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1、Introduction to EVA Management System,Contents,What is EVA? The calculation of EVA The EVA management system,Contents,What is EVA? The calculation of EVA The EVA management system,EVA is Earnings After the Cost of Capital,Revenues -Operating Costs -Depreciation -/+ Adjustments -Taxes =Operating Inco
2、me After Tax (NOPAT) Capital x c% Capital Charge =EVA,Objective: Continuous Improvement in EVA,P/L,B/S,The intrinsic value is the determinant of the market value in efficient capital market,Intrinsic value,Financial measures,Operating metrics,MVA, Stock price,EVA,ROI, Capital turnover, margin,Market
3、 share, Unit cost, scrap rate, delivery time,Competitive strategy Business model Management system Operating efficiency,Market value,US as example,50%,40%,30%,20%,10%,Correlation with stock price,EVA ROE Cash Flow EPS Revenue,As a measure of business intrinsic value, EVA correlates with stock price
4、better than other measures,EVA measure gives more insights into the business,From Enrons 2000 Annual Report (Letter to Shareholders):,Enrons performance in 2000 was a success by any measureThe companys net income reached a record in 2000. Enron is laser-focused on earnings per share, and we expect t
5、o continue strong earnings performance.,(in mil),Net Inc,EPS,EVA,(in mil),Contents,What is EVA? The calculation of EVA The EVA management system,From the traditional accounting model to the economic model of the firm,Separate financing effects from operating performance Extend matching of costs with
6、 revenue to economic basis Separate operating from non-operating Eliminate book keeping entries/reserves that distort cash flow and reduce objectivity So as to To better reflect value creation To motivate the right value-creating behavior,Optimizing the EVA Measure,Materiality Difference in EVA with
7、 or without adjustment Is it material? Set a rule of thumb and use common sense Motivation Adjustment must motivate managers to do the right thing Start with dysfunctional behaviors in standard operating procedures Data Availability Cost of collecting information must be reasonable Simplicity EVA is
8、 for operating people keep it simple A fully adjusted EVA is too complicated to use and communicate,The EVA Calculation Precision Varies,Basic EVA,Tailored EVA,True EVA,Disclosed EVA,Cash to Economic,Non-operating Items,Non-recurring Events,Accrual to Cash,Accounting conservatism treats many investm
9、ents as current expenses (R Other Financing),In the EVA framework, we must turn the accounting model into an economic model,Cost of Debt,Cost of Capital ? %,+,Cost of Equity,? %,? %,The cost of capital comprises both debt & equity costs,Risk Free Rate,Equity Risk Premium,Debt Premium (Credit spread)
10、,A Beta value is required to determine cost of equity,In general, a higher business risk implies higher beta value, hence higher cost of equity,To calculate Beta, a list of peers need to be identified for Client,A peer company is not necessarily a competitor, but rather a company engaged in principa
11、lly similar business subject to the same underlying economic forces. They may be competitors or companies in similar industries and business environments. Peer comparisons are used to : Derive Betas for the respective business units and the corporation to facilitate cost of capital (COC) calculation
12、s. Non-listed companies, wholly-owned subsidiaries and business units do not have publicly traded shares from which to measure the levered Betas. Where possible, a pure-play analysis of publicly traded peer companies is used to estimate the unlevered Beta, or BRI. This is then translated into the le
13、vered Beta for that company, using the capital structure and the cost of debt. Benchmark EVA performance and identify value drivers.,Contents,What is EVA? The calculation of EVA The EVA management system,Strategy Formation,Goal Setting,Planning & Budgeting,Execution,Evaluation,Motivation,EVA,EVA,EVA
14、,EVA,EVA,Motivation Strategy Goal Setting Planning Execution Evaluation & Budgeting,Value Based Management,EVA provides a comprehensive value management framework to translate strategy into action,From EVA Goal Setting to Execution,EPS Consensus Estimates Industry Data Benchmarking Internal forecast
15、s,Simulations of past history,Client Strategic Goals,Consolidated EVA Growth Goal,Business Unit EVA Growth Goals,Operating Plans,Capital Plans,Results/Outlook Reporting,EVA Plans,Reasonableness Check,Market Expectations,Internal Forecasts,Accuracy Check,Goal setting is not an issue of the right numb
16、er, but one of alignment,ALIGNMENT,Goal setting and benchmarking,In the EVA framework, Market Value can be broken down into Future Growth Value and Current Operations Value,MVA = Present Value of Current EVA + Present Value of Expected Improvements to Current EVA,Future growth value represents an expectation of increase in EVA,Market Value,Expected Improvements in EVA,Future Growth Value represents the premium o
