Beruflich Dokumente
Kultur Dokumente
11.4%
7.0% 7.56% 7.56%
Experience of a well -regarded U.S. manufacturing firm
7.1%
.7%
1/92 1/92 1/93
3.3%
1/92 1/94 1/92 1/95 1/92 1/96
1/92 1/97
1/92 1/98
11.4%
7.0% 7.56% 7.56%
Experience of a well -regarded U.S. manufacturing firm
7.1%
.7%
1/92 1/92 1/93
3.3%
.7%
1/92 1/94
-.2%
1/92 1/95
1/92 1/96
1/92 1/97
Results from Honda of America program
1/92 1/98
-3.1%
-7.9%
-16% -19%
Comparative Advantage
Advantage one firm has over another in terms of
Cost of producing or Distributing goods/services
Example:
Wal-Mart invested in regional warehouses and distribution system Reduces the need for retail inventory Replenish store inventory quickly.
Competitive Advantage
Advantage one firm has over another because of structure of the markets in which they operate
Barriers to entry
Patents Capital requirements Regulation
Must be sustainable to be a true competitive advantage
Traditional Measures
Fuzzy Finance
Return on Investment
Compare benefits (numerator) with resources (denominator) affecting that benefit
Basic earning power ratio
EBIT / Total assets
Return on assets
Net income / Total assets
Return on equity
Net income / Book value of equity
FIN 591: Financial Fundamentals/Valuation
10
Profitability Costs
Shareholder
value
Working capital Invested capital
Fixed capital
12
Honeywells Performance
Net Revenues
$25,023
$1,659
Net Income
Earnings / Share
$2.07
$23,652
$22,274
($99) ($220)
($0.12) ($0.27)
'00
'01
'02
'00
'01
'02
'00
'01
'02
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EPS
Accounting rules discourage EPSmanic managers from spending capital on value enhancing investments in intangibles like brands, research and training Why?
GAAP requires outlays to be written off immediately against earnings.
15
EPS
EPS focus may cause management to refrain from issuing equity at times when the company really needs it Fabricate EPS gains by using more debt than prudent
Both on and off the balance sheet
EPS
Earnings manipulation often used
Establish reserves Invest pension funds in equities Extreme cases, make up numbers as you go
Worldcom and HealthSouth.
17
EPS
Todays market perception:
Management that aims to boost earnings at the expense of quality will be more certainly penalized then ever before with a lower stock price and a sullied reputation.
18
Valuation
Relies on forecasts A firms stock price relies on investors expectations, not historical performance.
FIN 591: Financial Fundamentals/Valuation 19
Cash Flows
21
Honeywells trend...
23
After-tax operating earnings + non-cash charges - investments in operating working capital, PP&E and other assets It doesnt incorporate financing related cash flows
Represents cash flow available to service debt and equity.
25
Common Techniques
Evaluation techniques:
Payback Accounting rate of return DCF analysis
Consists of NPV and IRR DCF analysis is not a problem in theory
Only in practice.
26
NPV Methodology
Net present value (NPV)
Estimate of change in the value of equity if the firm invests in the project Forward looking
If NPV>0
If NPV<0
Investment is expected to add value Investment is expected to erode value
Decision rule
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9 10 11 12 13 14 15 16 17 18 19 20
-150
Significant info revealed?
-200 -250
FIN 591: Financial Fundamentals/Valuation 29
30
IRR Profiles
(New Example)
Mn
$1,100 $900 $700 $500 $300 $100 ($100) ($300) ($500) ($700) 0% 16%
IRRATL =36.53%
IRRNE=19.63%
50%
10% 10.7%
Value Enhanced?
Once a project is applied, the investment becomes buried in the balance sheet
How is its contribution measured?
Motivation:
Get your hands on as much capital as possible.
