Sport Finance Midterm review PDF

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Sport Finance Midterm review Chapter 1 – Introduction 1. what are the five forms of financing, and how is each used within sport? - Debt Financing – borrowing money that must be repaid over time, usually with interest (sport teams issue bonds or borrow from lending institutions to finance operations through debt) - Equity Financing – exchanging a share or portion of ownership of the organization for money (stadium renovations) - Retained Earnings – reinvestment of prior earnings (finance acquisition of players, improve operations, or make other investments) - Government Funding – funding provided by federal, state, or municipal source, including land use, tax abatements, direct stadium financing, state and municipal appropriations and infrastructure improvements (can be used to finance stadiums) - Gift Financing – charitable donations, either cash or in-kind (alumni donating to college sports team) 2. What is financial management? How does it differ in the sport industry compared to other industries? - It involves decisions within firms regarding the acquisition of funds usually with the goal or outcome of wealth maximization. Might not be interested in wealth maximization, but instead of winning championships or in seeking celebrity status by being one of a select few professional sport franchise owners 3. which has the greater impact in financial management: the structure of a league or the structure of a team? - The structure of a league has greater financial impact because there are specific rules that the organization must follow 4. what legislative actions currently being considered in Congress may affect the financial management of sport? - The VideoProgramming Choice and Deceny Act, and the Taxpayer Protection and Corporate Responsibility act Case 1. Why was the WNBA structured as a single-entity league when it was founded? What advantages and disadvantages did the structure provide to the league? - The WNBA was structured as a single-entity so that only a single group or individual owns the league. Works well for start ups. - Advantages; o Antitrust law does not apply. Therefore, the league can place franchises in preferred cities and assign players to specific teams in specific cities. This also allows for competitive balance. o Player salary costs are constrained. Players sign contracts with the teams,

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so there is no bidding on players in an open market. Disadvantages; o Provides little economic incentive at the club level o Falls under the Sherman antitrust act

2. What impact did the first CBA have on the WNBA? And how did each of the CBAs affect the leagues profitability? - The first CBA o Increased rookie minimum salary by 75% o Veteran minimum salary doubled o Contracts became guaranteed o Retirement plans and health coverage were provided o Players earned a collective share of league licensing income - The second CBA allowed for individual team ownership. Non NBA owners included and could be located in non NBA cities. - The third CBA set salary caps and increased player salaries. - The fourth CBA increased both salary caps and player salaries 3. What factors have caused the WNBA to move away from the single-entity structure? - Growth of the league - Increase in salary 4. For new leagues, why is the single-entity structure appealing? At some point do start-up leagues have to move away from this structure? - This structure is appealing because there are less financial management problems, and for a start up this allows one to get on its feet and start profiting before looking to expand and allow for individual owners. Chapter 2 – Analyzing Financial Statements and Ratios 1. what are the three main sections of the balance sheet? give an example for each section - Assets (cash) Liabilities (accounts payable) Owner's Equity (retained earnings) 2. what is the purpose of computing financial ratios? - they provide key information about the condition and performance of a company and are, therefore, vital for managers to understand 3. if an organization's current ratio value is under 1.00 what might it suggest about the organization - that it cannot easily cover its liabilities very easily with its assets 4. what information do leverage ratios provide? - how much debt the company has to other organizations

5. why is the price to earnings ratio so widely used among investors? - it allows comparisons of the market values of companies of all sizes. 6. This chapter repeatedly states that financial rations are most valuable when viewed in comparison to the organizations historical ratio values and competitors’ values. Why is this context valuable when examining financial ratios? - Allows you to determine loss or progress within the company. Also tells you any big differences between that year and previous years, good or bad. Chapter 3 – Risk 1. how does risk affect the financial management of sport organizations? - Sport organizations expect that money they invest will earn more in the future. The gain or loss over a period of time is the rate of return. The rate of return measures the financial performance of an investment. 2. describe the process of determining a nominal interest rate? - the real risk free rate of interest plus multiple risk premiums 3. of mlb, the nba, and the nhl, which league has the most risk, which has the least? Why? - MLB, NFL 4. What must players and agents understand about risk? How should an agent structure a player’s contract if it contains deferred compensation? 5. What risk factors should a team consider when deciding whether to build and find a new venue? How are the risk factors different if municipality is funding the construction? 6. If you were advising an investor interested in purchasing a sport franchise, what would you give?

