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Illustration of Value Creation/Destruction

Change BLUE cells to see impact upon NPV and Market/Book as Reinvestment and ROC vary

Assumptions
Life of investment 5 Term of investment, at the end of which you liquidate at accumulated
Initial Investment $100 Initial investment is $ 100 millions
Reinvestment proportion 100% Percent of cash flows reinvested: try 100 (no dividend), 50 (half paid
Return on equity (ROE) 15% Percent return on equity: try 20 for value creation, 10 for value destru
Required return on equity (Ke) 15% Required return on equity (discount rate): assumed as 15%
ROE - Ke 0% Return in excess of required rate of return (+ creates value, - destroys

Reinvestment Proportion
ROE - Ke ROE 0% 25% 50% 75%
5% 20% 1.17 1.18 1.20 1.22
0% 15% 1.00 1.00 1.00 1.00
-5% 10% 0.83 0.83 0.82 0.81

Project Life (years)


ROE - Ke ROE 5 10 15
5% 20% 1.24 1.53 1.89
0% 15% 1.00 1.00 1.00
-5% 10% 0.80 0.64 0.51

Year Now 1 2 3 4 5
Accumulated Investment Valu $100 $115 $132 $152 $175 $201
Investment -100 - - - - -
Returns 15 17 20 23 26
Reinvestment -15 -17 -20 -23 -26
Liquidation Proceeds - - - - 201
Total Cash Flow -$100 $0 $0 $0 $0 $201

Net Present Value = $0.0

"Market" or Intrinsic Value $100


Book Value = $100
Market/Book Ratio 1.00
ment and ROC vary

liquidate at accumulated investment value. (Try 5, 10 and 15 years)

dividend), 50 (half paid out as dividend) and 0 (all paid as dividend)


ation, 10 for value destruction and 15 for value neutral
umed as 15%
creates value, - destroys value)

100%
1.24
1.00
0.80

6 7 8 9 10 11 12 13 14
$177 $195 $214 $236 $259 $285 $314 $345 $380
- - - - - - - - -
16 18 19 21 24 26 29 31 35
-16 -18 -19 -21 -24 -26 -29 -31 -35
- - - - 259 - - - -
$0 $0 $0 $0 $0 $0 $0 $0 $0
15
$418
-
38
-38
418
$0

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