What’s It Worth? - The Movies - CSX Business Explorer Post 333 December, 2010

We all trade our dollars for things that we want. I LOVE going to the movies I LOVE going to the movies Every weekend (just about) Every weekend (just about) Only $10 (ticket AND popcorn!) Only $10 (ticket AND popcorn!) $520 if I go every week $520 if I go every week Today, my local theater has an interesting offer… Today, my local theater has an interesting offer…

You have to choose well, whether it is for business or in your personal life. A year’s worth of movies and popcorn actually costs $520: A year’s worth of movies and popcorn actually costs $520: A single ticket with popcorn costs $10 A single ticket with popcorn costs $10 There are 52 weeks in a year There are 52 weeks in a year $10 × 52 = $520 $10 × 52 = $520 A one-year pass for weekly movies and popcorn can be bought for $450, saving $70 in a year. A one-year pass for weekly movies and popcorn can be bought for $450, saving $70 in a year.

A few weeks ago, we talked about the movie offer in small groups. We setup teams of four people We setup teams of four people We pick a spokeperson who We pick a spokeperson who Took notes on our discussion Took notes on our discussion Was willing to share with the rest of the group Was willing to share with the rest of the group We thought through: We thought through: What might make this a good deal? What might make this a good deal? What might make it not so good? What might make it not so good? What would you be willing to pay for the pass? What would you be willing to pay for the pass?

We talked about why the pass might be worth more than $520. It has a good payoff It has a good payoff $450 is less than $520 $450 is less than $520 It’s Convenient, no standing in line It’s Convenient, no standing in line Includes popcorn, which I love Includes popcorn, which I love We could take our friends who might not have cash We could take our friends who might not have cash Save on 3D movies Save on 3D movies Gives us $70 to use for other things Gives us $70 to use for other things It’s low risk It’s low risk I could sell the pass if I get tired of going I could sell the pass if I get tired of going It’s Reliable (would get me into sold-out movies) It’s Reliable (would get me into sold-out movies) It’s Flexible, assuming location is flexible, at any theater in the same chain It’s Flexible, assuming location is flexible, at any theater in the same chain

And we talked about why the pass might be worth less than $520. I have other opportunities I can see movies in different ways, like redbox I’d rather buy candy han popcorn I really want an iphone Cash flow problem It is a lot of $ up front It uses up $450 you might want for something else Risk is too high Risk is too high I might get tired of going and lose the money, if I can’t sell the pass I might get tired of going and lose the money, if I can’t sell the pass There might be conflicts in my schedule There might be conflicts in my schedule Value is too Low Value is too Low It’s only once a week It’s only once a week I would feel forced to go I would feel forced to go It’s only $70 difference spread over a whole year It’s only $70 difference spread over a whole year

We learned a few things. Everything has a value Everything has a value That value might be all up front, or it might be spread out over time That value might be all up front, or it might be spread out over time Value is not the same for all people Value is not the same for all people There’s some science (and art) to figuring out the value of something that’s in the future There’s some science (and art) to figuring out the value of something that’s in the future A dollar today is worth more than a dollar tomorrow A dollar today is worth more than a dollar tomorrow A sure dollar is worth more than a risky one A sure dollar is worth more than a risky one Different people have different views on just what “risky” means Different people have different views on just what “risky” means

What’s It Worth? Buying a Business CSX Business Explorer Post 333 January, 2010

We learned a few things in our discussion of a movie pass. Everything has a value Everything has a value You can trade dollars now for a benefit in the future, if the future benefit is large enough You can trade dollars now for a benefit in the future, if the future benefit is large enough Value is not the same for all people Value is not the same for all people Some people avoid risk Some people avoid risk Some people need cash today and cannot invest Some people need cash today and cannot invest Some people have lots of money and lots of options Some people have lots of money and lots of options

The same ideas matter in business. A dollar today is worth more than a dollar tomorrow A dollar today is worth more than a dollar tomorrow A sure dollar is worth more than a risky one A sure dollar is worth more than a risky one Different people have different views on just what “value” and “risk” mean Different people have different views on just what “value” and “risk” mean This is why we have markets, so that people can trade dollars and property, to get the things they want, at the time that seems right to them. This is why we have markets, so that people can trade dollars and property, to get the things they want, at the time that seems right to them. Every transaction has a seller who is happy to make the sale, and a buyer who is glad to have spent the money. Every transaction has a seller who is happy to make the sale, and a buyer who is glad to have spent the money.

What are the principles? Buying a business means buying the income that it produces (now and into the future) Buying a business means buying the income that it produces (now and into the future) We can evaluate that income in terms of several things: We can evaluate that income in terms of several things: How much earnings growth we expect the company to have How much earnings growth we expect the company to have How long it takes us to get our investment back How long it takes us to get our investment back How risky we think that future income may be How risky we think that future income may be What other alternatives we have that may generate the same (or more, or less) income What other alternatives we have that may generate the same (or more, or less) income We can buy a piece of a business by buying stock We can buy a piece of a business by buying stock That stock will give us the same income (and the same return) as buying the whole business That stock will give us the same income (and the same return) as buying the whole business

Here’s a basic business question based on getting future benefits. * Example assumes that the business continues for 10 years after you buy it Would you buy my business? Would you buy my business? What would your return be, if the business could generate $7,500 per month in profit, every month? What would your return be, if the business could generate $7,500 per month in profit, every month? Is that good enough for you? Is that good enough for you? Can you raise the money to buy the whole business? Can you raise the money to buy the whole business?

What can you do if you don’t have enough money to buy the whole business? * Example assumes that the business continues for 10 years after you buy it

Investors pay now, for earnings growth they expect to get in the future. You can change the Expected Annual Earnings Growth Rate to get an idea of how much other investors believe the company’s profits will grow. Do you agree with them? You can change the Expected Annual Earnings Growth Rate to get an idea of how much other investors believe the company’s profits will grow. Do you agree with them?

Summary Stock represents ownership of the company, including the income that it produces Stock represents ownership of the company, including the income that it produces It’s just a piece of paper (or an electronic record), but has value just like a dollar bill does It’s just a piece of paper (or an electronic record), but has value just like a dollar bill does The basic unit of stock is a Share The basic unit of stock is a Share If a company issues one million shares, then each one entitles you to one millionth of that company’s earnings If a company issues one million shares, then each one entitles you to one millionth of that company’s earnings Earnings are the income produced by the company after it has paid all its expenses Earnings are the income produced by the company after it has paid all its expenses Because investors want to know how much they are entitled to, they are often published as Earnings Per Share, or EPS Because investors want to know how much they are entitled to, they are often published as Earnings Per Share, or EPS Return is what you get back on your investment, similar to the interest rate you might earn on a bank account Return is what you get back on your investment, similar to the interest rate you might earn on a bank account