Chapter 4 – Time value of money 1. What aspects of the time value of money must professional sport organizations and athletes consider when negotiating contracts? - Whether part of the payment is deferred or not. - Inflation, decreases each year as a result. Consider a signing bonus to compensate inflation. 2. What mistake did the NBA make in its dealings with the owners of the Spirits of St. Louis? - The NBA did not take into consideration the future value of the television rights when making their dealings with the owner of the Spirits.

3. What are some advantages and disadvantages of deferring salaries (both players and team’s perspectives)? - Team; leaves additional cash in the short term for other expenditures in hope this will lead to enhanced revenues. However, this might not be the outcome and your cash will be drained. Thus forcing you to borrow money to pay off deferred contracts - Players; the payments are valuable; the money becomes worthless if the organization defaults as a result of ceasing operations or bankruptcy. For players deferred salaries are a safety net – money for retirement. 4. What concerns should a sport organization contemplate when negotiating future payments from sponsorships or other long-term agreements? - Player long term contracts – must determine the appropriate compensation and the player’s future performance ability. If the long term contracts circumvent salary cap rules, can be penalized for this. Chapter 15 – Professional Sports 1. What is the difference between win maximization and profit maximization? How can these differing philosophies cause problems in professional sport leagues? - Profit maximization – the pursuit of the highest profits possible, secondary goal - Win maximization – the pursuit of winning as a primary goal - The pursuit of winning may or may not increase the overall value of the firm. - The pursuit of winning by one franchise or a small group of franchises could have an adverse impact on other owners. If an owner who has a large financial resource elects to diminish or eliminate potential franchise profits in the pursuit of winning, other owners may not be able to compete in signing the best players. 2. How does a commissioner interact with owners and players in a professional sport league? What are a commissioner’s main responsibilities? - The commissioner; consults with owners, negotiates national television contracts, establishes relationships with vendors for league-wide licensed merchandise sales, hire and supervise game officials, and negotiate a collective bargaining agreement with the players’ union. - Although the commissioner is the leader of the league, he or she still remains the employee of the owners. Therefore, the commissioner’s actions are what is best for the owners. 3. How do professional sport leagues such as the NBA, NHL, NFL, and MLB differ in structure from entities such as NASCAR, the PGA tour, and the PBA tour? 4. Why do professional leagues establish rules governing the financial operation of individual franchises? - Every professional sport league has an interest in maintaining financially successful teams. Because a successful league depends on competent and well-

financed owners, leagues establish ownership rules and policies to protect the solvency of every league member. If one or more of the league’s franchises experience significant financial hardship, then the league itself might suffer. 5. Explain the concept of pooled debt instruments. - A debt instrument, such as securitization, that has the backing of an entire league rather than an individual team, usually providing a more favourable interest rate than the individual franchise could obtain. 6. Why have so many rival professional sport leagues failed in the United States? 7. Explain the concept of competitive balance. How have leagues attempted to achieve competitive balance? - Competitive balance – the condition under which every franchise, if it executes sound management strategy, has a reasonable opportunity to compete for a playoff spot at least every couple of seasons. 8. Discuss the differences among the salary caps in the NBA, NHL, NFL and MLS. 9. List and describe the most important revenue sources for professional sport leagues. In what ways do you think these revenue sources will change in importance in the future? - Luxury seating, seat licenses, ticket reselling, variable ticket pricing, fantasy sports and gambling and securitization. 10. Do you feel that daily fantasy leagues are gambling or games of skill? How do you feel the legislative and judicial branches of government will resolve this question in the future? - I feel it is a form of gambling just a form that is more socially acceptable. I believe the government will leave fantasy leagues alone until there is some negative attention/media or a crisis around the subject. 11. Explain why a relegation system would be difficult to implement in North American professional sport leagues. - Territorial rights. These are a fundamental feature of the American system. A team has exclusive rights to its territory. Another team can’t move into town and set up shop, and be part of the system.

