finanzas VALOR

8/12/2019 finanzas VALOR

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01 VALUE

- Finance and The

Financial Manager


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Topics Covered

What Is A Corporation?

The Role of The Financial ManagerWho Is The Financial Manager?

Separation of Ownership and Management


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Corporate Structure

Sole Proprietorships

Corporations

Partnerships

Limited Liability

Corporate tax on profits +

Personal tax on dividends

Unlimited LiabilityPersonal tax on profits


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Role of The Financial Manager

Financial

manager

Firm's

operations

Financial

markets

(1) Cash raised from investors

(1)

(2) Cash invested in firm

(2)

(3) Cash generated by operations

(3)

(4a) Cash reinvested

(4a)

(4b) Cash returned to investors

(4b)


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Role of The Financial Manager

Common Finance Terminology

Real assets Financial assets / Securities

Capital markets and financial

markets Investment / capital budgeting

Financing


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Who is The Financial Manager?

Chief Financial Officer

ControllerTreasurer


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Present Value,

the Objectives of The Firm,

andCorporate Governance Slides by

Matthew Will


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Topics Covered

Introduction to Present Value

Foundations of the Net Present Value

Rule

Corporate Goals and Corporate

Governance


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Present and Future Value

Present Value

Value today of

a future cashflow.

Future Value

Amount to which aninvestment will grow

after earning interest


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Discount Factors and Rates

Discount Rate

Interest rate usedto compute

present values of

future cash flows. Discount Factor

Present value of

a $1 futurepayment.


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Future Values

Future Value of $100 = FV

FV rt

= +$100 ( )1


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Future Values

FV r t= +$100 ( )1

Example - FV

What is the future value of $5400,000 if interest iscompounded annually at a rate of 5% for one year?

000,420$)05.1(000,400$ 1 =+=FV


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Present Value

1factordiscount=PV

PV=ValuePresent

C


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Present Value

Discount Factor = DF = PV of $1

Discount Factors can be used to compute the present value of

any cash flow.

DFr

t=

+

1

1( )


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Valuing an Office Building

Step 1: Forecast cash flows

Cost of building = C0 = 400

Sale price in Year 1 = C1 = 420

Step 2: Estimate opportunity cost of capital

If equally risky investments in the capital market

offer a return of 5%, then

Cost of capital = r = 5%


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Valuing an Office Building

Step 3: Discount future cash flows

Step 4: Go ahead if PV of payoff exceeds investment

400)05.1(420

)1(1

===++r

CPV

30370400 ==NPV


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Net Present Value

r

C

+

+

1

C=NPV

investmentrequired-PV=NPV

10


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Risk and Present Value

Higher risk projects require a higher rate of

return

Higher required rates of return cause lower

PVs

400.051

420PV

5%at$420CofPV 1

=

+

=

=


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Risk and Present Value

400.051

420PV

5%at$420CofPV 1

=

+

=

=

375.121

420PV

12%at$420CofPV 1

=

+

=

=


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Risk and Net Present Value

$5,000

370,000-75,0003=NPV

investmentrequired-PV=NPV

=


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Rate of Return Rule

Accept investments that offer rates of return

in excess of their opportunity cost of capital

Example

In the project listed below, the foregone investment

opportunity is 12%. Should we do the project?

13.5%or.135370,000

370,000420,000

investment

profitReturn =

==


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Net Present Value Rule

Accept investments that have positive net

present value

Example

Suppose we can invest $50 today and receive$60 in one year. Should we accept the project

given a 10% expected return?

55.4$1.10

60+-50=NPV =


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Opportunity Cost of Capital

Example

You may invest $100,000 today. Depending on the

state of the economy, you may get one of threepossible cash payoffs:

140,000110,000$80,000Payoff

BoomNormalSlumpEconomy

000,110$3

000,140000,110000,80CpayoffExpected 1 =

++==


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Example - continued

The stock is trading for $95.65. Next years price,

given a normal economy, is forecast at $110

The stocks expected payoff leads to an expectedreturn.

15%or15.65.95

65.95110profitexpected

returnExpected =

==

investment


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Example - continued

Discounting the expected payoff at the expected

return leads to the PV of the project

650,95$1.15

110,000

PV ==


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Example - continued

Notice that you come to the same conclusion if you

compare the expected project return with the costof capital.

10%or10.

000,100

000,100000,110profitexpectedreturnExpected =

==

investment


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Investment vs. Consumption

Some people prefer to consume now. Some

prefer to invest now and consume later.Borrowing and lending allows us to

reconcile these opposing desires which mayexist within the firms shareholders.


