Corporate Value Creation provides an operations framework that management can use to optimize the impact decisions have on creating value by growing revenue and profitability. Designed to assist professionals without a strong business or financial education, this book provides a thorough understanding of the qualitative and quantitative aspects of managing a business for the purpose of value creation. Readers will find detailed information on financial reports, valuation, modeling and forecasting, and more, including discussion of best practices that functional management can embrace to leverage performance. The final chapter reviews key concepts and helps the reader tie them all together by using a step-by-step approach to build or modify a business plan that includes a complete set of financial statements. In addition, each chapter includes case studies or exercises so that the reader can practice using the material covered in the chapter.
Corporate Value Creation can also be used as a handbook for managers who are looking for information on specific topics that range from developing financial statements to manufacturing management, to internet marketing and much more. In most cases, individual topics can be reviewed without reading the entire book. Finally, for the manager who wants to quickly understand what's involved in running a successful business, each chapter begins with the key takeaways from that chapter in a section called "Nuggets".
Fundamentally, creating value is as simple as making more money – but therein lies the rub. Effective management of business growth involves a complex interplay of productivity, capital, debt, and margins, and finding the most efficient balance can be challenging. For managers who need a deeper understanding of the forces at work, Corporate Value Creation is a thorough, detailed guide but it is also valuable for managers who are looking for information on a specific topic or simply wanting to understand at a high level what's involved in running a successful business.
Preface
Acknowledgments
Chapter 1: Basic Concepts
Introduction
Financial Statements
The Income Statement
The Balance Sheet
The Cash Flow Statement
Required Revenue for a Given Level of Net Income
Case Study: Advanced Solar Systems Corporation
Chapter 2: The Envelope Equations
Introduction
ROCE and NiROCE
Net Investments,
Investment Rate
Incorporating and into the Expression for Net Income
Incorporating into the expression for Cash Flow after Investing Activities
NI and CFaIA - A Sequential Year by Year Analysis
NI And CFaIA - The General Model
Estimating Growth Rates of Cash Flow after Investing Activities and Net Income
Growth Rate of CFaIAg with Constant IR and NiROCE
The Envelope Equations Methodology for Estimating Net Income, Cash Flow after Investing Activities and Growth Rates
Example 2-1: The Impact of Net Income Return on Capital Employed and Investment Rate on Cash Flow after Investing Activities when NiROCE and IR are Constant
Example 2-2: The impact of Variable NiROCE and IR on CFaIA
Example 2-3: Calculating the growth rate of NI and CFaIA knowing IR and NiROCE
Example 2-4: Impact of NiROCE and target Net Income Growth Rates on the Investment Rate and Cash Flow after Investing Activities
Required Revenue Revisited
Example: 2-5: Calculating Required Revenue for the Stephenson Corporation
Case Study: American Technology Corporation
Chapter 3: The Weighted Average Cost of Capital
Why is a Company’s Weighted Average Cost of Capital Important?
Weighted Average Cost of Capital Defined
Operating and Capital Leases
Weighting of the Components of Capital Structure
Market Value of Debt and Equity
The Impact of Taxes on the Weighted Average Cost of Capital
Estimating the Cost of Debt and Equity and the Capital Asset Pricing Model
General Equations for Estimating the WACC for a Company with One Class of Debt and Equity
Levered and Un-levered Betas
Estimating Beta for Non-public Companies or Business Units
DLK Enterprises Using the Comparable Company Method
Significance and Uses of the WACC
Origin of the Coefficients Used in Calculating a WACC
Example 3-2: Calculating the Cost of Equity Using Market Data for MHH Incorporated
Example 3-3: Estimating the WACC of a Company with one Class of Debt and Equity
Multiple Hurdle Rates
Example 3-4: Retail Corporation’s WACC
Example 3-5: Retail Corporation Decides to Access the Debt Markets
Example 3-6: Comparison of Retail Corporation’s WACC’s
Introduction to Present Value
Example 3-7: Calculating the Value of a Stream of Cash Flows Using the WACC
Case Study: Omega Corporation
Chapter 4: Introduction to Valuation Models
Most Frequently used Single-Stage Valuation Models
Introduction to Estimating Value
Example 4-1: Valuing Amlee Incorporated’s Forecasted Cash Flows
