subject company compares to the industry will help with the risk assessment and ultimately help determine the discount rate and the selection of market multiples. ________________________________________________________________________________
2 (a) A company's current products face limited life spans and must be replaced by newe r products. But new products can fail -- the risks of innovation are as great as the rewards. The key to successful innovation lies in total company effort, strong planning, and a systematic new product development process. Companies find and develop new product ideas from a variety of sources. Many new product ideas stem from internal sources. Companies conduct formal research and development, pick the brains of their employees, and brainstorm at executive meetings. By conducting surveys and focus groups and analyzing customer questions in complaints, companies can generate new product ideas that will meet specific consumer needs. Companies track competitors offerings and inspect new products, dismantling them, analyzing their performance, in deciding whet her to introduce a similar or improved product. Distributors and suppliers are close to the market and can pass along information about consumer problems and new product possibilities. New product development process The new product development process consists of eight sequential stages. The process starts with idea generation. Next comes ideas screening, which reduces the number of ideas based on the companies own criteria. Ideas that pass the screening stage continue through product concept development , in which a detailed version of the new product

idea is stated in meaningful consumer terms. In the next stage, concept testing, new product concepts are tested with a group of target consumers to determine whether the concept has strong consumer appeal. Strong concepts proceed to marketing strategy development, in which an initial marketing strategy for the new product is development from the product concept. In the business analysis stage, a review of the sales, costs, and profit projections for a new product is conducted to determine whether the new product is likely to satisfy the company's objectives. With positive results here, the ideas then become concrete through product development and test marketing and finally are launched during commercialization. Product life cycle Each product has a lifecycle marked by a changing set of problems and opportunities. The sales of the typical product follow an S-shaped curve made up of five stages. The cycle begins with the product development stage when the company finds and develops a new product idea. The introduction stage is marked by slow growth and low profits as the product is distributed to the market. If successful, the product enters a growth stage, which offers rapid sales growth in increasing profits. Next comes a maturity stage, when sales growth slows down and profits stabilize. Finally, the product enters a decline stage, in which sales of profits dwindle. The company's task during the stage is to recognize the decline in to decide whether it should maintain, harvest, or drop the product. Marketing strategies change during product lifecycle In the introduction stage, the company must choose a launch strategy consistent with its intended product positioning. Much money is needed to attract distributors and build their inventories and to inform consumers of the new product and achieve trial. In the growth stage, companies continue to educate potential customers and distributors. In addition, the company works to stay ahead of the competition and sust ain rapid market growth by improving product quality, adding new product features and models, entering new market segments and distribution channels, shifting advertising from building product awareness to building product convention in purchase, and lowering prices at the right time to attract new buyers. In the maturity stage, companies continue to invest in maturing products and consider modifying the market, the product, and the marketing mix. When modifying the market, the company attempts to increase the consumption of the current product. When modifying the product, the company changes some of the products characteristics -- such as quality, features, or style -- to attract new users or inspire more usage. When modifying the marketing mix, the company works to improve sales by changing one or more of the marketing mix elements. Once the company recognizes that a product has entered the decline stage, management must decide whether to maintain the brand without change, hoping that competitors will drop out of the market; harvest the product, reducing costs and trying to maintain sales; or drop the product, selling it to another firm or liquidating it at salvage value.

2(B) Financial models are designed to evaluate everything from investment performance to borrowing requirements. Models take into consideration the mathematical relationships between financial variables in order to forecast future performance and evaluate different operating scenarios. As such, financial models are valuable tools to support management decision-making. When developing financial models to evaluate new products or services, financial teams are faced with a number of unique challenges. Some of these challenges include:

Management team members may have different ideas about the strategic role of a new product and how its success should be evaluated. There may be little or no historical information, such as sales or cost trends, on which to base a financial model. Many assumptions and calculations must be built into a financial model to account for different operating scenarios. This can make a model unwieldy. Management may be skeptical of the model assumptions and therefore may not embrace related recommendations. To overcome these challenges, incorporate the following tips for building effective financial models for new products or services.

