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Published byBruno Théophile Corriveau Modified over 6 years ago
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Introduction to Financial Management
Chapter 5
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TERMS Economics Micro-economics Macro-economics Accounting Profits
Economic Profits Gov.-Operated Org. Sole Proprietorships Partnerships Sub S Corp Limited Liability Partner C Corporations Taxes Depreciation Opportunity Costs:
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Economic Principles Economics:
The study of how people chose to allocate their scarce resources. Choices made are influenced by: Demand: Impacts prices that can be charged High demand may lead to additional event dates added Scarcity: Scarcity of tickets changes, which might lower ticket price. Leagues create scarcity by not expanding into every potential market that could potentially support a franchise Leagues also create scarcity with their territorial rules 3+ million in San Bernadino County (east of LA) MLB can prevent team from moving there as it is the home territory/market of LA Dodgers and LA Angels of Anaheim Price: is defined as what one party (the buyer), must give to obtain what is offered by another party. –Scarcity in sport – Result – Demand financial concessions from a metro area to keep team from leaving Florida Marlins used cities like Charlotte and Portland to negotiate new stadium deals NFL and LA market Example: Washington Nationals Moved into Baltimore Orioles territory Orioles had to approve Given control of National’s regional cable TV rights and guaranteed sale price of $365 million if owner were to sell team
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Supply in Sport and Entertainment
Supply and Demand for Tickets 2 4 6 8 10 12 14 5000 7500 10000 12500 15000 17500 20000 Number of General Admission Seats Price ($) D1 Supply
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Sport Application Variable Ticket Pricing:
Explains why a ticket manager can charge $10 for tickets on the weekends and only $7 for those same seats on the weekdays.
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Microeconomics versus Macroeconomics
Refers to: Study of forces that occur at the firm level Supply, demand, and pricing issues at the firm level Forces that affect some or even all sectors of the overall economy. Global economy: is a one world economy. Incidents that disrupt one country can have a tremendous impact on other countries. Discussed previously with the impact of the Canadian dollar’s purchasing power on the finances of NHL franchises and the league as a whole.
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NBA in Madrid, Spain
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Wealth Max./Profits Accounting Profits:
Is earned when revenues exceed costs and expenses over a particular time frame. Economic Profits: Is determined after including the opportunity cost.
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Opportunity Costs: represents the benefits an individual, investor or business misses out on when choosing one alternative over another. Example: Hamilton County, Ohio: Citizens approved a tax measure that led to $1 billion of public money being spent on two new stadiums Was this a good use of taxpayer dollars? Could this money have been better spent elsewhere? Missed chances are opportunity costs.
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Business Types Government-operated sports businesses:
In the sports venue of public school, collegiate athletic programs Examples: San Diego Padres, Minnesota Twins Drawback: Greater access to information about financial operations through Freedom of Information Requests Non-profit organizations Examples: PGA and PGA Tour events (continued) Legal structure of business impacts financial operations Government HS, College Athletic Departments – Government entity has ultimate authority and responsibility for financial performance Private businesses tend to want minimal governmental involvement Joan Kroc offered to donate all or a portion of the Padres to city of San Diego Carl Pohlad offered to sell a portion of the Twins to the state of Minnesota Freedom of Information (Sunshine Laws) – Filed by citizens to determine where and how a government agency is spending its money MLB forbid the sale Non-profits - Shareholders never receive dividends; most non-profit organizations that generate more revenues than expenses and costs will spend that money to further the business interests.
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S CORPORATIONS S Corps:
Profits flow through business to shareholders and taxed as ordinary income. Investors shielded from personal liability beyond their investment.
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OTHER TYPES OF BUSINESS
Sole proprietorships: Is a business that is legally owned and operation by a single individual. This business exists as long as the owner is operating it, and all profits belong to the owner. General partnership: Is simply the joining of two or more partners with the intent to own. It may be a 50/50 take or 60/40 take. The later is called a minority partner.
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C CORPORATIONS C Corporations
What most people think of when they think of a corporation. Structured so companies can seek investors and operate globally. Massive amounts of paperwork needed to form C corp. Taxed as company first, then profits provided to shareholders are taxed. Patriots, Cavaliers, Milwaukee Bucks, Orioles have all been C corps at one time.
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Limited liability corporation
LLP or LLCs: Profits flow through business and are taxed as ordinary income on owners taxes. Provides corporate veil. Easy to form.
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Advantages and Disadvantages of Various Business Types
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Typical Ownership Most North American teams are owned by individuals or groups of individuals. Fortune 500 companies have held, and do hold, sport teams as part of portfolio of assets. NFL bars publicly traded companies or non-profits One individual must own at least 30% of franchise and must not control majority interest in a team from another league in a different market. Sole Proprietorships, Partnerships, LLPs and LLCs Fortune 500: CBS – Yankees; AOL/Time Warner – Braves; Disney – Angels and Ducks
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Your Viewpoint What type of owner do you want for your local sports team? Do you want someone who might spend a bit more on expensive players in order to compete for championships? Do you prefer someone who is keeping an eye on the bottom line—making sure the team sticks to a strict budget? Or would you like to buy stock in a team and be a part owner yourself?
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Depreciation Defined: Four main methods:
The allocation of an item’s loss of value over a series of years (the useful life of the item). Four main methods: Straight-line (Total Cost – Estimated Salvage Value)/Useful Life Sum-of-years digits Double-declining balance Units of production
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Five-Year Sum-of-Years-Digits Depreciation Schedule for a $1,000 Computer with No Salvage Value
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Double-Declining balance
Begins with calculating straight-line percentage. For each year, estimated depreciation percentage is doubled. Most aggressive when allocating loss of useful life to early years of assets’ use. First, total years of useful life are determined. Next, straight-line percentage is calculated. Percentage depreciated is taken off remaining balance rather than original cost – salvage value. Remainder is salvage value.
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Five-Year Double-Declining Balance Depreciation Schedule
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Units-of-Production Depreciation Schedule
Possibly most accurate measure Estimate the total number of items produced (events or ticket sales) Depreciation schedule calculated by taking the total number produced in a given year and divided by total number expected over the useful life. Useful for items related to tangible production Example – Copier that cost $2,000 that can produce 1,000,000 copies
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Bill Veeck and Depreciation
Understood U.S. tax code and application of depreciation. Elements of his plan: Team sells players to a new organization for 90% of agreed-on purchase price of franchise. Then sell all the rest for remaining 10%. Since players had been purchased, they could be depreciated over course of 3 to 10 years.
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Impact of Veeck Sport teams became a great tax shelter
New owners attracted Franchise values increased (supply/demand) Omnibus Tax Act of 2004 Owners deduct 100% of purchase price over 15-year period
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Your Viewpoint What do you think of the so-called jock tax, and the fact that professional athletes pay taxes on all the jurisdictions in which they’ve earned a salary? Do you have any sympathy for them and their very complicated tax returns? Can you understand why they may choose to live in a country with no income tax (such as Monaco)?
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