SOUND ADVICE INTRODUCTION bit mo sis i ot banti bado zelo nevalne purban vizas vino i soldu A recent graduate, Will Stevens, finds that his limited business experience may be enough to make him a "finance guru" at a small manufacturing firm. The manager and owner of this firm, a wizened acoustical engineer, uses the opportunity of reviewing the annual capital budget to ask some questions about his personal portfolio and the investments of his senior employees and shareholders. In addition, Will's parents have placed a great deal of faith in him and have asked questions about their portfolios and what choices they should make. In reconciling all of these different questions about risk and return, Will gains some useful insights into the value of some of the concepts he studied in college. SOUND PRODUCTS, INC. O besit tua oil on caieuribor berego DW Will Stevens glanced at his "To Do" list again and wondered what priorities he should assign to each task. "They're all urgent," he thought, as he looked at the stack of papers which had accumulated during the past several weeks. Will had landed a great job right out of school, and he found working life to be altogether rewarding. His boss was Mike Jenner, owner and general manager of Sound Products, Incorporated. Sound Products manufactured and distributed audio equipment which was designed to please the type of consumers known as "stereophiles." Mike had started the company twenty years before, in his garage, and it had grown into one of the best known boutique firms in the industry. Since taking the job as Sound Product's business manager, Will had learned more about the stereo components business than he had ever wanted to know.meble de rigora! la revio From what he had learned about Sound Products, though, Will recognized that Mike's expertise in business did not match his knowledge of acoustical engineering. Sound Products had benefited from a great deal of luck to achieve its market position, and Will saw many things that the firm could do differently. Being a new guy was challenging enough, but the role of business guru that Mike had attributed to him was becoming quite demanding. Will had spent endless nights reading everything he could get his hands on regarding business finance and operations management, hoping to stay ahead of Mike expectations and in Financial Management, Robert Stretcher and Timothy B. Michael. Copyright © 2005 by Pearson Prentice Hall, Inc. All rights reserved. 45 Cases in Financial Management of the office. questions. Preparing for his role as business chieftain had also helped Will in his tasks outside As the first person in his family to go to business school, Will was constantly bombarded from home with questions about personal finance. His mother was a biochemist with a great deal of business responsibility and respect within her firm; it had taken her nearly twenty years to rise to that position. His father had started out as an aeronautical engineer at NASA, ending up as a manager of one of the agency's regional research facilities. Around the Sunday afternoon dinner table, his mom and dad would quiz him about their retirement options and investment alternatives. He had tried to direct them to his favorite books on the subject, but that only increased the intensity and frequency of their questions. Coming up with answers to their questions was just another item on his list of things to get done. TA WILL STEVENS, FINANCIAL GENIOUS 920 It was time for the Monday afternoon business meeting, which followed the usual Monday morning production meeting. Mike strolled into Will's tiny office and plopped down on the chair across from the desk. "What's the wise word today, O Anointed One?" Mike was pulling his chain, but will knew that this meant there were big questions rattling around in the engineer's mind. Will opened the discussion, while he still had the chance. "Mike, I've been looking at the list of things that you'd like to do for next year, and I've decided that I don't know enough about stereo equipment yet. And I figured that you could tell me about each project faster than you could write it down and let me read it." Will sat back and waited for Mike to take the stage. k b "We've got a handle on the revenue and cost numbers, in general, for all three projects; those are in front of you. The first one involves introducing a new turntable that I've been working on for a couple of years. I'm not in love with it, mind you, but I think that it might be something our customers would want. We could probably sell a thousand units by the end of next year, and once it was out, word would spread to give us another thousand units each year after that. Plus, I want to give some as Christmas gifts." Mike grinned. "I think my daughter's still using her old department store record player just to spite me. busihora "Next," Mike continued, "we could go ahead with the line of automotive speakers that we discussed last week. That's the second proposal. I went over the numbers again with the guys on the floor and we think it could fly. With the popularity of luxury automobiles, and the availability of installation by professionals, we might be able to charge our customary markups. Of course, we haven't competed in the market for automotive audio since I wanted bas ng hods oa o amor ਜੋ ਆ 46 SOUND ADVICE to bring out that combination 8-track/cassette deck in the late seventies. Who knew that 8- tracks were on their way out? Unlike that project, this one is probably a winner. "Finally, the shop wanted me to reconsider a line of noise-canceling speakers for home audio. We hold the patents on the necessary electronics, and we think there would be a considerable demand for such a thing down the road, especially among folks who live in urban areas where there is a great deal of ambient noise. A couple thousands units per year, to start, and it might even give us an opportunity to license the technology down the road. We might just see noise-canceling television audio in a few years. Of course, that might disturb the news channels," he chuckled. "I figure that we can afford to do only one of these, but I'll have to ask the shareholders about that." Will knew that Mike was the only shareholder that mattered, including some of the older guys in the shop. In fact, Mike and the other senior employees were the only shareholders. Mike continued, "I know that our primary concern is the risk of these alternatives. We don't want to get burned again, and we don't want to bite off more than we can chew. For each proposal, we've given you three or four different sales and cost scenarios, and I've been over them several times looking for holes. None of these ideas would be too taxing on our resources, and I don't think they would cannibalize existing sales. They're just so unrelated to each other and to what we're already doing that I don't see a way of sorting out which one would have the best chance of success. Maybe your Magic Spreadsheet can tell us which way to go." In fact, Will had already summarized the numbers for the three projects, but he wanted to get a better understanding of the reliability of the scenario information before giving Mike his recommendation (Exhibit 1). In addition, he had decided to judge Mike's enthusiasm for each proposal one more time, at this meeting. Goal todos eban to lo door berish 10 Tobno 90 . or bipolo told Obside alido do Web 47 Cases in Financial Management Exhibit 1. Sound Products, Inc. 2002 Capital Budget Development. Results of Scenario Analysis Project Title Best Case Most Likely Case Almost-Worst Case Worst Case Turntable project: Net Present Value $500,000.00 $210,000.00 -$90,000.00 scenario probability 0.25 0.40 0.35 Car Audio project: ona o Net Present Value $315,000.00 $175,000.00 -$75,000.00 -$100,000.00 scenario probability 0.30 0.35 0.25 0.10 Noise project: Net Present Value $435,000.00 -$121,000.00 -$135,000.00 scenario probability 0.55 0.35 0.10 From the look on Mike's face, that wasn't the end of new business. Given Mike's penchant for exposition, Will knew that there had to be more. "And another thing: some of the unit heads and I were wondering how this decision was different from the type of investment decision that some big conglomerate would make, or the decision that you or I would make when deciding which stocks to pick for our portfolios. I know they're related, somehow, but we couldn't come up with the particulars." Will knew there was still more. Mike looked down and thought for a moment, taking a much-needed breath, and continued. "You know, Will, many of us have a great deal of time and effort invested in this company. I'm grateful for the work you're doing, and I hope we can work out some shares of stock for you pretty soon, too. But it's different for some of the guys on the shop floor; they've been here a while and they've got lots of equity, with dividends, plus they're drawing 48
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