Fm10e ch13
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Fm10e ch13 Fm10e ch13 Presentation Transcript

  • Chapter 13 - Managing for Shareholder Value  2005, Pearson Prentice Hall
  • Top Creators of Shareholder Value for 2001 ($ Millions)
    • invested cost of
    • MVA capital return capital
    • Gen Elect 339,200 82,111 20.0% 9.4%
    • Microsoft 325,872 26,343 21.5% 13.7%
    • Wal - Mart 221,166 65,677 12.4% 8.9%
    • Intel 169,980 41,397 9.0% 16.2%
    • Citigroup 155,695 104,210 14.7% 12.0%
  • Market Value Added
    • MVA = Firm Value - Invested Capital
    • Firm value = market value of the firm’s outstanding debt and equity securities.
    • Invested Capital = the sum total of the funds that have been invested in the firm.
  • Value Creation
    • The combination of opportunity and execution .
    • Opportunities must be recognized.
    • Employees must be ready, willing, and able to take advantage of the opportunities.
  • Business Valuation: The Accounting Model
    • Using the P/E ratio:
    • If a firm’s P/E ratio is 20 , then a dollar increase in earnings per share will create $20 in additional equity value per share.
    • Problem: ignores R&D, which would reduce earnings per share, but should increase future earnings!
  • Business Valuation: Free Cash Flow Valuation Model
    • Value = the PV of the firm’s projected free cash flows for all future years.
  • Business Valuation: Free Cash Flow Valuation Model
    • Value = the PV of the firm’s 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
  • 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
  • Economic Value Added
  • Economic Value Added
    • Net operating weighted average invested
    • EVA t = profit after - cost of x capital t-1
    • tax (NOPAT) t capital (k wacc )
  • Economic Value Added
    • Net operating weighted average invested
    • EVA t = profit after - cost of x capital t-1
    • tax (NOPAT) t capital (k wacc )
    • alternative definition:
    • Return on weighted average invested
    • EVA t = invested - cost of x capital t-1
    • capital (ROIC) t capital (k wacc )
  • 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.
  • Components of a Firm’s Compensation Policy
    • base pay
    • bonus: quarterly, semi-annual, or annual
    • long-term compensation: options, grants
  • 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