What’s It Worth? - The Movies -

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 • Every weekend (just about) • Only $10 (ticket AND popcorn!) • $520 if I go every week • 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 single ticket with popcorn costs $10 • There are 52 weeks in a year • $10 × 52 = $520 • 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 pick a spokeperson who • Took notes on our discussion • Was willing to share with the rest of the group • We thought through: • What might make this a good deal? • What might make it not so good? • What would you be willing to pay for the pass?

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

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 And we talked about why the pass might be worth less than $520. • Risk is too high • I might get tired of going and lose the money, if I can’t sell the pass • There might be conflicts in my schedule • Value is too Low • It’s only once a week • I would feel forced to go • It’s only $70 difference spread over a whole year

We learned a few things. • Everything has a value • That value might be all up front, or it might be spread out over time • 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 • A dollar today is worth more than a dollar tomorrow • A sure dollar is worth more than a risky one • 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 • 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 • Some people avoid risk • Some people need cash today and cannot invest • 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 sure dollar is worth more than a risky one • 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. • 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) • We can evaluate that income in terms of several things: • How much earnings growth we expect the company to have • How long it takes us to get our investment back • How risky we think that future income may be • 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 • 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. • Would you buy my business? • What would your return be, if the business could generate $7,500 per month in profit, every month? • Is that good enough for you? • Can you raise the money to buy the whole business? * Example assumes that the business continues for 10 years after you buy it

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?

Summary • 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 • 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 • 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 • Return is what you get back on your investment, similar to the interest rate you might earn on a bank account

What’s It Worth? - The Movies -