Reasons for shareholder wealth culture are…
- globalization and deregulation of capital markets
- end of capital and exchange controls
- advances in IT
- generational changes in attitudes toward saving and investment
Consequences of shareholder wealth culture are…
- high mobility of capital
- companies must be competetive in commercial and capital markets
- operating and capital costs must be considered
pressure of capital markets on firms has been increasing because…
- capitalized pension funds grow
- younger generation accepts more risk on capital markets
the two conflicting paradigms for managerial decision making are…
- Shareholder value (maximize)
- Stakeholder value (maximize)
Outline the shareholder value approach.
- Maximize market value of firm (single objective)
- Shareholder is residiual claimant on firm
- Social welfare is maximized, when all firms in a society maximize their own firm value (assumptions)
Outline the shareholder value approach.
- Stakeholders are all parties that are affected by a firm‘s actions, e.g. shareholders, customers, suppliers, workers, local communities
- all Stakeholders have claims on the firm
- multiple objectives
- does not provide a guideline for managerial decision making
what are the assumptions required to support: “social welfare is maximized by maximizing shareholder value”?
no…
1. no monopolies
2. perfect markets
3. no externalities
what are the shortcomings of stakeholder theory?
- does not provide a criterion for decision-making
- decision criterion must specify how to make tradeoffs between demands of stakeholders (customer: low price, employee: high wage)
What are ESG cretria?
Environmental:
1. Climate Change
2. Energy Consumption
3. Biodiversity and habital
Social:
1. Community and development
2. Health and safety
3. Human rights
Governance:
1. Anti. money laundry
2. Cybersecurity
3. Data protection and privacy
Value-based management requires performance measures that are able to support the following objectives…
- strategic planning
- providing incentives
- measuring performance at the divisional level
- Communicating value creation
What are the three principal financial statements?
- Balance sheet
- income statement
- cashflow statement
Give the definition of “balance sheet”
- The balance sheet reports the categories and amounts of assets (firm resources),
- liabilities (claims on those resources),
- and stockholders’ equity at specific points in time.
What are uses and limitations of the balance sheet?
Uses:
1. Starting point for analysis of firm
2. reports firms earnings-generating ability
3. forecasts about the firms future cash flow
4. starting point for prep of adjusted balance sheet.
Limitations:
1. selective reporting
2. measurement, partially at historical cost, others at market value
Which two conditions must be met for “Revenue recognition”?
- Completion of earnings process
- Assurance of payment
Expense recognition is affected by the following accounting issues:
- Deferral of marketing expenses and sales commissions
- Accrual or deferral of the cost of periodic major maintenance projects
- Bad debt expense
- Warranty expense
which are the three classes of cash flow?
CFO Cash flow from operating activities
CFI Investing cash flow
CFF Financing cash flow
what methods are there to build the cash flow statement?
Direct: firm reports major categories of gross cash receipts and payments
Indirect: firm reconciles accrual-based net income to CFO
- required adjustments
1. noncash revenues & expenses (depreciation)
2. nonoperating items included in net income (property sale)
3. noncash changes in operating assets and liabilities (receivables & payables)
what are the purpose and use of ratio analysis?
- compare risk and return of different firms
- provide profile of a firm
- economic characteristics
- competitive strategies
- operating, financial, investment characteristics
- Categories:
- Activity
- Liquidity
- Long term debt and solvency analysis
- Profitability analysis
What are things to keep in mind with ratio analysis? (potential risks)
- economic assumptions (fixed costs are ignored)
- which benchmark to choose?
- Timing (management can manipulate ratios)
- negative numbers (don’t affect ratios)
- accounting methods (incomparable firms due to different accounting standards)
How is EVA calculated? (including NOPAT)
EVA = NOPAT - WACC * invested capital
How is EVA calculated? (including)
How is EVA calculated? (including NOPAT)
