Why are you destroying the FCF
The shareholder value concept was first defined in 1986 by the American economist Alfred Rappaport. Thereafter, the value of a company is measured by the market value of its shares.
1 This is the purpose of shareholder value
The shareholder value is part of the strategic target planning. With its help, the value of strategies can be determined. Equity represents the most important variable. Its increase means an increase in value for the owners. The shareholder value approach says that this should be the top priority of management, as the owners also bear the risk.
2 These data are important for the concept
The following values are considered to be the basic evaluation factors for a successful strategy:
These values must always be included in strategic considerations.
3 Calculation of shareholder value
The following formula is used to calculate the shareholder value as the present value of future cash inflows:
The following apply:
|K||= Cost of capital rate, discount factor|
|t = 1, ..., T||= Planning periods|
For the calculation, the free cash flow must first be determined:
|Free cash flow||= Operating profit|
- paid taxes
+ Depreciation (does not affect expenditure)
- Investments in fixed assets (net)
- Investments in current assets (net)
The cost of capital is in turn calculated using the following formula:
For the determination of the shareholder value a Planning period from five to 10 years. Ultimately, the period chosen depends on the lifespan of the strategy. When determining the shareholder value, the cash flows of a period of z. If, for example, five years are used, the present value of the cash flows for these five years is the so-called Final value to complete. Based on the consideration that even after the five-year period under consideration there is still an enterprise value that will also lead to a cash flow contribution beyond the five years, this final value must be taken into account.
The final value summarizes the present value of the net cash flow inflows after the planning period. For the sake of simplicity, it is usually assumed that these net cash flow inflows will be achieved continuously at a constant level. For the calculation, this means that the net cash flows beyond the planning period are to be calculated as a "perpetual" annuity.
Determination of the shareholder value
As a result of its strategic considerations, a company decides to add a new product to its product range. Development costs for this product have so far been EUR 3.7 million. Production and sales are to be started from 2 year 1.
The following investments are required in year 0:
The following sales are to be achieved with the new product:
The product achieves a coverage ratio of 25% in year 1. This is reduced by 1% per year as a result of the cost increases. From 2008, a constant coverage ratio of 20% is assumed.
10% of the increase in sales in each year is assumed to be an investment in current assets.
15% of the increase in sales in each year is invested as a net investment in the fixed assets of the following year. For 2003, 10% of the initial investment is calculated.
From year 6ff, the depreciation corresponds to the investment in fixed assets, so that the net investment is zero.
A profit tax rate of 50% is used.
|period||Year 0||Year 1||Year 2||Year 3||Year 4||Year 5||Year 6ff|
|Increase in sales||5.500||5.500||5.500||3.000||1.500||0|
|from initial investment||1.740||1.740||1.740||1.740||1.740|
|Net investment AV||870||825||825||825||450||0|
|Net investment UV||550||550||550||300||150||0|
|profit after taxes||–182,5||450||1.027,5||1.275||1.335||2.100|
|Cash flow I||1.557,5||2.190||2.767,5||3.015||3.075||2.100|
|Cashflow II (free CF)||–8.700||137,5||815||1.392,5||1.890||2.475||2.100|
|Present value factors 15%||0,869565||0,756143||0,657516||0,571753||0,497176||0,432327|
|Present value CF II||–7.565||104||536||796||940||1.070|
|Cumulative present value CF II||–4.120|
|Residual value||Cash flow in year 0: cost of capital =||14.000|
|Present value of the residual value||14.000 × 0,432327 =||6.053|
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