Begin with the end in mind

First, make sure that you understand the key decisions that the model will be used to support, who will be using the financial model, and what criteria will be used to measure the model's success.

Identify the goals Clearly identify the purpose of the financial model. Often, management will want to use a model to find out the impact of a new product on company profitability. Or management may want to evaluate a product's unique role within an overall product portfolio. Identify and meet with stakeholders Involve managers from product development, marketing, sales, production, customer service, and other relevant departments. Conduct introductory one-on-one meetings or hold a group kickoff meeting with these stakeholders to explain the modeling project goals and to ask for input about key sales, cost drivers, and risks. Understand the company's lexicon Every company has a unique set of terms used to communicate and evaluate financial performance. This includes evaluation metrics such as return on investment (ROI), internal rate of return (IRR), net present value (NPV), and market share. Even the definitions of simple terms (such as operating income and gross margin) can be perceived differently, depending on the department or organization. Make sure that key stakeholders are on board with the metric terms and methods that are used in the model.

Build the core structure of the financial model

Financial models for a new product or service are often custom-developed in spreadsheets and take into consideration the unique characteristics of that product's market, competitive situation, and cost structure. Avoid wasting precious time during this time-consuming process by following these guidelines:

Outline the model structure Diagram the steps that the model will take to generate its output, including the interdependencies of model components, mathematical equations used for key components, and where user interaction occurs. Your model outline can be as simple as a sketch on a piece of paper. For more complex outlines, consider using a graphics program, such as Microsoft Office Visio Professional 2003. Weigh costs and benefits of building a complicated model Don't be tempted to build a model that considers every possible detail and scenario. Keep in mind that forecasting future performance is not an exact science, no matter how detailed the model. And the potential benefits of a financial model may become compromised if it is too onerous to use. Understand product demand Make sure that you understand customer appetite for your product, given different feature combinations and price points. Incorporate price elasticity of demand into your model to measure how price variations affect customer purchases. Understanding customer demand can be a challenging part of financial modeling, and you may need to work with marketing research or outside consultants to fully address this area. Categorize costs Break down costs associated with your product into different categories to aid data analysis and forecasting. Examples of cost categories include: Variable costs, including direct materials and direct labor per unit of production. Fixed costs, such as advertising and product manager salaries. Mixed costs, such as communications. Step costs, such as compensation for customer service representatives, each of whom can handle only a certain number of customer inquiries. You also need to understand how overhead costs from the parent company will be allocated to the product.

Make the model intuitive

Ideally, a financial model will be distributed to stakeholders so that they can use it to test different scenarios and to help in their planning activities. Make sure that your model is easy to use so that those who weren't involved in building it will still be able to derive value from it.

Color-code for easy interpretation Key variables, such as unit prices, unit costs, or required head count can be highlighted by using cell shading or font color. For example, red shading or font colors might be used for cells that need user input. Areas on the worksheet that contain formulas can also be color-coded perhaps using gray for cells that contain formulas and therefore should not be altered. Safeguard your model Use the protection feature of the spreadsheet program to prevent user tampering that might have a ripple effect on the rest of the financial model. Use multiple worksheets Split key sections of the model into separate worksheets (all within the same spreadsheet file). For example, your model might have different worksheets for user input, output, a summary of data elements (for instance, outline of revenues, costs, income, expected returns, and market share), and supporting graphs. Be sure to use logical names for each worksheet tab. Use comments and name cells Use the comments function to add an explanation to a particular cell where you may have a formula that merits description. For instance, in Excel, you can insert a comment by clicking the Insert menu, clicking Comment, and then entering your text. Be sure to use clear, helpful names for column and row headers and titles for charts, tables, and graphs. Provide helpful graphics Because the output of the model will likely be used in management presentations, consider including graphs in the model. For instance, a breakeven point graph that illustrates fixed costs, variable costs, total costs, and total revenues over time can help management find out when the product might break even, and the graph can also outline short-term funding requirements.

