Chapter 5: Finance and Budgeting in Sport Management

Comprehensive practice flashcards covering sport facility finance, capital projects, debt and equity funding mechanisms, municipal bonds, budgeting approaches, and variance analysis based on Chapter 5.

What is a capital project?

A long-term investment that increases organizational assets, typically requiring large upfront cash outlays for land acquisition, construction, and infrastructure.

What is the decision basis for a for-profit organization considering a capital project?

It compares the present value of expected cash inflows with the present value of expected cash outflows, adding value when inflows exceed outflows.

How do public or nonprofit organizations evaluate capital project decisions?

They evaluate financial feasibility and sustainability while considering their organizational mission, service obligations, and stakeholder benefit.

What accounting equation reflects how facility acquisition, construction, or renovation is funded?

$\text{Assets} = \text{Liabilities} + \text{Equity}$ (an increase in assets must be matched by an increase in liabilities, equity, or both).

What are the three primary sources of equity finance for facility capital projects?

Stock, retained earnings, and gifts (donations).

How much capital did the Green Bay Packers raise during their 2011 stock offering for Lambeau Field renovations?

Approximately \twentyfour = \$67\text{ million}.

What are retained earnings and what is the primary advantage of using them?

Retained earnings are internally generated funds that are reinvested into the organization, allowing it to maintain control over the use of funds without creating a debt repayment obligation.

How much funding was raised by the Duke Forward campaign across the university, which included athletic facility projects?

$\$3.85\text{ billion}$.

How much did the Philadelphia Girls' Rowing Club raise in the first phase of its boathouse preservation campaign?

$\$600{,}000$.

In loan financing, what is defined as the maturity?

The date by which the borrower must repay the principal and interest in full.

Under the NFL's G-4 credit facility program, how much was an individual team permitted to borrow for stadium projects?

Up to \twentyfive = \$250\text{ million}.

Why can league-wide credit facilities in the NFL, NBA, MLB, and NHL secure lower borrowing interest rates?

League assets, including media contracts and stable franchise values, reduce perceived risk for lenders.

What is the primary advantage of municipal bonds issued by state and local governments in the United States context?

Municipal bond interest is tax-exempt, which allows for lower interest rates and reduces total financing costs.

What secures the repayment of general obligation bonds (GO bonds)?

The government's authority to levy broad taxes, such as income, property, or sales taxes.

What principle governs revenue bonds regarding who pays for the facility?

The benefit principle, meaning project users or customers who benefit directly from the facility bear the repayment burden through project-generated revenue.

What is a special tax bond?

A bond secured by revenue from a designated tax tied to activities people are not legally obligated to perform, such as hotel, rental car, alcohol, or cigarette taxes.

What bond package did Austin, Texas voters approve in 2012 for parks and recreation?

A $\$77.7\text{ million}$ bond package approved by a $58\%$ vote.

What is securitization of operating revenue?

Using contractually obligated income (such as naming rights, media agreements, sponsorships, or multiyear premium seating) as collateral for debt financing.

What is the fundamental difference in organizing logic between a line-item budget and a program budget?

A line-item budget groups revenue and expense estimates into categories answering 'What does the organization buy?', whereas a program budget allocates funds to specific projects answering 'Which programs advance strategic goals?'.

What is incremental budgeting and what is its main limitation?

A method using the previous year's budget as the starting point; its limitation is that it can preserve low-value spending and encourage year-end budget exhaustion without testing alignment to making the company better.

What are the five core elements evaluated in zero-based budgeting (ZBB)?

1. Objectives, 2. Alternatives, 3. Funding levels, 4. Performance, and 5. Priorities.

How does the initial budgeting process differ between nonprofit and for-profit sport organizations?

Nonprofits typically estimate program expenditures first and then determine required fundraising, whereas for-profits generally begin by forecasting revenues.

In financial variance analysis, when are revenues and expenses classified as favorable?

Revenues are favorable when actual results exceed the budget, and expenses are favorable when actual spending is below the budget.

What percentage of the total budget does the textbook recommend allocating to a contingency reserve for events?

$8\%$ to $10\%$.

What contingency reserve amount was incorporated into the Los Angeles 2024 Olympic budget estimate of $\$5.3\text{ billion}$?

$\$491.9\text{ million}$.

What is Equity Finance?

A way of raising money for a business or project by selling a piece of ownership (shares) in exchange for cash. Involves bringing on investors who become partial owners of the business or facility

What is debt finance?

A method of raising funds by borrowing money that must be repaid, typically with interest.

Simple definition of securitization of operating revenue.

A financial strategy where a company takes its expected future earnings and turns them into immediate cash today.