FI.Chapter15 - 1 i Corponat Valuatiom Value-Eased...

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1- i Corponat* Valuatiom, Value-Eased Maraagemremtu amd eorporate uoveg"maE?ee Tl r,..r \.rd inra.tpd $.0rl,r in th, \\:l I Cumpo-rlp IndF\ l0 V.dr, .r':,'. \.,ur Irnvp.lmen. rvou d h"r c gros r to S2.2q4 t..ullin8 'n nr 8.t- .,rrru.,lr.rte oI return Hid y.r pui rhP sl 000 rn Berl-hrn Hathah'ay, you would nor\, havc $2,960, rvhich is an 11.5% annual rcturn.And if you had been really smart (or lucky) and invest ed rr Dell. \ou sL'uld llow have gi17r'. \rf i.l' r,nr,lJ (. i,rlo i hhoppinB 2L.u . annual reiurnl Berkshir€ Hathaway and Dcll compete in very diffcrent jndustries ,nJ urrli,,F diffrrrn -l..rleF,ie.. )et borlr Ldv" b.,,r(,' rl-, m.,.ke, b\ "hdrint dn,.p, r rrirB pl- lu.,.ph\ lhe) hr\..rcrt,J \.,lLL for shareholders by foftsing on the Iree cash flows of their undcrlyinB busjnesses. Wh€n this focus is applied systematically .Irorg\nJt r.umpJ.r\ rt r...rlled v.rl , based manailement, $'hich is thc .cntral th{rlne of this chapier. Berkshire Hatha$'ay's p mary stratety h;ls been to gro| through acquisitions. hhff€n Buffett, Berkshire's CEO, lvrote in n recent letter to shareholders that hc seeks i o\\1 'bu'rre-.e- ll-,rl Sencr.rl( (.r.lr rnd corsistenilv earn above-average returns on lh'.r..'pir.rl. Wh.n ' vrlu"lrrg J potentr,rl ,1(.tui.iri,'n. BuffLlr n,v- he (omprrF. rl. purchasc price {,ith its "intrinsic value, whj. h ',f Jerl|rer .r. lhe dr-counred \aluy ,.f rh, cr-h th,,r cdI be lalen out oi a bu,i- n.'ss during its remaining Iife-" Thus. Buffett's Brou'th strategy is Sovemed by the principles of value-based management. Instcad of gror'\'ing primarily through acquisitions, Dell has chosen to grow "or8an- ic.lly" by expanding its existing businesses and developing ncw products and markets. Fnr mr^l ,,'nrprni... rdprd 8row,h n .al,* r,\|rrri- r.rpr.i erowlh ir opernlirg (dpil.rl. whrch r,J,r'F. Iee.r,h fl('(. BL,l Dell i5 rcle1rtless in minimizing the amount of oper JtirE (.rt.ilr'e,tuirLd tu,upporl "ale.. Tr. t.r.!. JL rints thc l.r-L i ).rr.. Dpll h". hdd oul .r.l|trlirt i,frf.,nn.rn. p in rhe d rivFr , ol \ alu(- bas€d management: (1) Iis sales have grown f.r.lrr lh.rr ll',.i1.lu.lr\ . ve'.rge, /2) rr- prolil nargin has cxcccdcd the inctustry ai.erage, and (3) its capital requnemenis have remained Low€r than the industry average. Kccp Berkshife Hatha\^'ay's and DeU's f,,.,,. ,'t) , .r.h flor,- ir m ind .i\ ) uu .e.,d tl,r" ch.rpter. 5or.er Voriom anildl,epo : olBe*shne Horhowoy li. oid DelCompde6
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518 Chopier 15 e le50Llfce Th€ r.xlbookh Web sire contoins on Excel file lhor rhe chopErt col.ulolions. The file for lhh choprd i3 F 12Ch 15 Tool Kt.xh, ond w€ €ncouroge you to op6n the fileond fol. Corporore Voluollon, Vdlu+Bosed Monosemeni, ond Coporote Govornonce As we have emphasized throughout the book, maximizint shareholder value should be managemenfs primary objective. However, to maximize value, man- ag€rs need a tool for estimating the effects of altemative strategies. In this chapiet we d€velop and illustrate such a tool-the corporate valuation model, which i!
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