FIN 591: Financial Fundamentals/Valuation 33
2004
$x,xxx xxx xxx xxx $x,xxx $x,xxx xxx xxx xxx $x,xxx $x,xxx
34
Focused Finance
36
37
ROE
EVA
38
Translation:
Ultimate litmus test of any companys success lies in increasing its market value by more than it increases its capital.
FIN 591: Financial Fundamentals/Valuation 39
Value of firm = Value of debt + value of stock Market value of a company reflects: Earning power of invested assets
Present value of current operations Present value of expected improvement in operating performance.
FIN 591: Financial Fundamentals/Valuation 40
What is MVA?
MVA = Market value of capital - book value of capital Honeywells MVA = ? Key elements:
Calculation of market value of capital
Market value of debt + market value of equity
Premium
Investment
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MVA
44
Value of invested capital Value of ongoing operations Present value of expected future economic profits
Captures improvement in operating performance
Measuring all the capital Seeing what the firm is going to do with the capital Turn FCF forecasts into EVA forecasts Discount EVA.
FIN 591: Financial Fundamentals/Valuation 45
What is EVA?
EVA = Economic profit
Not the same as accounting profit
Difference between revenues and costs
Costs include not only expenses but also cost of capital
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Advantages of EVA
Annual EVA is easy to interpret Correlations between market value and various measures:
Standardized EVA ROE Fortunes Most admired firms Cash flow growth EPS growth Dividend growth Sales growth 0.50 0.35 0.24 0.22 0.18 0.16 0.09
50% of change in market value explained by standardized EVA (Standardized EVA = EVA /
Capital).
FIN 591: Financial Fundamentals/Valuation 47
Components of EVA
NOPLAT
Operating capital
What is NOPAT?
Net sales Cost of sales Depreciation SG&A Net Operating profit Taxes @ 40% NOPAT 150,000 135,000 2,000 7,000 6,000 2,400 3,600
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Asset write-downs, restructuring charges, Cash, receivables, inventory, prepaids Trade payable, accruals, deferred taxes Net property, plant, and equipment
50
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Calculating EVA
NOPAT/Average capital = Return on invested operating capital (ROIC) - Weight average cost of capital (WACC) = Spread (= ROIC - WACC)
* Operating capital
= Economic value added (EVA) Net operating profit after tax (NOPAT) - Capital charge (= WACC * Capital) = Economic value added (EVA)
FIN 591: Financial Fundamentals/Valuation 53
MVA
EVA + EVA + 1+r (1 + r)2 Capital EVA + ... + EVA (1 + r)3 (1 + r)n
Market value is based on establishing the economic investment made in the company (capital), making a best guess about what economic profits (EVA) will happen in the future, and discounting those EVAs to the present to get market value added.
55
Charge
MVA
Fundamental Strategies
NOPAT EVA Cost of capital * Capital Capital
Operate: Improve the return on existing operating capital Decrease: WACC Build: Invest as long as returns exceed the cost of capital Harvest: Re-deploy capital when returns fail to achieve the cost of capital.
FIN 591: Financial Fundamentals/Valuation 57
An Example of Drivers
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Why?
Positive changes in EVA are consistent with shareholder value added -- whether from a positive or negative base Positive changes in EVA are consistent with the managerial notion of continuous improvement in performance.
FIN 591: Financial Fundamentals/Valuation 59
Each projects expected return must exceed its cost of capital to be justified
Can this explain all the outsourcing?
