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Practical Applications of Corporate Finance

Practical Applications of Corporate Finance

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Practical Applications of Corporate Finance

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  1. Practical Applications ofCorporate Finance Presentation to Finance 321 University of Illinois at Urbana-Champaign March 27, 2007

  2. Today’s Discussion • Case study: A-Rod – Signing the Best Player in Baseball • My career in finance: a perspective

  3. Today’s Discussion • Case study: A-Rod – Signing the Best Player in Baseball • My career in finance: a perspective

  4. Assessing Value Key issue Is this 25-year-old baseball player worth one quarter of a billion dollars? Key considerations • What are the incremental benefits that will accrue to the Rangers over the life of the contract – and beyond? • What characteristics does this asset possess that make it attractive? • Uniqueness/rarity • Complementarity • Appropriability • Life-cycle value creation • What can be done during the ownership/disposal phases to enhance the value of this asset? • What are the key risks in buying this asset – and how can they be mitigated? Key themes

  5. Record Offensive Statistics At bats 100% = 12,364 9,507 11,434 8,001 8,298 10,961 10,881 8,399 2,930 Strike outs/walks Base hits Home runs Hank Aaron Ty Cobb Ken Griffey Willie Mays Alex Rodriguez Barry Bonds Lou Gehrig Ricky Henderson Babe Ruth Batting High .355 .370 .420 .374 .327 .327 .347 .393 .358 Average .305 .299 .366 .340 .291 .279 .302 .342 .314 RBI High 132 129 127 184 146 74 141 163 132 Average 100 92 81 117 89 45 87 101 115 Stolen bases High 31 52 96 17 24 130 40 17 46 Average 10 24 37 6 10 56 15 6 25 Career (years) 23 21 24 17 18 25 22 22 5 Source: Baseball Almanac

  6. On-Base and Slugging Statistics

  7. Analytical Framework Tickets Ticket revenue x Average price $18.00 + + Spaces/ purchases Live gate revenue Parking/concessions revenue x Incremental revenue Average price $2.50 + + Items + Merchandise revenue x x Average price $1.80 Sponsorships $1 million Franchise multiple 3.0x Value + Broadcast revenue + + Incremental revenue $10 million • Regression analysis: 45,000 additional attendees per win • Eight (8) additional wins ALCS revenue x “Glamour factor” $100 million Probability7.0% + Incremental revenue $10 million World Series revenue x Probability 3.5% + Revenue lost to revenue sharing 17.5% * Additional assumptions: discount ate = 8.0%, inflation rate = 3.5%, baseline salary inflation rate = 16.5%, interest rate on deferred money = 3%, tax rate = 40%, contract insurance = 10.0%

  8. DCF Analysis of Rodriguez Signing

  9. DCF Analysis of Rodriguez Signing

  10. What Happened Next Events December 2000: signs record $252 million, 10-year contract with Texas Rangers Tom Hicks, Rangers owner: “Alex is the player we believe will allow this franchise to fulfill its dream of continuing on its path to becoming a World Series champion.” Alex Rodriguez: “Hopefully when it is over, they won’t be calling Mr. Hicks a fool, but the wisest man in baseball. But only time will tell.” For 2003 season, Rodriguez wins American League Most Valuable Player; the Rangers finish the season with win/loss ratio of 0.78 – identical to its 2000 finish February 2004: Rangers trade Rodriguez to New York Yankees and agree to pay $67 million of the $179 million remaining on his original contract Rodriguez wins 2005 American League MVP award September 2006: Sports Illustrated publishes cover story entitled, “The Lonely Yankee,” which highlights Rodriguez’s failure to win acceptance with the media, Yankee fans, and his own teammates Unidentified Yankee teammate: “It was always about the numbers in Seattle and Texas for him. Winning is all you’re judged on here.”

  11. A-Rod Offensive Statistics Batting average Stolen bases RBI Home runs Milestones/awards Mariners lose ALCS to Yankees 2000 Signs with Texas Rangers 2001 AL Gold Glove – shortstop 2002 AL Gold Glove – shortstop; AL MVP 2003 Signs with New York Yankees 2004 AL Silver Slugger;AL MVP 2005 2006 Source: Baseball Almanac

  12. Team Standings by Year

  13. Attendance and Wins by Team Mariners Mariners Attendance Indexed Rangers Rangers Wins Yankees Yankees Source: ESPN, Baseball Almanac

  14. Key Takeaways • Financial concepts are applicable to a wide range of situations – not just to standard corporate financial decision making • Finance is a fundamental tool in problem solving: it forces logic and ensures analytical rigor and completeness • Classic financial skills can be brought to bear in assessing, building, and managing personal value/wealth creation

  15. Today’s Discussion • Case study: A-Rod – Signing the Best Player in Baseball • My career in finance: a perspective

  16. My resume My story Comments Experiences Aimed to create distinctive skill set Operational Financial Deal execution Complex business problem solving Managerial A seemingly incremental, logical progression; but in reality a narrative filled with twists, turns, and ultimately self-discovery Personal renewal/ reinvention entails experimentation, learning, adapting – and a willingness to put oneself at risk Coherence does emerge: our present is related to the past, and from that trajectory, we are able to glimpse our future Allstate Insurance Company Deutsche Bank Bankers Trust McKinsey & Company Goldman Sachs Supplemented with international experience U.S. U.K. France Worked hard to establish and cultivate broad professional network Education International business Finance Government Philanthropy Harvard Business School Oxford University Middlebury College Tulane University Established track record/ reputation Hard working Energetic Focused initially on establishing credibility through academics My Story

  17. Selected Career Experiences

  18. Future leadership role Leadership potential Business/general management Technical/functional expertise People leadership Performance Demonstrated impact Performance impact Intellectual contributions/thought leadership People development/followership Prerequisites Personal impact Adherence to professional values Basic skills Partnerlike behavior Development/caring for people Inspirational to others Is enjoyable to work with Reinforces professional values Does what is right • Business/technical problem solving • Conceptual power • Business judgment • Productivity/quality control • People leadership • Interpersonal relations • Communications effectiveness Overview of Professional Development

  19. We have not even to risk the adventure alone, for the heroes of all time have gone before us. The labyrinth is thoroughly known. We have only to follow the thread of the hero path. And where we had thought to find an abomination, we shall find a god. And where we had thought to slay another, we shall slay ourselves. And where we had thought to travel outward, we shall come to the center of our own existence. And where we had thought to be alone, we shall be with all the world. ” Joseph Campbell A Few Parting Words Key themes Heroism: follow the examples of recognized heroes Career is, ultimately, a journey/quest of self-knowledge and understanding Intense sense of commonality/kinship