Fm10e ch13
14
Chapter 13 Chapter 13 - Managing - Managing for Shareholder Value for Shareholder Value 2005, Pearson Prentice Ha
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Transcript of Fm10e ch13
- 1. Chapter 13- Managing for Shareholder Value 2005, Pearson Prentice Hall
2. Top Creators of Shareholder Value for 2001 ($ Millions)
- investedcost of
- MVAcapitalreturncapital
- Gen Elect 339,200 82,11120.0% 9.4%
- Microsoft 325,87226,34321.5%13.7%
- Wal - Mart 221,16665,67712.4%8.9%
- Intel 169,98041,3979.0%16.2%
- Citigroup 155,695104,21014.7%12.0%
3. Market Value Added
- MVA= Firm Value - Invested Capital
- Firm value= market value of the firms outstanding debt and equity securities.
- Invested Capital= the sum total of the funds that have been invested in the firm.
4. Value Creation
- The combination ofopportunityandexecution .
- Opportunities must be recognized.
- Employees must be ready, willing, and able to take advantage of the opportunities.
5. Business Valuation: The Accounting Model
- Using the P/E ratio:
- If a firms P/E ratio is20 , then a dollar increase in earnings per share will create$20in additional equity value per share.
- Problem:ignores R&D, which would reduce earnings per share, but should increase future earnings!
6. Business Valuation: Free Cash Flow Valuation Model
- Value = the PV of the firms projected free cash flows for all future years.
7. Business Valuation: Free Cash Flow Valuation Model
- Value = the PV of the firms projected free cash flows for all future years.
- Value =FCF+FCF+FCF+ +Terminal value
- ( 1+k) 1 (1+k) 2 (1+k) 3 (1+k) n
8. Value Drivers
- Variables that managers can tweak to increase firm value.
- Examples:
- sales growth
- operating profit margin
- net working capital-to-sales ratio
- property, plant and equipment-to-sales ratio
- cost of capital
9. Economic Value Added 10. Economic Value Added
- Net operatingweighted averageinvested
- EVA t= profit after-cost ofx capitalt-1
- tax (NOPAT) t capital (k wacc )
11. Economic Value Added
- Net operatingweighted averageinvested
- EVA t= profit after-cost ofx capitalt-1
- tax (NOPAT) t capital (k wacc )
- alternative definition:
- Return onweighted averageinvested
- EVA t= invested-cost ofx capitalt-1
- capital (ROIC) t capital (k wacc )
12. Paying for Performance
- Shareholder and manager interests are aligned when:
- contributions of individuals and groups toward creation of shareholder value are measured using EVA, and
- rewards are structured accordingly.
13. Components of a Firms Compensation Policy
- base pay
- bonus: quarterly, semi-annual, or annual
- long-term compensation: options, grants
14. Designing a Compensation Program
- 1) How much to pay?
- 2) Base pay versus at-risk or incentive compensation
- 3) Linking incentive compensation to performance
- 4) Paying with a cash bonus versus equity