【正文】 shareholders perspective Net Ine Retained Earnings Dividends Management Decision Reinvest it in the Company Distribute it to Shareholders Ine Statement and Balance Sheet Traditional Link (1 of 2) Economic Profit bc Corporate Performance Measurement LON 45 CorporatePerformanceMeasurement Economic Consequence The traditional linkage of the Ine Statement and Balance Sheet is the connection between ine and retained earnings or dividends = Retained Earnings = Net Ine Dividends Revenue Costs Ine Statement Balance Sheet Assets Liabilities Current Assets Net Fixed Assets Other Assets NIBLs Debt Equity Ine Statement and Balance Sheet Traditional Link (2 of 2) Economic Profit bc Corporate Performance Measurement LON 46 CorporatePerformanceMeasurement ?If you could buy the same factory for 163。s investment in the pany –total assets less total liabilities Key Observations Balance Sheet Makeup What do we own? Assets NIBLs Debt Shareholder39。O ve r h e a d sPr o f itBe f o r eT a xT a x Pr o f itAf te rT a xEq u ityCa p ita lCh a r g eEc o n o m icPr o f it0204060801 0 0Economic Profit (EP) is a residual profit concept accounting for the opportunity cost of holding capital Amount ($) Traditional accounting concept of profits Economic Profit bc Corporate Performance Measurement LON 40 CorporatePerformanceMeasurement Definition (2 of 2) Note: NOPAT = Net Operating Profit After Tax (See Appendix for details) WACC = Weighted Average Cost of Capital Economic Profit determines a pany?s value creation or destruction ? Easy to use, based on accounting records (for historical values) ? Not prisoners of GAAP ? Can be used to show relative performance of products, segments, regions, etc. in a given year ? Can be calculated for future years and discounted to show value creation ? When Economic Profits are positive over time –value creation is positive –market price per share is more than book value per share –growth creates value EP NOPAT $ Charge for Capital Employed Operating Profit Effective Taxation Invested Capital WACC Gross Profit Aamp。B) () () n/a Market Value Added UK Company Performance 10 Best bc Corporate Performance Measurement LON 36 CorporatePerformanceMeasurement W a s t eM a n a g e m e n tM e d e v aB C CC a r a d o nA r j oW i l l i a m sI n c h c a p eC o a t s V i y e l l a B r i t i s hE n e r g yP i l k i n g t o nB r i t i s h S t e e l( 0 . 1 ) ( 0 . 1 ) ( 0 . 1 )( 0 . 3 ) ( 0 . 3 ) ( 0 . 3 )( 0 . 4 )( 0 . 5 )( 0 . 6 )( 3 . 0 )( 4 .0 )( 3 .5 )( 3 .0 )( 2 .5 )( 2 .0 )( 1 .5 )( 1 .0 )( 0 .5 )0 . 0163。E Market Value Added Operating Approach Net Fixed Assets bc Corporate Performance Measurement LON 27 CorporatePerformanceMeasurement Market V al ueAd de d (MVA)I nve stedCa pi t alPV of EPsBe y on d Y ea r 5P V of E PYea r 5P V of E PYea r 4P V of E PYea r 3P V of E PYea r 2P V of E PYea r 1M a r k e t V a l u e o f t h eC o m p a n y ( D e b t + E q u i t y )M a r k e t V a l u e A d d e d( M V A )0204060801 0 0 % Market value added (MVA) reflects the markets expectations of the EP managers will add in the future Percent of Total MVA is the market’s expectation of discounted future EPs Market Value Added Link to EP bc Corporate Performance Measurement LON 28 CorporatePerformanceMeasurement After extensive work by a diligent Bain team, Acme Industries is expected to generate $25M in economic profits next year, which is expected to grow at 3% forever. If the cost of capital is 13% and the invested Capital is $100M, what is the MVA and the market value of the pany? Market Value Added Link to EP Example bc Corporate Performance Measurement LON 29 CorporatePerformanceMeasurement After extensive work by a diligent Bain team, Acme Industries is expected to generate $25M in economic profits next year, which is expected to grow at 3% forever. If the cost of capital is 13% and the invested Capital is $100M, what is the MVA and the market value of the pany? MVA = PV of EPs = $ 25 M 13% 3% = $ 250 M = MVA + Invested Capital = $ 250 M + $100 M = $350M Market Value of the Company Market Value Added Link to EP Solution bc Corporate Performance Measurement LON 30 CorporatePerformanceMeasurement EP measures managers? performance in the past, since it represents the market value added created over one year Note: *Assumes Invested Capital Constant M a r k e t V a l u eA d d e d * T o d a yM a r k e t V a l u eA d d e d * L a s t Y e a rE c o n o m i c P r o f i tO v e r L a s t Y e a rMarket Value Added Link to EP (1 of 2) bc Corporate Performance Measurement LON 31 CorporatePerformanceMeasurement EP is used to evaluate manager performance because the change in MVA over a period of time is measured ?Goal of pany?s managers should always be to maximise MVA ?When managers make any investment decisions, if the project is: –valuecreating NPV 0 MVA increases –valuedestroying NPV 0 MVA decreases ?Reason that EP is the focus of most attention is because MVA is a stock or wealth measure, so MVA will show how much value has been added at that point in time –EP measures the amount of value added over a period of time, which is far more useful when measuring manager performance Market Value Added Link to EP (2 of 2) bc Corporate Performance Measurement LON 32 CorporatePerformanceMeasurement ?Which UK sectors would you expect to have the highest market v