...CASE STUDY FOR FINANCIAL MANAGEMENT CASE 4: The Battle for Value, 2004: FedEx Corp. vs. United Parcel Service, Inc. VALUE CREATION AND ECONOMIC PROFIT I. OUTLOOK OF CASE 4 Case 4 mentions about the competition between two leading companies in package- delivery market. FedEx which is the largest 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...
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...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 it means that the company has high expectancy of generating...
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...Under the framework of VBM, economic value added (EVA) is one of the approaches to measure the value-creating performance of business units and managers. 1) Do you think that EVA can be 'used' by company managers to actually improve performance? YES Accounting measures more often produces historical data or distorted data that may have no relation with the real status of the company. But, EVA goes for adjustments to accounting data to make it economically viable. EVA is able to improve the performance of business unit or managers. For example, R&D normally classified as expense under accounting standard unless it meet several extremely requirements, then expense can be capitalized. Under EVA approach, R&D expense added back to the NOPAT which encourage managers innovation mind since the cost of innovation will not considered as a distortion of performance measurement as long as R&D will bring in the economic benefit in the future. The real life example would be James Hardie, he introduced EVA to its operation in 1996 and made a great success by doing that. We have to notice that, EVA performance measurement is a financing measurement, it must link to employees’ compensation and inventive payment system NO EVA is a single period measurement approach which discourages managers to undertake long term profitable project. Compare to ROI, ROI maximizing rate of return but not necessarily maximize the return for shareholders. 2) Companies should be required...
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...Abstract Economic Value Added (EVA) is a value based performance measure that gives importance on value creation by the management for the owners. Profit maximization as a concept is age-old, wealth maximization is matured and value maximization is today’s wisdom. Stern Stewart’s EVA raises storm in corporate world and gives a new way to think about rewarding management. Usability of EVA largely depends on the quality of accounting information system, as traditional information system will not provide sufficient information to compute true EVA. Thus, EVA is required to be tailored in line with accounting system, management philosophy and the degree of demand of such a system. In this paper, an earnest effort has been made to explain theoretical foundation of EVA with its origination, definition, ways to make it tailored, adjustments required, scope and some other related issues. The methodology used is a type of theoretical mining of logics resulting a step-by-step process required for EVA implementation. As corporate house plans to move from traditional to value based performance measures, EVA would yield good result and the paper may become helpful to them to comprehend the methodology. Keywords: Value Based Performance Measure, Tailored EVA, Residual Income (RI), Accounting Distortions, Shareholders’ Value, Value Based Measure, Market Value Added, True EVA 1. Introduction Economic Value Added (EVA) is the financial performance measure that comes closer than any...
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...Team 7 from afternoon class 2012159 2012171 2012161 2012112 2012118 2012170 Ans. To Q1. Economic Value 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...
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...under control and maintain profitability. However, it is important to balance cost-controls with long-term growth. * The 5-year measurement cycle provides an adequate horizon for management decision-making and should motivate managers to take on projects that add long-term value to the firm. * Although the exact calculation of the performance factor was not described in detail, the plan appears to be fairly straightforward and easy to understand for both managers and stakeholders. Furthermore, the inputs of the performance factor are common metrics and its calculation is likely a weighted average of these factors. The bad * With respect to the valuation of equity securities of a private firm, the American Institute of Certified Public Accountants has established guidelines for private firms using stock-based compensation plans to derive market value of equity. The guideline recommends three approaches: a market or relative valuation approach; an income or DCF-based approach; and, an asset replacement cost approach. Instead of hiring a third-party valuation specialist, or using this guideline themselves, Braddock management estimated the market value of equity by multiplying the book value per share (BVPS) by a...
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...In corporate finance, Economic Value Added or EVA, a registered trademark of Stern Stewart & Co., is an estimate of a firm's economic profit – being the value created in excess of the required return of the company's investors (being shareholders and debt holders). Quite simply, EVA is the profit earned by the firm less the cost of financing the firm's capital. The idea is that value is created when the return on the firm's economic capital employed is greater than the cost of that capital; see Corporate finance: working capital management. This amount can be determined by making adjustments to GAAP accounting. There are potentially over 160 adjustments that could be made but in practice only five or seven key ones are made, depending on the company and the industry it competes in. NOPAT is profits derived from a company’s operations after cash taxes but before financing costs and non-cash bookkeeping entries. It is the total pool of profits available to provide a cash return to those who provide capital to the firm. Capital is the amount of cash invested in the business, net of depreciation. It can be calculated as the sum of interest-bearing debt and equity or as the sum of net assets less non-interest-bearing current liabilities (NIBCLs). The capital charge is the cash flow required to compensate investors for the riskiness of the business given the amount of economic capital invested. The cost of capital is the minimum rate of return on capital required to compensate investors...
