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266 PART 3 • STRATEGY IMPLEMENTATION

EAT (profit maximization) were the decision criteria, but EPS (maximize shareholders’
wealth) is the better ratio to make this decision. Firms can do many things in the short run
to maximize profits, so investors and creditors consider maximizing shareholders’ wealth
to be the better criteria for making financing decisions.
In Table 8-7, note that Boeing should use stock to raise capital in recession (see 0.92)
or normal (see 2.29) economic conditions but should use debt financing under boom con-
ditions (see 5.07). Let’s calculate here the number of shares figure of 1014.68 given under
Boeing’s stock alternative. Divide $10,000 M funds needed by the stock price of $53 =
188.68 M new shares to be issued + the 826 M shares outstanding already = 1014.68 M
shares under the stock scenario. Along the final row, EPS is the number of shares outstand-
ing divided by EAT in all columns.
Note in Table 8-6 and Table 8-7 that a dividends row is absent from both the Gateway
and Boeing analyses. The more shares outstanding, the more dividends to be paid (if the
firm indeed pays dividends). Paying dividends lowers EAT, which lowers the stock EPS
values whenever this aspect is included. To consider dividends in an EPS/EBIT analysis,
simply insert another row for “Dividends” right below the “EAT” row and then insert an
“Earnings After Taxes and Dividends” row. Considering dividends would make the analy-
sis more robust.
Note in both the Gateway and Boeing graphs, there is a break-even point between the
normal and boom range of EBIT where the debt option overtakes the 70% Debt/30% Stock
option as the best financing alternative. A break-even point is where two lines cross each
other. A break-even point is the EBIT level where various financing alternative represented
by lines crossing are equally attractive in terms of EPS. Both the Gateway and Boeing
graphs indicate that EPS values are highest for the 100 percent debt option at high EBIT
levels. The two graphs also reveal that the EPS values for 100 percent debt increase faster
than the other financing options as EBIT levels increase beyond the break-even point. At
low levels of EBIT however, both the Gateway and Boeing graphs indicate that 100 percent
stock is the best financing alternative because the EPS values are highest.

New Source of Funding
Credit unions were not involved in the subprime-loan market, so many of them are flush
with cash and are making loans, especially to small businesses. Deposits to credit unions
were also up when many investors abandoned the stock market. Roughly 27 percent of the
12
8,147 U.S. credit unions offer business loans. The amount of businesses loans was up 18
percent in 2008 to $33 billion, and the average loan size was $215,000.
Many credit unions want to give more business loans, but the 1998 federal law (Credit
Union Membership Access Act) caps the amount of business loans credit unions can have
at 12.25 percent of their assets. Credit unions are trying to get this law changed, but of
course banks are lobbying hard to have the law remain in place. Credit unions are chartered
as nonprofit cooperative institutions owned by their members. Thus credit unions are tax-
exempt organizations. Bankers argue that allowing credit unions to give more business
loans would give them an unfair competitive advantage over traditional banks.
Projected Financial Statements
Projected financial statement analysis is a central strategy-implementation technique because it
allows an organization to examine the expected results of various actions and approaches. This
type of analysis can be used to forecast the impact of various implementation decisions (for
example, to increase promotion expenditures by 50 percent to support a market-development
strategy, to increase salaries by 25 percent to support a market-penetration strategy, to increase
research and development expenditures by 70 percent to support product development, or to
sell $1 million of common stock to raise capital for diversification). Nearly all financial institu-
tions require at least three years of projected financial statements whenever a business seeks
capital. A projected income statement and balance sheet allow an organization to compute pro-
jected financial ratios under various strategy-implementation scenarios. When compared to
prior years and to industry averages, financial ratios provide valuable insights into the feasibil-
ity of various strategy-implementation approaches.