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A

B

100

80

60

40

20

40 60 80 100income in period 0

income in period 1

Some investors will prefer A

and others B


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The grasshopper (G) wants to

consume now. The ant (A) wants to

wait. But each is happy to invest.Each invests $185,000 and returns

$210,000 at the end of the year. G

wants to consume now so G borrows$200,000 and repays $210,000 at the

end of the year. The existence of

capital markets allows G to consumenow and still invest with A in the

project.


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The grasshopper (G) wants to consume

now. The ant (A) wants to wait. But

each is happy to invest. Each invests

$185,000 and returns $210,000 at the end

of the year. G wants to consume now soG borrows $200,000 and repays

$210,000 at the end of the year. The

existence of capital markets allows G to

consume now and still invest with A inthe project.

185 200Dollars

Now

Dollars

Next Year

210

194

A invests $185 now

and consumes $210

next year

G invests $185 now,

borrows $200 and

consumes now.


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Managers and Shareholder Interests

Tools to Ensure Management Pays

Attention to the Value of the Firm

Mangers actions are subject to the scrutiny of the

board of directors.

Shirkers are likely to find they are ousted by more

energetic managers.

Financial incentives such as stock options


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Whose Company Is It?

24

29

78

83

97

76

71

22

17

3

0 20 40 60 80 100 120

UnitedStates

UnitedKingdom

France

Germany

Japan

% of responsesThe Shareholders

All Stakeholders

** Survey of 378 managers from 5 countries


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Dividends vs. Jobs

11

11

59

60

97

89

89

41

40

3

0 20 40 60 80 100 120

UnitedStates

UnitedKingdom

France

Germany

Japan

% of responsesDividends

Job Security

** Survey of 399 managers from 5 countries. Which is more important...jobs orpaying dividends?


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Goals of The Corporation

Shareholders desire wealth

maximization

Do managers maximize shareholder

wealth?

Mangers have many constituenciesstakeholders

Agency Problems represent theconflict of interest between

management and owners


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Goals of The Corporation

Agency Problem Solutions

1 - Compensation plans

2 - Board of Directors

3 - Takeovers

4 - Specialist Monitoring5 - Auditors


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Agency Problems,Management

Compensation, and

The Measurement

of PerformanceSlides by

Matthew Will


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Topics Covered

The Capital Investment Process

Decision Makers Need Good Information

Incentives

Residual Income and EVA

Bias in Accounting Measures of

Performance

Measuring Economic Profitability


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The Principal Agent Problem

Shareholders = Owners

Managers = Employees

Question: Who has

the power?

Answer: Managers

i l i i


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Capital Investment Decision

Project Creation

Bottom Up

Strategic Planning

Top Down

Capital Investments

i l


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Capital Investment Process

Capital budget

Project authorization

R&D

Marketing

Post-audits

Off B d E di


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Off Budget Expenditures

Information Technology

Research and DevelopmentMarketing

Training and Development

I f i P bl


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Information Problems

1. Consistent Forecasts

2. Reducing Forecast Bias

3. Getting Senior Management

Needed Information

4. Eliminating Conflicts of

InterestThe correct

information

is

l & All S d


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Brealey, Myers & Allens Second Law

The proportion of proposedThe proportion of proposed

projects having a positive NPVprojects having a positive NPVat the official corporate hurdleat the official corporate hurdle

rate is independent of therate is independent of thehurdle rate.hurdle rate.

I i


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Incentives

Reduced effort

Perks

Empire building

Entrenching investment

Avoiding risk

Agency Problems in Capital Budgeting

I ti I


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Incentive Issues

Monitoring - Reviewing the actions of managers

and providing incentives to maximize shareholder

value.

Free Rider Problem - When owners rely on the

efforts of others to monitor the company.

Management Compensation - How to paymanagers so as to reduce the cost and need for

monitoring and to maximize shareholder value.

CEO C ti (2003 04)


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CEO Compensation (2003-04)

0

500

1000

1500

2000

2500

$1,000s

Australia

Canada

China

Fance

Germany

India

Italy

Japan

Mexico

Netherlands

Singapore

Spain

Sweden

Switzerland

U

nitedKingdom

UnitedStates

Benefits

Perks

Options & OthersVariable Bonus

Basic Compensation

R id l I & EVA


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Residual Income & EVA

Techniques for overcoming errors in accountingmeasurements of performance.

Emphasizes NPV concepts in performanceevaluation over accounting standards.

Looks more to long term than short termdecisions.

More closely tracks shareholder value thanaccounting measurements.

