Lecture 3 Flashcards
From
Cash inflow from operations
to
Flow to equity (Schaubild)
Cash inflow from Operations
- Cash outflow from operations
- CapEx for replacement
- income tax payments
= OCF
- CapEx for additional fixed assets & additional WC
= FCF - Interest Expenses
=Flow to equity
Calculation free Cash Flows
EBITDA
- Depr. & Amort
- Taxes
= NOPAT
+ Depr. & Amort
- CapEx
- Changes in WCR
=FCF
What are WCR?
Working Capital Requirement
= short term operating assets,
net of short-term operating liabilities
What is the central performance measure of VBM
EVA = Economic Value Added
Which performance measurement techniques should be used to provide the right incentives to managers?
Those, that are conceptually linked with the free cash flow model of evaluation
-> consistent with the way capital markets evaluate the firms
Definition of EVA
=NOPAT - Cost of Capital
or
= (Rona - WACC) * invested Capital
Cost of Capital = WACC * Invested Capital
Why should RONA not be used as a performance measure for managers?
RONA = NOPAT / net assets
-> incentive to undertake value destroying projects, if RONA < WACC (Costs of capital are considered in EVA, not in RONA)
Extensive calculation of EVA
Net sales
- Operating Expenses
= EBIT
- Taxes
= NOPAT - Capital charges
=EVA
What is the difference between the
EVA balance sheet
and
regular balance sheet?
In the EVA balance sheet short-term NIBL are netted against short-term operating assets to obtain the WCR
What does the WCR represent?
…the firms investment in its operating cycle.
The operating cycle consists of…
… Inventory period,
receivables period
Investments in the operating cycle are…
- inventories
- receivables
- prepaid expenses
operating cash (for day-to-day operations)
How can EVA be increases?
- increase ROC
- reduce WACC
- reduce net assets
What does EVA contribute to value-based management?
- incentivizes managers to seek NPV positive investments
- create shareholder value
- use assets as efficiently as possible
