...1.0 BACKGROUND In assignment 2, I was assigned to find the relationship between Free Cash Flow (from now on refer as FCF), Economic Value Added (from now on refer as EVA) and Market Value Added (from now on refer as MVA), specifically whether a company with high FCF also have high EVA and MVA. Explanation using empirical evidence is also needed to support my reasoning and arguments. Therefore, in order to complete this assignment, I have used a few types of references which are financial management reference books, journals, articles from Fortune magazine and set-up an interview with Mr. Amiruddin b. Abdul Shukor which is the Chief Financial Officer (CFO) for Nationwide Express Courier Services Berhad. Throughout his career, he had worked in Permodalan Nasional Berhad (PNB), Permodalan Terengganu Berhad (PTB), Securities Comission Malaysia (SC) and Malaysian Industrial Development Finance Berhad (MIDF). An interview session was set with him on 2/12/2011 at his office in the headquarters of Nationwide Express Courier Services Berhad in Shah Alam, Selangor. 2.0 FINDINGS 2.1 Free Cash Flow In definition, FCF is the cash flow actually available for distribution for investors after the company has made all the investment in fixed assets and working capital necessary to sustain ongoing operations (Brigham & Ehrhardt, 2005). Basically, the formula for FCF is as follows: In the investors’ perspective, positive value of FCF is more favorable than negative value because...
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...Added (EVA) EVA is not actually a new discovery. The concept of EVA has been described in the first theoretical basis of capital structure and company value was presented in the academic papers by two financial economists, Franco Modigliani and Merton H. Miller in 1958, later has been known as M&M (Modigliani-Miller) theorem. The basic theorem states that the value of a firm is unaffected by how the firm is financed, whether by issuing stock or selling debt. However, Modigliani and Miller did not provide a technique to measure economic income in a firm. “The EVA Challenge: Implementing Value Added Change in an Organization”, he proposes that the EVA program encompasses three things essentially, which are a measurement system, an incentive system and a system of financial management. In measuring performance, EVA’s key ingredient is recognition of ‘capital charges’ – the cost of capital in a company, in a division, in a branch store, or in a product. EVA focuses on managerial effectiveness in a given year (Brigham and Ehrhardt 2002). Therefore, EVA basic formula is calculated using NOPAT to reflect firm’s return from its operations: EVA = NOPAT – After-tax dollar cost of capital used to support operations = NOPAT – (Total net operating capital x WACC) Where, NOPAT = Net Operating Profit After Taxes WACC = Weighted Average Cost of Capital Total Net Operating Capital is another term of Invested Capital (IC) From this formula, it can be seen that EVA represents...
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...EVA Definition: Economic Value Added (EVA) est l'excédent de résultat dû à l'activité d'une organisation par rapport au coût du financement des apporteurs de capitaux. Partant d'un résultat d'exploitation retraité (proche de l'EBE), cet indicateur peut être considéré comme un indicateur proche des flux de trésorerie mais il reste constitué de flux de fonds. L'EVA est donc un indicateur financier utile aux apporteurs de capitaux qui vérifient ainsi si leurs investissements (stratégiques ou tactiques) génèrent un excédent de trésorerie. Formule de base: ou MVA Definition: Market Value Added ou MVA est l’écart entre la valeur de marché de l’actif économique et de son montant comptable. La MVA est une marque déposée par J. Stern et G. Stewart. La MVA est égale au Goodwill de l’entreprise. Si la MVA est positive, l’entreprise aura créée de la valeur sinon elle aura détruit de la valeur (badwill). Il est possible de relier la MVA à l’EVA : la MVA est égale à l’ensemble des EVA attendues (espérances) pour les années à venir actualisées au coût du capital (CMPC) Formule de base: Valeur de l'entreprise Definition: la valeur d'une entreprise (enterprise value, abrégé en VE0) désigne la valeur de marché des capitaux investis dans cette entreprise. Elle donne une indication des performances opérationnelles que les investisseurs attendent de l'entreprise pour l'ensemble des années à venir. Formule de base: Lien avec l’EVA： La valeur de l'entreprise est la somme...