60
61
Investment Schedule
Net Assets
FIN 591: Financial Fundamentals/Valuation 62
An Example Revisited
(See Slides 27 & 28)
Asset's Balance 200 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 Period 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 NPV IRR WACC NOPAT 115 110 90 70 60 40 30 20 15 15 15 15 15 15 15 15 15 15 15 15 Deprec 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 FCF -200 125 120 100 80 70 50 40 30 25 25 25 25 25 25 25 25 25 25 25 25 $125.86 50.4% 25% CapChg 50.0 47.5 45.0 42.5 40.0 37.5 35.0 32.5 30.0 27.5 25.0 22.5 20.0 17.5 15.0 12.5 10.0 7.5 5.0 2.5 EVA 65.0 62.5 45.0 27.5 20.0 2.5 -5.0 -12.5 -15.0 -12.5 -10.0 -7.5 -5.0 -2.5 0.0 2.5 5.0 7.5 10.0 12.5 $125.86
EVA = NOPAT WACC * Beginning Balance = 110 25% * 190 = 110 = 47.5 = 62.5
63
NPV
(Using FCF)
10 11 12 13 14 15 16 17 18 19 20
FCF EVA
-150
Significant info revealed?
-200 -250
FIN 591: Financial Fundamentals/Valuation 64
50
40
30
20
McKinsey & Co.s survey of electronics companies Items shown as % of sales Major difference between successful and unsuccessful companies is cost of goods sold Requires a closer look at the reasons.
66
Affect on EVA
Sales - Operating expenses - Taxes = NOPAT - Capital charge = EVA
Market potential
Reducing COGS
40
Undefined responsibility
35
Production Controlling
Successful companies
Increase outsourcing
More competitive the industry more important to outsource activities that fall short of world standards Neutral decision maker
Board or committee.
30
Mat'ls Mgmt
25
Board/Committee
20
15
10
0 Successful Less So
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In-house application
$180,000 in net benefits - ($1 million capital investment x 12% cost of capital) = $60,000 EVA
Outsourced application
$180,000 in net benefits - ($0 capital investment x 12% cost of capital) - $80,000 in rental fees = $100,000 EVA
Outsourced application requires no capital investment thus, no capital charge. Most companies only look at the income statement side of the ledger; they wouldn't outsource this application because it would be exchanging $50,000 of in-house expenses for the $80,000 rental fee, another kind of expense on the income statement. Yet on an EVA basis, the company would outsource the system, because doing so would produce more residual income ($100,000 vs. $60,000) by virtue of the $0 capital charge.
Suppose the operating costs to run the system in-house were $50,000 per year.
"When you are exposed to the EVA philosophy, you recognize how to better manage your capital," says Jim Pecquex, Manitowoc's CIO.
Source: Computerworld, February 17, 2003.
69
The new storage technology costs $1 million, with maintenance costs of $100,000 per year. The maintenance expense on the old storage technology is $350,000.
For simplicity, we'll assume that the new storage equipment offers no benefits other than the lower maintenance costs.
Boise's cost of capital is about 16%. Thus, the capital charge for investing in the new storage is 16% x $1 million = $160,000, which EVA says must be added to the $100,000 maintenance costs to get the true cost. The result:
The total cost of the new storage is $260,000, vs. $350,000 for the old storage. "In this case, have you lowered the operating cost enough to make up for spending the capital?" asks Egan. Yes -- $90,000 worth.
Boise is constantly reminded of the obvious point that technology isn't free. The company is also aware of the less obvious fact: neither is the capital to finance it.
Source: Computerworld, February 17, 2003.
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71
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Summary
Benefits:
Reduce cost of capital Improve operational efficiency Better management of assets Profitable growth.
74
Greater customer service (higher market share, increased gross margins). Greater product availability Lower cost of goods sold, transportation, warehousing, material handling and distribution management costs Lower raw materials and finished goods inventory Shorter order-to-cash cycles Fewer physical assets (e.g. trucks, warehouses, material handling equipment)
75
Costs
minus
EVA
Cost of capital
times
Working capital
plus
Invested capital
Fixed capital
Improvement in EVA
Sales
Customer Satisfaction Volume Product Pricing New Products Marketing Growth
Operating Expenses
Overhead Account Management Manufacturing Costs Compensation Training & Development
Capital Charge
Acquisitions & Divestitures Alliances R&D Decisions Working Capital Management Accounts Receivable Inventory Management
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The End
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