Economic Value-added: Why Shareholder Value, And Why Now?

Economic Value-Added Why Shareholder Value, And Why Now?

Major Developments       

Globalization and deregulation of capital markets End of capital and exchange controls Advances in information technology More liquid securities markets Improvements in capital regulations Generational changes in attitudes toward savings and investments Expansion of institutional investments

Value creation  



Product and service quality The ability to attract, develop, and retain talented people Community and environmental responsibility

Coke: Provides value    

Customers take comfort from the brand Stimulating and rewarding workplace Bottlers enjoy attractive profit margins Shareholders are wealthier because of strong financial performance

VBM       

Strategic planning Capital allocation Operating budgets Performance measurement Management compensation Internal communication External communication (w/ the capital markets)

Valuation Principles  

Why commit cash today? Because we believe, that we will receive a lot more cash in the future

Discounted Cash Flow

VALUE =

∑

CFt ----------------(1 + r )t

Free cashflow for any period EBITDA - Depreciation and amortization - Taxes = Net operating profit after tax (NOPAT) + Depreciation and amortization - Capital expenditures - Changes in the working capital requirements (WCR) = Free cashflow

Net Present Value (NPV)

Internal Rate of Return (IRR)

Market Value-Added MVA = MARKET VALUE - INVESTED CAPITAL

EXCESS RETURN Excess returnN = actual wealthN - expected wealthN

Actual Wealth =

Dividends1 (1+ Ce)N–1 + + … + + PriceN - Price0 (1 + ce)N

Measure of Performance that: 1

Can be calculated at divisional levels, thus providing line of sight for divisional managers

2

Are flows, not stocks, and thus are amenable to performance evaluation over periods of time

3 Promote the creation of shareholder wealth

EVA Net Sales - Operating expenses = Operating profit (or EBIT) - Taxes = NOPAT - Capital charges (invested capital x cost of capital) = EVA