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...The goal of all companies is to create value for the shareholder. But how is value measured? Wouldn't it be nice if there were a simple formula to figure out whether a company is creating wealth? A growing number of analysts and consultants think there is an answer. Like many economic formulas, the measure - economic value added (EVA) - is both intriguingly clever and maddeningly deceptive. Does EVA simplify the task of finding value-generating companies or does it just muddy the waters? What Is EVA? EVA is a performance metric that calculates the creation of shareholder value, but it distinguishes itself from traditional financial performance metrics such as net profit and earnings per share (EPS). EVA is the calculation of what profits remain after the costs of a company's capital - both debt and equity - are deducted from operating profit. The idea is simple but rigorous: true profit should account for the cost of capital. To understand the difference between EVA and its older cousin, net income, let's use an example based on a hypothetical company, Ray's House of Crockery. Ray's earned $100,000 on a capital base of $1 million thanks to big sales of stew pots. Traditional accounting metrics suggest that Ray is doing a good job. His company offers a return on capital of 10%. However, Ray's has only been operating for a year, and the market for stew pots still carries significant uncertainty and risk. Debt obligations plus the required return that investors demand for...
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...specific outcome can be measured. These include measurable facts and figures such as sales quotas or profit objectives. For example, a firm might tell its sales staff that it needs to sell 20% more than last year's figure or it might tell its operations managers that costs need to be reduced by 10% over last year's figure. Input controls include employee skills, motivation and knowledge. Hiring an individual with the necessary education and job skills to perform in a position is an input control. Additionally, there are several primary measures of corporate performance. Financial measures include return on investment (ROI), earnings per share (EPS), and operating cash flow. Shareholder measures include market value added (MVA) and economic value added (EVA). DQ 2 What methods would you consider to measure organizational performance? •SWOT Analysis- used to evaluate the company's strengths, weaknesses, opportunities, and threats. This measures the organization's present state and its potential. •Market Research- this research can be done through focus groups, surveys and personal interviews. If a company is meeting consumers' needs means it's generally performing well. •Strategic...
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...shareholder’s benefit – this is very critical as business should be able to bring value to people who finance it, as they put in capital as part of the risk they take to be able to sustain the business. It is also important to take into consideration the value it should bring to its customers and employees as well as business partners up and down the supply and distribution chain referred to as stakeholders from CAM article. And while it’s important to calculate for EVA (Economic Value Added), it is equally important to also measure a business value to stakeholder in the form of its corporate and social responsibility (CSR). I agree with Mr Mansibang’s statement that stakeholder value can be achieved only if it is embedded as part of corporate life or part of the business’ DNA - a non-negotiable strategy with internal processes making way for more effective accountability, transparency and responsibility. Last statement is very true as it puts on a challenge of not just complying with the rules and that it is just not about being legal – but being ethical and moral as well. Yes, it’s important that primarily business are gaining profits so that it can be sustained. But once needed profit is achieved business should be able to bring back something to the community to which they operate on and earning business with. It is also important that employees, one of the key stakeholders, are getting value out of doing business with the company they are employed to – not just financially...
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...Introduction It is important for every business to measure and evaluate how well it performs in relation to its objectives and goals. The primary goal of every business is to generate value for the business. The desire to achieve these goals directs scare resources to products that are deemed profitable; however, value is generated not only from profitable products but rather through the effective use and management of resources. Value can be viewed as maximizing wealth of shareholders, and or improving the quality of life. The desire for businesses to generate value has resulted in using and developing different performance measurement, sometimes centered on the wrong financial measurement, and strategy. Businesses today only look cash strategies, and sometimes operational goals, and ignore the main reason for existence, which results in rewarding employees and even management for the wrong achievement instead of procedures and strategies that actually added value to the business. If the main goal is to generate value then, it follows that measuring performance must be geared toward this, and not solely on profitability. This paper will discuss the importance Economic Value Added (EVA) in measuring performance of a business. It will also look at how it is calculated and possible disadvantages Definition and History It is normally to see many businesses use the profit base measurement as their primary measure of evaluating the performance of its organization, however, this...
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...The concept of Economic Value Added Name: Institution: Tutor: Course: Date: The concept of Economic Value Added (E.V.A.). Economic Value Added (E.V.A.) can be defined as the measure of the financial performance of a company in relation to the remaining wealth calculated by taking away the cost of capital from the economic profit also known as the operating profit. EVA seeks to show a company’s excess profit over the amount of earnings that the company needs to maintain its capital and whether there is any wealth created. The economic profit is usually adjusted for taxes on the basis of cash. EVA can be deduced as follows: EVA= Net Operating Profit after Taxes (NOPAT) – [Capital * Cost of Capital] The cost of capital refers to the yearly return needed by the shareholders as well as the lenders of the business entity in exchange for providing capital. Each of the returns of the contributors is calculated differently. Lenders’ returns are shown in the loan agreement whereas that of the shareholders is shown in the company’s dividend policy. Both returns to the lenders and that of the shareholders are used in the computation of weighted average cost of capital. This is in turn used to derive the amount supposed to be deducted from the NOPAT when calculating EVA. NOPAT plays a vital role in calculating economic profit because this equation makes an attempt to look at the actual finances that are available to the company from its operations as opposed to the accounting profit only...
