A shareholder is any person, company or other institution that owns at least one share of a company’s stock. Because shareholders are a company's owners, they reap the benefits of the company's successes in the form of increased stock valuation. If the company does poorly, however, shareholders can lose money if the price of its stock declines.

1. President of Media5 Corporation
Louis Lagassé

2.  Learning objectives
 Risk and return
 The two-stage investment process
 What does ‘good’ look like?
 NPV illustration (Working Insight 1.3)
 Value is created ‘above the line’ (Figure 1.4)
 Individuals have different risk appetites (Figure 1.5)
 The seven drivers of value
 Economic profit (Working Insight 1.5)
 Total shareholder return (Working Insight 1.6)
 The value matrix (Figure 1.6)
 Stakeholders are important
 Agency and double agency
2Louis Lagassé

3. 1. Understand what financial strategy is, and how it can add
value.
2. Explain why shareholder value is created by investments
with a positive net present value.
3. Appreciate how the relationship between perceived risk
and required return governs companies and investors.
4. Differentiate the different models of measuring
shareholder value.
5. Explain why share price is not necessarily a good proxy
for company value.
6. Outline how agency theory is relevant to corporate
finance.
3Louis Lagassé

4. Perceived risk
Required
return
4Louis Lagassé

5. 5
Shareholders
(and others)
invest in the company
Company invests in a
portfolio of projects
Louis Lagassé

6. 6
Is it a good
Product?Is it a good
Product?
Is it a good
Business
?
Is it a good
Company
?
Is it a good
Investment?
Louis Lagassé

7. Reduce risk
more than
return
Increase return
more than risk
Perceived risk
Required
return
X
7Louis Lagassé

8. Perceived risk
Required
return
8
Well-
diversified
institutional
investor
Long-
serving
manager
Venture
capital fund
Louis Lagassé

9. 9
Rappaport, Creating Shareholder Value, 1998
More profit
1. Increase sales growth
2. Increase operating profit margin
3. Reduce cash tax rate
Out of fewer
assets
4. Reduce working capital as % of sales
5. Reduce fixed assets as % of sales
At lower risk
6. Reduce weighted average cost of
capital
For as long as
possible
7. Increase timescale of competitive
advantage
Louis Lagassé

10. 10
Operating profit after tax 2,400
less cost of capital (20,000 x 10%) 2,000
Economic profit 400
Operating profit after tax £2,400
Capital employed £20,000
Cost of capital 10%
Return on capital employed (2,400/20000) 12%
Spread 2%
Economic profit (2% x 20,000) 400
Louis Lagassé

11. 11
Share price at 1 January 100
Share price at 31 December 110
Capital gain in the year 10
Dividend paid in the year 5
Total return 15
Total shareholder return (TSR) 15%
Louis Lagassé

12. 12
Economic profit
Value multiple
Market value
÷
Fair value
Negative Positive
> 1.0
< 1.0
= 1.0
Louis Lagassé

13. 13
Business and
Financial
strategy
Shareholders
Investment institutions, family
members, prospective
investors
Debt holders
Banks, investment
institutions, individuals
Customers
Direct customers, end consumers,
consumer groups
Managers
Board of directors, senior managers,
other managers
Employees
Individuals, unions / staff
associations, pensioners
Government and regulators
Tax authorities, trade department,
employment department, governance
regulators
Suppliers
Long term suppliers, raw material
suppliers, sub-contractors
Community
Local community, environmental
bodies, public at large
Louis Lagassé

14. 14
Net assets
Fixed assets
Current assets
less current
liabilities
Non-operating
assets
Debt
Equity Fund
managers
Individual
shareholders
and
pensioners
Management
Employees
Louis Lagassé