Financial decisions and financial markets

• High growth leads to the bankruptcy

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  1. Does the company provide a return on investment above the cost of capital, or are there good reasons to believe that it will earn an attractive return in the future?
  
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  2. If profitability exceeds the cost of capital, then how long does the company maintain a steady excess return?
  
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  3. If the company's profitability has fallen below the cost of capital, what is the likelihood that it will be able to return to sustainable super-profitability?
  

Childhood

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  Pin on the market
  
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    →Complete the acquisition of company assets
    
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  →break-even point
  

Example

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  Total fixed costs: $500,000
  
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  Variable costs per unit: $300
  
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  Sale price per unit: $500
  
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  Desired profits: $200,000
  

Youth

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  Expansion of the market segment
  
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    →Expanding the diversity of the investment portfolio ( on assets, on risk, ..) - to reduce volatility of ROI
    
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  →Ensuring profitability growth
  

» Profitable Growth paradox. Most growth investment will at first reduce the profitability, cost reduction efforts to boost the bottom line usually have a negative impact on future growth. This is especially true with mature products or services. The only way out of the Profitable Growth paradox is through innovation. It concerns not only technical innovation but mainly business model innovation, a new product-market space where there is no competition (see Blue Ocean Strategy). An interesting piece of research by the BCG shows that no business model is able to achieve a sustainable competitive advantage for more than 10 years.

Early maturity

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  →Regional diversification
  
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    →expansion of the investment portfolio
    
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  →optimal level of profitability (Liquidity Vs Profitability)
  

Example

Maturity

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  →Industry diversification
  
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    →Expanding financial investment
    
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  →Stability of profitability and liquidity
  

Aging

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  → activity stabilization
  
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    →An investment portfolio sufficient to maintain the required level of activity (risk vs return)
    
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  → stability and solvency
  

Revival

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  → Substantial update of activity forms
  
  • 
    →Investment portfolio diversification
    

→ Managing the growth rate of profits and cash flow.

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Rational vs irrational

Expected Utility

Theory

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  Mean-Variance Theory
  

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  Prospect Theory