Example 4-2: Company C’s Valuation of Acquisition Target Company A
Example 4-3: Company A Values Various Business Plans
Valuation Considerations – Lessons Learned
Most Frequently used Single Stage Valuation Models
Multi-Stage Valuations
Example 4-4: Multi-Stage Valuation of Company A’s Plan 2
Example 4-5: Company C’s Multi-Stage Valuations of Companies A and B
Equivalence of the Post-forecast Period Models
Impact of 1/(k – g) on the Perpetual Growth Model
Considerations of the Terminal Value Multiplier as Implied by the Equivalency Equations
Case Study: NexgenSonics
Chapter 5: ROCE and Cash Flow Analytics
Introduction
Basic Drivers of ROCE
Some Practical Aspects of Managing Return on Capital Employed
Case Study: Pharos Corporation … The Early Days
Chapter 6: Strategies & Best Practices for Managing ROCE & Cash Flow
Introduction to Maximizing Return on Capital Employed and Cash Flow
Basic Pricing Driven Models
Value Added Models
Introduction to Factors That Impact the Cost of Goods Sold
Depreciation and Amortization
Example 6-5 Calculating Balance Sheet Statistics
Case Study
Chapter 7: Productivity and Operating Margin
Productivity
Cycle Time
Closing Comments on Value Added and Cost
Case Study
Chapter 8: The Expense Coverage Ratio
The Expense Coverage Ratio
Concluding Comments
Case Study: Safety Solutions Corporation
Chapter 9: Debt and Leverage
Introduction
Debt and Leverage
LIBOR and Pricing Loans
Debt Financing Alternatives
Credit Ratings
Relative Cost of Debt Financing
Impact of Debt on Return on Capital Employed and Return on Equity
Example 9-1: Impact of Leverage on Capital Structure, ROCE and ROE
Financial Covenants
Example 9-2: Financial Performance Covenants
Case Study: Edsson Corporation
Chapter 10: Understanding Financial Statements
Introduction
The Income Statement
The Balance Sheet
Some Complications
Case Study: Light Technologies, Inc.
Appendix A: Present Value Models
Present Value of any Stream of Cash Flows
Present Value of a Cash Flow “E” that Takes Place at the End of Year “n”
Present Value of the Terminal Value of a Cash Flow at the End of Year “n”
Present Value of a Stream of Fixed Cash Flows “E” for “n” Years
Present Value of a Fixed Stream of Cash Flows in Perpetuity (n = infinity)
Single-Stage Growth Models
Present Value of a Stream of Cash Flows that Grow at a Fixed Rate for a Finite Period
Present Value of a Stream of Cash Flows that Grow at a Fixed Rate in Perpetuity
General Equation for Present Value of Single-Stage Cash Flows that Grow at a Fixed Rate
Multistage Growth Models
Two-Stage Growth Models
Three-Stage Growth Models
Appendix B: Business Valuation Models
Introduction Stream of Distinct Cash Flows
Stream of Distinct Cash Flows Followed by a Stream of Perpetual Fixed Cash Flows
Stream of Distinct Cash Flows Followed by a Stream of Finite Fixed Cash Flows
Stream of Distinct Cash Flows Followed by a Stream of Perpetual Growth Cash Flows
Stream of Distinct Cash Flows Followed by a Stream Finite Growth Cash Flows
Stream of Distinct Cash Flows Followed by a Terminal Cash Flow
Initial Cash Flow Sequentially Followed by a Finite Period of Cash Flows that Grow at a Fixed Rate “gFG” and a Terminal Cash Flow
Initial Cash Flow Sequentially Followed by a Finite Period of Cash Flows that Grow at a Fixed Rate “gFG” and a Perpetual Fixed Cash Flow
Initial Cash Flow Sequentially Followed by a Finite Period of Cash Flows that Grow at a Fixed Rate “gFA” for “NA” Periods and Perpetual Cash Flows that Grow at a Fixed Rate “gPB”
Stream of Cash Flows that Grow at a Fixed Rate “gA” for “NA” Periods, Followed by a Stream of Cash Flows that Grow at a Fixed Rate “gB” for “NB” Periods, and a Stream of Perpetual Growth Cash Flows that Grow at a fixed Rate “gC”
Appendix C: Growth Models
Introduction
The General Compound Annual Growth Rate Model
General Expression for CFaIAg, the growth rate of CFaIA
General Expression for NIg, the growth rate of NI
Appendix D: General Equations for Estimating NI and CFaIA
Introduction
ROCE and NiROCE
The General Case for the Envelope Equations
Special Case: Constant Investment Rate and Net Income Return on Capital Employed
Special Case: Focus on Operational Cash Flows
Net Income and Cash Flow Growth Equations
Appendix E: R & D Growth and Investment Equation
Introduction
Generational Cost Factor
Product Life Cycle
Developing an Expression for the Cost of the Next Generation
Life Time Revenue Factor
Example E-1: Calculating the R&D Cost of the Next Generation
Growth Rates and Product Life Cycles that Satisfy the Requirement I current = I next
Example E-2: Determining “g” and “PLC when Icurrent = Inext
Appendix F: Inventory Considerations and the EOQ Model
Introduction
Components of Inventory Costs
Economic Order Quantity
Shortage Costs
References
About the Author
Index