Chapter 11 and 12 1. Provide reasons why many corporate sponsors believe they derive greater value from shirt naming rights than facility naming rights? - Shirt naming rights differentiates brand in a busy advertising and sponsorship environment. Maintains visibility as ad-blocking technology grows. Exposure goes beyond the game, through highlight videos, social media and photographs.

2. Explain how you would sell the naming rights partnership to a business. Specifically identify key benefits you would extend to the business in a naming rights agreement. In addition, identify key provisions or elements you would require in the naming rights agreement with the business. (What would you give and what would you like most to get in such an agreement?) - Pros for a business; o Helps introduce new products, helping with new or established products to compete with competitive brands o Staying relevant. Reminding consumers that a brand exists, which can translate into brand preference when considering what product to choose o Huge return on advertising dollars far above what can be achieved through traditional marketing channels o Offsite promotion through media mentions o Valuable unpaid ad time through commercials during season and championships o Direct access to consumers - For the team; o Financial boost, quiet large. This contributes to player incomes, equipment, and facility upgrades. - Key elements required for the agreement; o Term or length of contract o Consideration (amount and schedule of payments) o Signage rights and limitations (number, size, placement and type of signs, and design approval process o Installation costs (responsibility for expenses related to preparation, installation and maintenance of signage) o Marketing rights (number and location of luxury suites, boxes, club seats, and on-site exhibit space, ATMs, etc.) o Termination upon default (provision to terminate contract if either party fails to perform obligations of the agreement with no more than 90 days’ notice) o Reimbursement (naming sponsor compensation in event of incomplete season due to strike, lockout, weather) o Renewal option (current sponsor given first right of refusal to extend agreement generally 30 days to six months prior to expiration of contract) 3. What are the types of premium seating available in a sport venue? Describe the trends and challenges in selling each type. - Types; Club seats, luxury suites, courtside/dugout seats etc. - Challenges; o A prevailing culture of austerity – given the economy’s slow recovery and persistent high unemployment rates, many companies will be reluctant to associate their brands with expensive premium seating. o The rising cost of attending a game – many companies have slashed their

entertainment budgets, making it increasingly difficult to pay not only for expensive seating inventor but for the additional costs related to entertaining guests, such as gourmet food and beverage service over the course of a full season. o Advanced technology has made it more appealing to stay at home – this addressed the increased quality of in-home entertainment options and their adverse impact on live attendance. o A surplus of single-event inventor cannibalizes long-term demand – in the tough economy, many teams have struggled to sell or lease all of their premium seating. Due to this teams have offered unsold inventory on an individual game basis. However, doing this can have a devastating impact on the ability of a team to resell the inventory on a long-term basis. 4. What are PSLs? How do they work exactly? - Personal seat license. - Buyers make a one-time payment that allows them to purchase the season ticket to that designated seat for a specified period of time. The seat license provides the buyer with an exclusive claim to that seat as long as he or she continues to purchase season tickets. 5. Discuss the Sounders innovative approach to replacing traditional paper tickets and the customer service advantages of their new approach. - Using smart cards for season tickets. Bar code is scanned at the gate for admission and the magnetic stripe is used to purchase food and merchandise. Tickets can be transferred by email if the consumer cannot attend. 6. -

Describe the common feature of these team’s mini plans. Free game with purchase Discounts off box office prices Pick games to suit your schedule Your choice of seat location

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Describe different differential pricing strategies used by teams to sell tickets. Quality, time and place Quality – the reputation, strength and draw of the opponent Time – day of the week, time of day and part of the season Place – determined by seat location...