Myers, S.C. (1984). “Finance Theory and Financial Strategy”. Interfaces, 14.

Topics: Investment, Net present value, Discounted cash flow Pages: 3 (795 words) Published: May 1, 2013
Myers, S.C. (1984). “Finance Theory and Financial Strategy”. Interfaces, 14.

This journal explained how to bridge the gap between strategic planning and finance theory. Myers wrote this journal to explain why finance analysis had only slight impact on strategic planning, even though strategic planning needs finance. Strategic and financial analysis are not reconciled. When low net present value (NPV) projects are nurtured "for strategic reasons," the strategic analysis overrides measures of financial value, and vice versa.

Relevant Financial Theory
The financial concepts most relevant to strategic planning are those dealing with firms' capital investment decisions. To select the projects to be financed, we calculate net present value by subtracting project’s present value with required investments. Projects with positive or higher NPV should be preferred than those with negative or smaller NPV. However, the theory is usually boiled down to a single model, discounted cash flow (DCF): PV= t=1TCt(1+r)t with PV = present value, Ct = forecasted incremental cash flow, t = project life, and r = the opportunity cash capital.

The Gaps
Myers argued that the gaps between strategic and financial analysis are caused by: * Finance theory and traditional approaches to strategic planning may be kept apart by differences in language and "culture." Managers worry about projects' book rates of return or impacts on book earnings per share. They worry about payback, even for projects that clearly have positive NPVs. They try to reduce risk through diversification. * Discounted cash flow analysis may have been misused, and consequently not accepted, in strategic applications. Competing projects are often ranked on internal rate of return rather than NPV. Thus make small and short lived projects are preferred than long lived projects. Inflation are not consistently calculated in DCF calculations. Management often sets unrealistic high discount rates...
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