【正文】 ? BreakEven Example 70% Debt / 30% Equity Solution Economic Profit bc Corporate Performance Measurement LON 48 CorporatePerformanceMeasurement Economic Profit Agenda ? Definition ? Advantages/Disadvantages ? Framework ? Use in Strategy Work bc Corporate Performance Measurement LO。7K with 100% debt financing ? Any aftertax profits beyond 163。 (cover interest payments) (cover equity charge, which is not taxdeductible) ? Therefore 163。30 15%) (1 40%) 163。100K, but could only finance 70% with debt and required equity for the remaining 30%, how much aftertax profit would you require to breakeven? –assume tax rate = 40% –assume cost of equity = 15% Debt: Equity: 163。E q u i t yN e t A s s e t sI n v e s t e d C a p i t a l o r C a p i t a l E m p l o y e d 0204060801 0 0Economic Profit Balance Sheet Note: NIBL= Noninterest bearing liabilities In order to develop the EP balance sheet, shortterm noninterest bearing liabilities must be removed and adjustments for accounting distortions must be made ?Shortterm NIBL are removed from the EP balance sheet since capital returns are not expected on the amounts owed (. wages payable) ?EP Balance Sheet Net Assets amount may be much larger than the traditional accounting value after adjustments for accounting distortions (., adding internallygenerated intangible assets) are made Regular Balance Sheet EP Balance Sheet Financing Approach Operating Approach Economic Profit bc Corporate Performance Measurement LON 44 CorporatePerformanceMeasurement Dividend Policy The traditional linkage of the Ine Statement and Balance Sheet is the connection between ine and retained earnings or dividends ?Ine attributable to shareholders (EBIT Interest Tax) ?Cash “in” from shareholders perspective ?Cash “out” from 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。Equ ityA s s e t s L i a b i l i t i t e s amp。s investment in the pany –total assets less total liabilities Key Observations Balance Sheet Makeup What do we own? Assets NIBLs Debt Shareholder39。s Equity is the accountant39。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。3B of market value destroyed was the worst of Britain?s 200 largest panies Source: Stern Stewart, Sunday Times Company Market Value Added (Sept 98) 1998 EVA? (163。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。 8 0 B Shell?s 163。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 CorporatePerformanceM