【正文】 5 Ye a r% Real Debt Rate After Corporate Tax Real Equity Rate Real Weighted Average THE BOSTON CONSULTING GROUP P:\MasterDk\ BCG?s Value Management Framework An Overview for MBA Rt rt (Ppt) Slide 30 March 2, 1998 2:01 PM 30 Copyright 1996 BCG/HOLT Planning Associates All Rights Reserved MARKET % DEBT/TOTAL CAPITAL HAS DECLINED SIGNIFICANTLY SINCE 1990 0510152025301950 1955 1960 1965 1970 1975 1980 1985 1990 1995 Ye a r%Variations in Market Leverage and Investor Tax Premiums Help to Explain Market Derived Real Equity Discount Rates See Next Slide ... THE BOSTON CONSULTING GROUP P:\MasterDk\ BCG?s Value Management Framework An Overview for MBA Rt rt (Ppt) Slide 31 March 2, 1998 2:01 PM 31 Copyright 1996 BCG/HOLT Planning Associates All Rights Reserved 202468101214161950 1955 1960 1965 1970 1975 1980 1985 1990 1995%Real Equity Discount Rates Depose into the Fundamentals of Tax Premiums, Leverage Risk Premiums, CFROI?s SubPar Returns USA 19501997 Dividend Tax Premiums Capital Gains Tax Premiums Leverage Risk Premiums Market Derived Real Equity Discount Rate Fundamental Equity Discount Rate =+DivTaxPrem+CapGainTaxPrem +*Debt/Total Capital +* CFROI 1972/78 SubPar Returns 1972/78 SubPar Returns。 May Represent a Proxy for Other Effects Discount Rates Based on 1996 Discount Rate Sample of 279 SP Industrials R2 = CFROI Effects THE BOSTON CONSULTING GROUP P:\MasterDk\ BCG?s Value Management Framework An Overview for MBA Rt rt (Ppt) Slide 32 March 2, 1998 2:01 PM 32 Copyright 1996 BCG/HOLT Planning Associates All Rights Reserved CFROI?S NORMALLY EXCEED THE MARKET DERIVED DISCOUNT RATES 1996 DISCOUNT RATE SAMPLE 2101234567891011121950 1955 1960 1965 1970 1975 1980 1985 1990 1995CFROI?s Market Derived Discount Rates Differences Politics/Policies Change THE BOSTON CONSULTING GROUP P:\MasterDk\ BCG?s Value Management Framework An Overview for MBA Rt rt (Ppt) Slide 33 March 2, 1998 2:01 PM 33 Copyright 1996 BCG/HOLT Planning Associates All Rights Reserved CFROI?S NORMALLY EXCEED THE MARKET DERIVED DISCOUNT RATES Even though many economists believe that all returns must converge, in a healthy capitalist economy, CFROI?s on hard assets will exceed investor required returns on financial assets most of the time, because: ? Continuous new entrepreneurial innovations prevent CFROI?s from converging pletely to promised financial returns (imperfect arbitrage) and ? Entrepreneurs must be rewarded with greater returns to assume the greater dispersion and higher risk of loss associated with CFROI?s on illiquid hard assets pared to financial returns on marketable, liquid financial assets THE BOSTON CONSULTING GROUP P:\MasterDk\ BCG?s Value Management Framework An Overview for MBA Rt rt (Ppt) Slide 34 March 2, 1998 2:01 PM 34 Copyright 1996 BCG/HOLT Planning Associates All Rights Reserved 5051015201950 1955 1960 1965 1970 1975 1980 1985 1990 1995 Ye a r%Producer Price Index % Change GNP/GDP Deflator % Change Inflationary Expectations % Base Rate 19501980 % Base Rate 19811996 Inflationary Expectations based on base rates follow actual inflation more closely, but avoid the sharp volatility of actual PPI and GNP/GDP annual inflation. Note: the base rate is defined as the afterinvestor tax, after inflation required return on Government long term bonds. BCG CALCULATES INFLATIONARY EXPECTATIONS BY SUBTRACTING TAX PREMIUMS AND A BASE RATE FROM LONG TERM GOVERNMENT BOND YIELDS USA 19501997 THE BOSTON CONSULTING GROUP P:\MasterDk\ BCG?s Value Management Framework An Overview for MBA Rt rt (Ppt) Slide 35 March 2, 1998 2:01 PM 35 Copyright 1996 BCG/HOLT Planning Associates All Rights Reserved MARKET DERIVED NOMINAL EQUITY RATES COME FROM MARKET DERIVED REAL EQUITY RATES PLUS THE COMPOUNDED EFFECT OF INFLATIONARY EXPECTATIONS 1357911131517191950 1955 1960 1965 1970 1975 1980 1985 1990 1995 Ye a r%Market Derived Nominal Equity Rate Market Derived Real Equity Rate Inflationary Expectations THE BOSTON CONSULTING GROUP P:\MasterDk\ BCG?s Value Management Framework An Overview for MBA Rt rt (Ppt) Slide 36 March 2, 1998 2:01 PM 36 Copyright 1996 BCG/HOLT Planning Associates All Rights Reserved THE EQUITY RISK PREMIUM HAS DECLINED TO THE 23% RANGE 0246810121416181950 1955 1960 1965 1970 1975 1980 1985 1990 1995Risk Premium Differences Market Derived Nominal Equity Rate Nominal Long Term Government Bond Rate THE BOSTON CONSULTING GROUP P:\MasterDk\ BCG?s Value Management Framework An Overview for MBA Rt rt (Ppt) Slide 37 March 2, 1998 2:01 PM 37 Copyright 1996 BCG/HOLT Planning Associates All Rights Reserved RISK CONCEPTS AND MEASUREMENT CAPM Market Derived Investors seek to avoid price volatility relative to the market. Investors seek to avoid losses from unanticipated major events. P = Net Cash Flow( 1 + DR ) ttt = 1n = ??Major Events Bankruptcy (Leverage) Unanticipated Inflation Government Intervention Government Ownership Voting Rights on Key Changes Asset Age Arbitrage Pricing Theory (APT) postulates other risk factors: Interest Rates Oil Prices Price/Equity Book Size ? ?r r r rf m f? ? ?? THE BOSTON CONSULTING GROUP P:\MasterDk\ BCG?s Value Management Framework An Overview for MBA Rt rt (Ppt) Slide 38 March 2, 1998 2:01 PM 38 Copyright 1996 BCG/HOLT Planning Associates All Rights Reserved NAIVE BELIEFS INCORRECTLY