CASE STUDY

1. Standards are often classified into three types - theoretical (tight), normal

(reasonable), or expected actual (loose). Standards which are too loose or too tight will generally have a negative impact on workers motivation. If too loose, workers will tend to set their goals at this low rate, thus reducing productivity below what is obtainable; if too tight, workers will realize that it is impossible to attain the standard, become frustrated, and will not attempt to meet the standard. An attainable or reasonable standard which can be achieved under normal working conditions is likely to contribute to the worker's motivation to achieve the designated level of activity. If executive management imposes standards, workers and plant management will tend to react negatively because they feel threatened. If workers and plant management participate in setting the standard, they can more readily identify with it and it could become one of their personal goals. In Geeta & Co. Case, it appears that the standard was imposed on the workers by management. In addition, management used an ideal standard to measure performance. Both of these actions appear to have had a negative impact on output over the first six months. Geeta & Co. made a poor decision to use dual standards. If the workers learn of the dual standards, the company's entire measurement system may become suspect and credibility will be lost. Company morale could suffer because the workers would not know for sure how the company evaluates their performance. as a result, disregard for the present and any future cost control system may develop.

2.

The analysis of this study suggests caution in following either of the more interventionist approaches, and especially the leading edge approach. That conclusion is derived mainly from economic principles, but they are principles that place considerable weight on improving the situation of the more vulnerable members of society. The caution is more in the nature of an orange light not a red light, but certainly not a green light. As enunciated throughout the report, reasons for this caution include:

Costly labour standards may deter competitiveness, and this can mean lost jobs and lost investment, especially given global pressures. The theory and evidence reviewed suggests that in most cases raising the legislated minimum standards considered in the paper is not likely to spur productivity. Some of the costs may be shifted back to immobile workers (e.g., in the form of lower wages) who can generally not afford to absorb such costs. To the extent that the costs are not shifted back to workers or forward to customers (given that prices tend to be set on world markets) this can mean reductions in employment, in which case a trade-off has to be made between a less-protected job and no job. The changing nature of work (e.g., small firms, non-standard employment) has made monitoring and compliance even more difficult. Non-standard employment may also be too heterogeneous to try to protect in a uniform fashion. The changing nature of work (dual-earning families and more non-standard employment) also provides other forms of risk sharing. Better pay and working conditions can make work attractive relative to welfare or other income maintenance, but if government cost-saving is the rationale why should the costs initially be placed on employers? Labour standards are closer to passive income maintenance programs (buffering the effects of negative shocks and deterring adjustment in the direction of market forces), than they are to active adjustment assistance (involving skills and human capital formation that foster adjustment from declining to expanding sectors). There is both theoretical and empirical support for the notion that a relatively expansionary and deregulated labour market can foster job creation that disproportionately assists marginal and vulnerable groups, transforms non-standard to standard jobs, facilitates earning income rather than receiving it as a transfer payment, improves human capital formation (especially through work experience) and places pressure on employers to provide more family-friendly practices. More research is needed, however, to determine the extent to which such a rising tide raises all boats, or mainly raises all yachts, leaving behind the dinghies and those anchored to the bottom. While this analysis suggests a cautionary orange light with respect to labour standards, not all standards are the same with respect to their cost implications and their possible offsetting benefits. A green light may be more appropriate for a number of labour standards: advance notice policies which may foster efficient job matching; rights-torefuse overtime; the use of overtime premium rates rather than quantity restrictions on maximum hours regulations; and protection against harassment which may improve morale and workplace productivity. A red light seems appropriate, however, for using federal labour standards to serve as a leading-edge role model for the provinces. There may be political benefits to be garnered by such a practice by appearing as the progressive jurisdiction, and the economic costs in the federal jurisdiction are likely small given the nature of its employment. But this simply means that the federal jurisdiction does not bear the cost of its actions. The political costs are either born by provincial governments by not following suite, or the economic costs are born by market participants in the provincial jurisdictions. The principle that parties should bear the consequences of their actions suggests that this temptation to garner political gains as a role model should be resisted in the federal jurisdiction.