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...foreign presence in China, with 11 weekly flights, serving 220 Chinese cities, so the company’s volumes in China had grown by more than 50% between 2003 and 2004. UPS which is the world’s largest package-delivery company and dominant parcel carrier in US, serving 200 cities in 2003. FedEx had virtually invented customer logistical management, and was widely perceived as innovative. Historically, UPS had reputation for being big, bureaucratic and an industry follower. Two companies have their own market, an individual characteristics, and inconclusive. Thus, not only based on the development and operation of the two companies, the analysis also relied on the special purpose financial ratios ( especially Economic Value Added (EVA), an effective measure and rapid for firm within an industry) to find which company has more competitive advantage. II. INTRODUCTION 1. FedEx corporation: [pic] FedEx, formally known as Federal Express, started delivering packages and freight on April 17, 1973. The company was founded by Frederick W. Smith, a Yale University graduate. Federal Express offered overnight and second-day delivery to 25 cities in the United States. The company started in Memphis, Tennessee, and it is still in that location today. FedEx didn’t actually start showing a profit until July 1975. FedEx starting going international in the 1980s after the company purchased...
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...i. What is the difference between economic profit (EVA) and accounting profit (NI)? Is it possible to have a positive NI and negative EVA? Is it possible to have a negative NI and positive EVA? Why or why not ii. When is a company “destroying value” in an EVA framework? iii. What is the difference between ROIC and ROA? 2. In order to answer the following question, look at the Sanity Test described on p.10 of the classnotes. For Costco calculate the following using assumptions in Part I of Week 6 homework: i. Take the Value of the firm as of the date of valuation, and decompose it into the “future growth value” of the company and the value of the firm if it earned its current EVA in perpetuity. ii. Determine the future growth value as a percentage of Firm Value. This is called the Sanity Test. iii. The Enterprise value of Costco was approximately $38,308M as of September 2012. At this EV, what percentage of this value comes from “future growth value” in EVA? What is the percentage of value that comes from MVA? (Use IC as of September 2012) iv. What is the relationship between EVA and MVA? v. What is the relationship between MVA and NPV? 3. Use your Costco Model – Part 1 to answer the following questions. i. What information can you glean about Costco from just looking at FCFF worksheet? ii. What information can you glean about Costco from just looking at the EVA worksheet? Question Two: Abnormal Earnings Model...
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...the computer industry, Apple and Acer were the two companies that were given. One important thing here is that apple is an American Company whereas, Acer is a Taiwanese company. It is like Asian versus America. Looking at their data and financial analysis, it is obvious that Apple is a growing company that holds lots of promise in the future, while Acer is a mature company that is losing its grip on the market. Between 1996 and 1997, Apple posted a net loss but improved on that from 1998 to 2000. Within this period, Acer posted profits as their net income. It started with 111 in 1996 and went to 204 in 2000. But even though they posted profit, their Economic Value added was not impressive in comparison to that of Apple. They had a negative EVA throughout those years showing that even though they posted nice net profit, but they did not make or add value to the stakeholders. Conversely, the opposite was the case for Apple. They...
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...Tujuan dari memo ini adalah memberikan rekomendasi mengenai apakah akan berinvestasi di FedEx atau UPS, mengingat bahwa pasar transportasi udara di Cina sekarang terbuka untuk kedua perusahaan. Diuraikan dalam memo ini adalah penilaian terhadap pendekatan strategis dan evaluasi kinerja keuangan dan non-keuangan kedua perusahaan, yang menyebabkan kesimpulan bahwa UPS adalah peluang investasi yang unggul. 1.0 Pendekatan Strategis untuk FedEx dan UPS FedEx dan UPS adalah perusahaan paket pengiriman yang bersama-sama memberikan supply chain, transportasi, logistik dan layanan informasi terkait. FedEx telah berkembang dari yang beroperasi di 25 kota di AS, untuk melayani pasar internasional. Demikian pula, UPS awalnya dioperasikan hanya di AS sebelum ekspansi ke Kanada, Eropa, Amerika Latin dan yang terbaru, Cina. FedEx dan UPS menargetkan pasar yang sama dan bersaing untuk kehadiran di dalamnya. FedEx dan UPS memiliki beberapa perbedaan penting berkaitan dengan pendekatan strategis mereka untuk bisnis (lihat Tabel 1). FedEx, yang dianggap sebagai pemimpin yang inovatif, kewirausahaan, dan operasional memiliki strategi yang berfokus pada penyediaan layanan berkualitas tinggi kepada para pelanggannya. Inovasi teknologi FedEx, termasuk antarmuka COSMOS, memungkinkan untuk menyediakan layanan pengiriman tepat waktu kepada pelanggan dan klien besar. UPS memiliki strategi yang didorong oleh upaya untuk efisiensi dan pengurangan biaya. Di masa lalu, UPS dianggap sebagai "finansial...
