Capital Budgeting

1
Capital Budgeting

• Sport Finance

2
What is Capital?

• The long-term funding used to acquire fixed
  assets.
  
• New revenue streams necessary to offset costs.
• Capital budgeting is long-term usually 1 year
• Must be developed in detail
• Where do funds come from?
• How will funds be allocated?

3
Costs of Capital

• Four traditional forms of capital to fund
  fixed-asset acquisition
  
• 1. Debt (loans/bonds)
• 2. Common Stock
• 3. Preferred Stock
• 4. Retained Earnings

4
Government Assistance

• Small Business Administration
• Provides loans and business support
• Typical loans are between 100 and 25K
• Borrowers must have
• Good credit history
• No bankruptcies in past 10 years
• A business plan
• Some form of collateral
• 1/3 of required capital for the business needs

5
Costs of Capital

• Any capital acquisition has a cost
• Interest
• Stock value increase
• Stock dividends
• Use of existing organization equity

6
Costs of Capital

• The proportion of capital costs varies.
• Leagues may control these proportions (ie debt
  limits).
  
• Usually a includes a combination of debt and
  equity.
  
• Non-profits have another source of capital
  fundraising.

7
Costs of Capital

• Influenced by several factors
• Strength of the stock market may make the
  issuance of stock more or less attractive
  
• Lower stock prices require more shares to be
  issued to raise an equivalent amount of money
  
• Issuing new stock/debt also has costs, such as
  investment banking (flotation costs) and legal
  fees
  
• I.e. 15 costs require raising 2.3M in order to
  keep 2M
  
• Bond flotation is less, typically 1/3 of stock
  flotation costs
  
• Many of the fees are fixed (legal), so issuing
  stocks or bonds typically only happens with large
  amounts
  
• How about retained earnings if it has the same
  COC as stock?

8
Costs of Debt

• Smaller organizations use bank loans (cost
  interest)
  
• Larger organizations issue private bonds (cost
  coupon payment)
  
• Rate of return estimation based upon
• Historical data on the company
• Similar yields (Rating services)

9
Bond Financing

• Similar to loans from banks, but issued by
  government or corporations
  
• Often with better interest or tax benefits
• Secured vs. Unsecured
• Debentures are unsecured, and only issued by
  companies with the best credit

10
Bonds Advantages / Disadvantages

• Advantages
• Interest is usually tax deductible (government
  bonds)
  
• There is a strong, established market
• Disadvantages
• Interest payments not optional (like dividends on
  stock)
  
• Principal amount must be paid in full when due
  (unlike stock)
  
• Bondholders have higher preference during
  liquidity events

11
Bank Financing

• Loans are short term and long term
• Short 30, 60 days or a few months
• Some have renewable options
• Long more than 1 year
• Conventional loans spread principal/ interest
  over the duration of the loan period
  
• Term loans entail regular periodic payments and
  one balloon payment at the end
  
• Cost of borrowing
• Interest / (amount borrowed compensating
  balance)

12
Costs of Equity

• Preferred Stock
• Dividend payments are not tax deductible
• Usually paid on a regular interval
• Stockholders often have option to take over
  company if dividends are not paid.
  
• Failure to pay dividends is a signal to
  stockholders that the company may be in financial
  distress.
  
• Predetermined share value

13
Costs of Equity

• Common Stock
• Prospective stockholders buy the stock if they
  think the value will rise.
  
• Using retained earnings will keep the
  organization from paying dividends
  
• The shareholders must decide which will earn
  more the dividends or the ROI
  
• Retained earnings used to create fixed assets
  must increase the value of the stock and/or
  dividends.

14
Risks and Capital Budgeting

• Since investing in the development of new fixed
  assets has a cost, those costs must be analyzed
  
• Is the cost too high?
• Is the return great enough to cover costs?
• Is the return greater than that from other
  potential investments?
  
• Is the risk of smaller-than-expected returns
  worth the investment?
  
• In order to accept higher risks, expected returns
  must be higher.

15
Projecting Cash Flow

• Capital budgeting must include estimates of
  income from new fixed assets
  
• Use of existing statements
• Calculations of income estimates

16
Stadium Applications

• Three questions to consider
• Who owns the stadium?
• Who operates and manages the stadium?
• How many sporting clubs are tenants of the
  stadium?
  
• Ex Redskins own, operate, and only tenant
• Ex Saints anchor tenant, owned by state,
  operated by SMG
  
• Very complex when dealing with naming rights,
  ticket pricing, sharing rules with other tenants,
  etc.

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Case Example Houston Texans

• Cost of Reliant Stadium was 310M
• Owner of stadium is Harris County Houston
  Sports Authority
  
• Owner put up 195M based on lodging taxes
• Texans and Houston Livestock Show and Rodeo
  combined to pay 115M
  
• How many seats should be put in?
• Whats the demand for tickets?
• Will it cover the black-out risk?
• What is construction cost of more seats?

18
Case Example Houston TexansRevenues

• Personal Seat Licenses
• Texans sold 41K PSLs at prices ranging from
  600-4200 this is 98.4M upfront, assuming the
  average of these values
  
• Naming Rights
• Reliant Resources 300M, 30 year deal
• Texans received 75 of the payments
• Suites
• 165 suites 19 added after year 1 due to demand
• Price range of 55K-225K more than 28M in
  revenue at an avg. price of 154K
  
• Season Ticket Holders
• 38K holders with PSLs annual range is
  500-2680
  
• At avg. of 1590, revenues are 60.42M
• Non PSL holders avg. 365 6.095M
• In-Stadium Sponsorship and Signage Parking
• Hospitality Village - 1.5M