Chapter 11 Part 2 notes

Chapter 11 Part 2 notes - CHAPTER11part2...

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1 CHAPTER 11 part 2 Corporate Valuation and  Value-Based Management
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2 Value-Based Management  (VBM) VBM is the systematic application of the  corporate valuation model to all  corporate decisions and strategic  initiatives. The objective of VBM is to increase  Market Value Added (MVA)
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3 MVA and the Four Value  Drivers MVA is determined by four drivers: Sales __________ Operating __________  (OP=NOPAT/Sales) Capital requirements (CR=Operating  capital / Sales) Weighted average cost of capital
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4 MVA for a Constant Growth  Firm MVA t  =   OP – WACC  CR (1+g) Sales t (1 + g) WACC - g
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5 Insights from the Constant  Growth Model The first bracket is the MVA of a firm that  gets to keep all of its sales revenues (i.e.,  its operating profit margin is 100%) and  that never has to make additional  investments in operating capital. Sales t (1 + g) WACC - g
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6 Insights (Cont.) The second bracket is the operating  profit (as a %) the firm gets to keep, less  the return that investors require for  having tied up their capital in the firm. OP – WACC  CR (1+g)
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7 Improvements in MVA due to  the Value Drivers MVA will improve if: WACC is _____ operating profitability (OP) _______ the capital requirement (CR) ________
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8 The Impact of Growth The second term in brackets can be either  positive or negative, depending on the  relative size of profitability, capital  requirements, and required return by  investors. OP – WACC  CR (1+g)
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The Impact of Growth (Cont.) If the second term in brackets is  negative, then growth decreases MVA.   In other words, profits are not enough to  offset the return on capital required by  investors. If the second term in brackets is 
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This note was uploaded on 10/12/2010 for the course FINC 3630 taught by Professor Jensen,m during the Spring '08 term at Auburn University.

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Chapter 11 Part 2 notes - CHAPTER11part2...

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