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...The battle of value This article provide us the information about two package-delivery companies FedEx and UPS. The purpose is to tell the readers whether to invest in FedEx or UPS. Nowadays, China open the air transportation market to both companies. Both of them want to enter the Chinese market and have different strategy and financial situation. FedEx and UPS are package-delivery companies. They provide supply chain, transportation, logistics and related information services. FedEx has expanded the service in 25 U.S cities and international market. UPS build the base in the US. They also expanding in to Europe, Canada, Latin America, China. FedEx and UPS in the same industry, same market. They are competitors. Define corporate Excellence FedEx and UPS have different market strategy. They try to earn the strong financial position and provide high returns to share holders. Both of them cut the costs through economics of scale and use of information technology. FedEx, which is regarded as an innovative, entrepreneurial, and operational leader has a strategy that focuses on providing high quality services to its customers. FedEx invents the“HUB” system and “ absolutely positively overnight” ad campaign. They expanding services, acquiring more trucks and air crafts. They focuses on producing superior financial returns for share owners by providing high value-added supply chain. “People-Service-Profit” is their core business philosophy that emphasizes...
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...a. Assuming the expansion was effective Jan. 1, 2010, the 2010 income statement indicates an approximate increase in sales of $2.4M. However, the income statement also indicates a Net Loss in 2010 of ($95K) compared to Net Income of $88K in 2009. Total Assets increased approximately $1.4M. The major drivers causing the increase are fixed assets of $711K, inventory of $572K, and accounts receivable of $280K. Being that assets have to equal liabilities and equity the effect is the same with an approximate increase of $1.4M. Major drivers causing the increase for liabilities and equity are notes payable of $520K and long-term debt of $680K. b. Computron Industries (CI) had to finance the expansion. The financing activities are what kept them cash positive in 2010. In 2011, CI will need to focus on improving cash flow from the operation of the expansion and long term CI will need to manage the return on their investments. c. Free Cash Flow is the Net Operating Profit after Taxes minus net investment in operating capital. The cash flow is used for distribution to investors after all necessary investments are made to sustain operations. It is important to free cash flow now and in the future to increase the value of a company. Free cash flow can be used for paying off debt and interest to debt holders, paying dividends to shareholders, repurchase stock (treasury stock), and buy short-term investments or other non-operating assets. d. Computron’s NOPAT is $10,464...
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...added (EVA) is a financial performance method to calculate the true economic profit of a corporation. EVA can be calculated as Net Operating Profit After Tax minus a charge for the opportunity cost of the capital invested. EVA is an estimate of the amount that earnings differ from the required minimum rate of return for shareholders or lenders. The difference can be both a surplus and a shortage. Ans. To Q2. Tax is demonstrated by using capital charge, or WACC which refers to a cost before tax and taxed PBIT. It is of the existing accounting and financial reporting systems of companies. The disadvantages are that accounting profits and book asset values may be untrue and managers may somehow prefer projects with high short-run EVA to longer-term projects. Ans: to Q3 Balance Sheet Side | | Short-term debt (8%) | 27,300 | Long-term debt (10%) | 98,744 | Total debt and leases | 126,044 | | | Common equity | 413,065 | | | Plus: equity equivalents | | Accumulated goodwill amortization | 21,000 | LIFO reserve | 3,613 | R&D expense | 467,371 | R&D expense amortized | 9,622 | Deferred income taxes | 6,784 | Sum of equity equivalents | 508,390 | | | Adjusted common equity capital | 921,455 | | | Total Equity | 1,047,499 | P&L Side | | EVA NOPAT...
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...ECON MIDTERM #1 Chapter 1: 1. What goods and services should be produced? * “guns versus butter” decision: * Which of the following is the best example of "what goods and services should be produced?" Selected Answer: the production of SUV’s versus the production of sub-compact cars * Which of the following is an example of how the question of "what goods and services to produce?" is answered by the command process? Selected Answer: government subsidies for windmill energy production How goods and services should be produced? * Involves the allocation of a country’s resources in the production of a particular good or service. * Which of the following is the best example of "how goods and services should be produced?" Selected Answer: the use of additional workers versus the use of machines in the production of goods. 2. Factors of production * factors of production, resources, or inputs are what is utilized in the production process in order to produce output—that is, finished goods. * Factors of production may also refer specifically to the primary factors, which are land, labor (the ability to work), and capital goods applied to production * Resources: Land, Labor, Capital, Entrepreneurship and management skills 3. Scarcity and opportunity cost * Scarcity is the condition in which resources are not available to satisfy all needs and wants of a specified group or people. * Opportunity cost is the amount...
