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【正文】 (cover interest payments) (cover equity charge, which is not taxdeductible) ? Therefore 163。s Equity How did we pay for it? $500 $500 100% Balance Sheet The balance sheet separates what is owned by the firm from how it was paid for Understanding the Balance Sheet Economic Profit 42 CorporatePerformanceMeasurement bc Corporate Performance Measurement LON Ca shReceivables+ Inv en tor ies+ Pr epay me ntsF ix ed Asse t sSh orttermNIBLSh ortterm De btLo ng t erm De btLo ng t erm NIBLSh are ho ld ersEqu ityNe t Workin gCa pi t alNe t Fix edAsse t s (Nodi stin ct io nbe tw ee ntan gi bl es andin t an gi bl es)Sho rtt erm De btLo ng t erm De bi tSh are ho ld ers 39。 of market value added is the largest in the UK Source: Stern Stewart, Sunday Times Company Market Value Added (Sept 98) 1998 EVA? (163。Equi tyM a r k e t V a l u eo f C o m p a n y( D e b t E q u i t y )T o t a l A s s e t s N e t A s s e t s I n v e s t e d C a p i t a lo r C a p i t a l E m p l o y e d020406080100%MVA equals the total market value of the pany less invested capital or assets. Either the Operating or Financing Approach can be used, but Bain typically uses the Operating approach Note: *Shortterm noninterest bearing liabilities Operating Approach (Typically used by Bain) Financing Approach Market Value Added Definition (2 of 2) 23 CorporatePerformanceMeasurement bc Corporate Performance Measurement LON O p e r a t in gCa sh T o t a l C a s hC a s h R e q u i r e d i nO p e r a t i n g C y c l eE x c e s s C a s hThe first step required to calculate Net Assets with the Operating Approach is to identify excess cash, which is total cash less cash required in the operating cycle Note: *Shortterm noninterest bearing liabilities Amount ($) Market Value Added Operating Approach Excess Cash 24 CorporatePerformanceMeasurement bc Corporate Performance Measurement LON O pe rati ng Ca shP rep aid Ex pen se s an dOt he r Cu rren t Asse t sI nv en t ori esRe cei vab le sA dva nce Pay me ntsAcco un t sPay ab leA ccrue dEx pe ns es an d O the r Cu rren tLi ab il itie s T o t a l I n v e s t m e n t si n O p e r a t i n g C y c l eL i a b i l i t i e s I m p l i c i ti n O p e r a t i n g C y c l eN e t I n v e s t m e n t si n O p e r a t i n g C y c l eNext, The working capital requirements are the firm?s investments in the operating cycle, or the amount of shortterm investment required to fund operations Amount ($) Working Capital Requirements Market Value Added Operating Approach Working Capital Requirements 25 CorporatePerformanceMeasurement bc Corporate Performance Measurement LON When calculating MVA, Net Fixed Assets is defined as Net PPE plus other Investment (tangible and intangible). The third and final step to calculate Net Assets is Net PPE, which is the amount of longterm investment required to fund operations N e t F i x e dA s s e t sP r o p e r t y , P l a n t a n d E q u i p m e n tA c c u m u l a t e dD e p r e c i a t i o nO t h e rI n v e s t m e n t sAmount $ Net PPE Market Value Added Operating Approach Net Fixed Assets 26 CorporatePerformanceMeasurement bc Corporate Performance Measurement LON 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 27 CorporatePerformanceMeasurement bc Corporate Performance Measurement LON 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 28 CorporatePerformanceMeasurement bc Corporate Performance Measurement LON 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 29 CorporatePerformanceMeasurement bc Corporate Performance Measurement LON 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) 30 CorporatePerformanceMeasurement bc Corporate Performance Measurement LON 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 i