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...7 Economic Value Added (EVA) 7.1 What is EVA? • EVA ™ is a measure of performance similar to residual income, except the profit figure used is ECONOMIC profit and the capital employed figure used is ECONOMIC capital employed. This is because it is argued that the profit and capital employed figures quoted in the fillclncial statements do not give the true picture and that the accounting figures need to be adjusted to show the true underlying performance. • Th e bCl sic concept of EVA is that performance should be measured in terms of the value added during the period. It is a measure of performance that is directly linked to shareholder wealth. EVA calculation Net operating profit after tax (NOPAT) Less economic value of capital employed x WAee EVA Decision rule: accept the project if the EVA is positive. 7~ ~. VVh ~.t . !~..~.9..~~.r.~................................... 0 • • •••••••••• ••• • COlltrol'(lblePAT Add back non-cash items such as: 8ccollilting depreCiation n O fl-C Cls h expenses interest paid net of tax Add back items that add value such as: qoodwill 8mortisation development and advertising costs operating lease interest cost • ••• • •• • • • • •• ••••• • •• •• •••• • • • •• • x x X X x X X Deduct: econ o mic depreciation impairment to the value of goodwill amortisation of development and advertising costs =NOPAT (X) (X) (X) X •• ...
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...RENCANA JUDUL : Analisis Pengaruh Rasio Profitabilitas dan Economic Value Added terhadap Harga Saham pada Perusahaan Jasa di Bursa Efek Indonesia (BEI) A. Latar Belakang Masalah Perkembangan dunia bisnis dan pertumbuhan ekonomi saat ini pada negara-negara berkembang seperti Indonesia menunjukkan pertumbuhan yang semakin meningkat dari tahun ke tahun. Para pelaku bisnis, mereka menyadari adanya pergeseran pasar dan perilaku pembelian konsumen beberapa tahun terakhir, sehingga mereka dengan tanggap mengadakan perubahan-perubahan mendasar pada setiap aspek perusahaannya agar dapat terus melayani serta mengembangkan segmen pasar mereka. Pasar dan perilaku pembelian konsumen bergeser pada jumlah permintaan akan produk jasa yang terus meningkat dengan berbagai macam ragam jasa yang ditawarkan, serta permintaan terhadap produk barang yang cenderung menurun apabila tidak disertai oleh produk jasa. Adapun pertumbuhan dalam sektor jasa yang sangat berkembang ini juga tidak lepas dipengaruhi oleh beberapa faktor (Schoell dan Gultinan, 1992) yaitu antara lain: Perkembangan teknologi yang sangat pesat termasuk teknologi informasi, adanya peningkatan pengaruh sektor jasa, persentase wanita yang masuk dalam angkatan kerja semakin besar, tingkat harapan hidup semakin meningkat, produk-produk yang dibutuhkan dan dihasilkan semakin kompleks, adanya peningkatan kompleksitas kehidupan dan meningkatnya perhatian terhadap ekologi dan kelangkaan sumber daya. Serta jasa-jasa seperti logistik...
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...ECONOMIC VALUE ADDED (EVA®) (for personal use only) Concept EVA was originally proposed by the consulting firm Stern Stewart & Co., Economic Value Added (EVA) is currently a very popular idea. Fortune Magazine has called it “today’s hottest financial idea and getting hotter” and management guru Peter Drucker refers it to as a measure of total factor productivity. Companies across a broad spectrum of industries and across a wide range of countries have joined the EVA bandwagon. EVA is essentially the surplus left after making an appropriate charge for the capital employed in the business. It may be calculated in any of the following, apparently different but essentially equivalent, ways: EVA = NOPAT – c* x CAPITAL EVA = CAPITAL (r – c*) Where, EVA = Economic Value Added NOPAT = Net operating Profit After Tax c* = Cost of Capital CAPITAL = Economic book value of the capital employed in the firm r = Return on capital = NOPAT / CAPITAL The goal of Financial Management is to maximize the shareholders’ value. The shareholders’ wealth is measured by the returns they receive on their investment. Returns are in two parts, first in the form of dividends and the second in the form of capital appreciation reflected in market value shares, of which market value is the dominant part. The share prices are influenced by the extent to which the management is able to meet the expectation of the shareholders. Various measures like the return on capital employed ...
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