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...CHAPTER 3 BA II Plus 2nd . 9 Enter Financial Statements, Cash Flow, and Taxes Balance sheet Income statement Accounting income vs. cash flow MVA and EVA Federal tax system The Annual Report Balance sheet – provides a snapshot of a firm’s financial position at one point in time. Income statement – summarizes a firm’s revenues and expenses over a given period of time. Statement of retained earnings – shows how much of the firm’s earnings were retained, rather than paid out as dividends. Statement of cash flows – reports the impact of a firm’s activities on cash flows over a given period of time. Balance Sheet: Assets 2013 2012 Cash 7,282 57,600 Accounts Receivable 632,160 351,200 Inventories 1,287,360 715,200 Total Current Assets 1,926,802 1,124,000 Gross Fixed Assets 1,202,360 491,000 Less: Depreciation 263,160 146,200 Net Fixed Assets 939,790 344,800 Total Assets 2,866,592 1,468,800 Liabilities and Equity 2013 2012 Accts payable 544,160 145,600 Notes payable 636,808 200,000 Accruals 489,600 136,000 Total Current Liabilities 1,650,568 481,600 Long-term debt ...
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...CHAPTER 3 BA II Plus 2nd . 9 Enter Financial Statements, Cash Flow, and Taxes Balance sheet Income statement Accounting income vs. cash flow MVA and EVA Federal tax system The Annual Report Balance sheet – provides a snapshot of a firm’s financial position at one point in time. Income statement – summarizes a firm’s revenues and expenses over a given period of time. Statement of retained earnings – shows how much of the firm’s earnings were retained, rather than paid out as dividends. Statement of cash flows – reports the impact of a firm’s activities on cash flows over a given period of time. Balance Sheet: Assets 2014 2013 Cash 7,282 57,600 Accounts Receivable 632,160 351,200 Inventories 1,287,360 715,200 Total Current Assets 1,926,802 1,124,000 Gross Fixed Assets 1,202,360 491,000 Less: Depreciation 263,160 146,200 Net Fixed Assets 939,790 344,800 Total Assets 2,866,592 1,468,800 Liabilities and Equity 2014 2013 Accts payable 544,160 145,600 Notes payable 636,808 200,000 Accruals 489,600 136,000 Total Current Liabilities 1,650,568 481,600 Long-term debt ...
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...David Faskas, Julius Cano, Dan Dragomir, and Tisha Ray FINC 4369 Dr. Jonathan Du February 7, 2011 Analysis of FedEx and United Parcel Service The domestic United States market for package-delivery is a $45-billion dollar market. The air express market is a $25-billion dollar segment of this market. The package delivery industry is very large and highly competitive. Two of the top competitors, FedEx Corporation and United Parcel Service have been racing to gain a larger portion of this multi-billion dollar market for years. Recently with a landmark air-transportation agreement being reached in China, the market for international delivery has boomed. Analysts expect China to become the world’s largest economy within the next few decades. The air-cargo market in China has been growing at a rate of 30 percent per year and is expected to increase for at least 5 years at this rate. With such an important growing market opening to international companies, the opportunity is great. Many risks may also be present with this new venture, but the reward may be great for the company that can take hold of this market share first. Through this analysis I will analyze the goals of each firm, how each firm has achieved or strived to achieve these goals, and how each company has dealt with threats from competitors. FedEx has stated in their mission statement that they have the goal of “[producing] superior returns for shareowners by providing high value-added supply chain, transportation...
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...Accruals = $324,000 + $284,960 =$608,960 The net operating working capital=Operating current assets-Operating current liabilities =$1,926,802-$608,960 =$1,317,842 The total net operating capital=NOWC+Operating long-term assets =$1,317,842+$939,790 =$2,257,632 e. FCF=NOPAT-Net investment in operating capital =EBIT(1-T)-(Net investment in operating capital in 2010-Net investment in operating capital in 2009) =$17,440(1-0.4)-($2,257,632-$1,138,600) = -$1,108,568 f. ROIC=NOPAT/Total net operating capital =($10,464/$2,257,632) =0.0046 =0.46% g. EVA=Net operating profit...
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