R id l I & EVA


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Income

Sales 550

COGS 275

Selling, G&A 75

200

taxes @ 35% 70

Net Income $130

Assets

Net W.C. 80

Property, plant and

equipment 1170

less depr. 360

Net Invest.. 810

Other assets 110

Total Assets $1,000

Quayle City Subduction Plant ($mil)Quayle City Subduction Plant ($mil)

R id l I & EVA


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13.000,1

130==ROI

Given COC = 10%

%3%10%13 ==NetROI

R id l I & EVA


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Residual Income or EVA = Net Dollar return

after deducting the cost of capital

EVA is copyrighted by Stern-Stewart Consulting Firm and used with permission.

[ ]InvestmentCapitalofCost-EarnedIncome

requiredincome-EarnedIncomeIncomeResidual

=

=

=EVA

R id l I & EVA


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Given COC = 10%

million03$

)000,110(.130IncomeResidual

+=

=

=EVA

E i P fit


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Economic Profit

Economic Profit= capital invested

multiplied by the spread between return on

investment and the cost of capital.


InvestedCapital)(

ProfitEconomic

=

=

rROI

EP

E i P fit


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Economic Profit



Example at 10% COC continued.

million$30

1,000.10)-.13(InvestedCapital)(

=

=

=

rROIEP

Message of EVA


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Message of EVA

+ Managers are motivated to only invest in

projects that earn more than they cost.

+ EVA makes cost of capital visible tomanagers.

+ Leads to a reduction in assets employed.- EVA does not measure present value

- Rewards quick paybacks and ignores timevalue of money

EVA of US firms 2003


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EVA of US firms - 2003

($ in millions)

Econimic Value Added

(EVA)

Capital

Invested

Return on

Capital

Cost of

CapitalWal-Mart Stores 4,525 79,177 12.30% 6.60%

Johnson & Johnson 4,459 51,508 17.6 8.9

Microsoft 4,027 24,677 29.8 13.5

Merck 3,347 40,941 16.9 8.7

Coca Cola 2,729 20,503 20.1 6.7

Intel Corp. (57) 31,216 15.6 15.8

Dow Chemical (1,503) 44,158 3.6 7

Boeing (1,974) 50,046 2.2 6.1

Delta Airlines (2,288) 27,238 -0.9 7.5Viacom (5,508) 96,515 3.5 9.2

IBM (7,505) 108,926 4.6 11.5

Accounting Measurements


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0

011 )(

pricebeginning

priceinchangereceiptscashreturnofRate

PPPC +=

+=

Economic income = cash flow + change in present value

0

011 )(returnofRatePV

PVPVC +=



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ECONOMIC ACCOUNTING

Cash flow + Cash flow +change in PV = change in book value =

Cash flow - Cash flow -

economic depreciation accounting depreciation

Economic income Accounting income

PV at start of year BV at start of year

INCOME

RETURN

Nodhead Book Income & ROI


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Nodhead Book Income & ROI

1 2 3 4 5 6Cash flow 100 200 250 298 298 298

Book value at start of year,

straight-line depreciation 1000 833 667 500 333 167

Book value at endof year,

straight-line depreciationBook depreciation 167 167 167 167 167

Book income -67 33 83 131 131

Book ROI -0.67 0.04 0.124 0.262 0.393 0.784

Forecasted EVA (5-.1 *2) -167 -50 17 81 98 115

Year

Nodhead Store Forecasts


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Nodhead Store Forecasts

1 2 3 4 5 6

Cash flow

PV, atstart of year, 10 percent

discount rate 1000 1000 901 741 517 271

PV, at endof year, 10 percent

discount rate

Economic depreciation 0 100 160 224 246 271

Economic income 100 100 90 74 52 27

Rate of return 0.1 0.1 0.1 0.1 0.1 0.1

Forecasted EVA (5-.1*2) 0 0 0 0 0 0

Year

Nodhead Peer Book ROI


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Nodhead Peer Book ROI

1 2 3 4 5 6

Book Income for store

1 -67 33 83 131 131 131

2 -67 33 83 131 131

3 -67 33 83 1314 -67 33 83

5 -67 33

6 -67Total book income -67 -34 49 180 311 442

Book value for store1 1000 833 667 500 333 167

2 1000 833 667 500 333

3 1000 833 667 500

4 1000 833 667

5 1000 833

6 1000Total book value 1000 1833 2500 3000 3333 3500

Book ROI for all

stores -0.067 -0.019 0.02 0.06 0.093 0.126

EVA for all stores -167 -217 -201 -120 -22 92

Year

Nodhead Growth v Return


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Nodhead Growth v. Return

Rate of Return

(%)

Rate of Growth

(%)

Economic rate of return

Book rate of return

12

11

10

9

8

7

5 10 15 20 25

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