financial tools necessary for understanding the marketing finance interface

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1、IFinancialToolsNecessaryforUnderstandingtheMarketing-FinanceInterfaceThispageintentionallyleftblank1ChoosingMarketingPolicyintheShortRunThischapterandthenextwillintroduceyoutosomefinancialtoolsthatareessentialforunderstandingFusionforProfit.Forsimplicity,wewillassumethatmark

2、etingpolicies(e.g.,priceandadvertising)haveshort-termeffects.Inthenextchapter,wewillconsiderthemoregeneralcasewherethefirm’smarketingpolicieshavelong-termeffects.Theinformationcoveredinthischapterwillbeusefulwhenyouarefacedwiththefollowingtypesofdecisions:•Howshouldmyfirmmeasu

3、reprofitabilityunderuncertainty?•Howshouldmyfirmusethereturnoninvestmentcriterion(ROI)formarketingdecisionmaking?•Howshouldmyfirmchoosemarketingpolicyifmyfirmisprivatelyheld?•Howshouldmyfirmchoosemarketingpolicyifmyfirmispubliclyheld?•HowshouldmyfirmusetheROIcriterionifmyfirmsells

4、multipleproductsorhasmultipledivisions?Thefollowingtermswillbeintroducedinthischapter(seeglossaryfordefinitions):accountingcostcostofcapitalhedgefundcashflowscyclicalityhurdlerateofreturncertainty-equivalenteconomiccostinventoryholdingcostprofitfinancialcostlong-termeffects56TH

5、EMARKETINGFINANCEINTERFACEmarketsegmentationprofitrisk-neutralmarketvalueprofitabilityriskpremiumnetprofitrateofreturnshort-termeffectsnonaccountingcostsreturnoninvestment(ROI)uncertaintyprivatelyheldfirmrisk-adjustedROIvolatility
1.1ShouldtheFirmUseProfitstoChooseMarketingPoli

6、cies?Beforeweaddressthisissue,itisnecessarytodefineprofits.Profitisdefinedas:profit=revenue–costsinanygiventimeperiod.
Isprofitawell-definedquantity?Howshouldprofitbecomputed?Onthesurface,profitappearstobeawell-definedquantity.However,itiseasytomismeasureprofit.Theprimarydangerisomit

7、tinghidden,nonac-countingcosts.Example1:Consideranentrepreneurwhohasinvestedhisorherownmoneyinabusiness.Sincethefirmdoesnothaveanyfinancialobligationstooutsiders,theaccountingcostofthisinvestmentiszero.However,thefinancialcostofthisinvestmentisclearlynonzero,sincetheentrepren

8、eurcouldhaveinvestedthemoneyelsewhere.Similarly,insteadofrunninghisorherownbusiness,theen