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Handout Tutorial 2 - Lehrstuhl für Controlling
Technische Universität München Value-Based Management Handout Problem Set 2 Relative Performance Measures and EVA calculation Lehrstuhl für BWL – Controlling Prof. Dr. Gunther Friedl Email for questions and comments: [email protected] Technische Universität München Question 2: Relative Performance Measures Should one use the ROI as performance measure for top management to enhance value-creating decisions? Which might be the possible disadvantages? Handout Problem Set 2: EVA calculation 2 Prof. Dr. Gunther Friedl – SS 2015 Technische Universität München Question 3: Calculation of EVA Handout Problem Set 2: EVA calculation 3 Prof. Dr. Gunther Friedl – SS 2015 Technische Universität München Economic Value Added (EVA) as a measure of economic profit The EVA represents the company’s profit after full cost of capital: Calculation of EVA Net sales – Operating expenses = Operating profit (EBIT, earnings before interest and taxes) – Taxes = Net operating profit after tax (NOPAT) – Capital charges (Invested capital ∙ cost of capital) = EVA EVA can be calculated for any entity of a company if its NOPAT, invested capital and WACC are known Handout Problem Set 2: EVA calculation 4 Prof. Dr. Gunther Friedl – SS 2015 Technische Universität München Calculating the invested capital: The EVA balance sheet differs from the regular balance sheet Cash Receivables + inventories + prepayments Fixed assets Short-term debt Short-term NIBL (non interest-bearing liabilities) Cash Working capital requirement (WCR) Long-term debt Other long-term liabilities Fixed assets Shareholders‘ equity Regular balance sheet Short-term debt Long-term debt Other long-term liabilities Shareholders‘ equity EVA balance sheet In the EVA balance sheet short-term NIBL are netted against short-term operating assets to obtain the WCR The left side of the EVA balance sheet represents the “net assets” the right side the “invested capital” Handout Problem Set 2: EVA calculation 5 Prof. Dr. Gunther Friedl – SS 2015 Technische Universität München Some definitions: Handout Problem Set 2: EVA calculation 6 Prof. Dr. Gunther Friedl – SS 2015 Technische Universität München Question 3: Calculation of EVA Determine the company’s working capital requirement using the data of the balance sheet. Calculate the average invested capital and the capital charges, assuming a cost of capital of 10 %. Calculate the NOPAT out of the 2014 income statement. Use a corporate tax rate of 35 % to calculate the tax shield on income taxes. Calculate EVA. Handout Problem Set 2: EVA calculation 7 Prof. Dr. Gunther Friedl – SS 2015 Technische Universität München Determine the company’s working capital requirement using the data of the balance sheet. Handout Problem Set 2: EVA calculation 8 Prof. Dr. Gunther Friedl – SS 2015 Technische Universität München Calculate the average invested capital and the capital charges, assuming a cost of capital of 10 %. Handout Problem Set 2: EVA calculation 9 Prof. Dr. Gunther Friedl – SS 2015 Technische Universität München Calculate the NOPAT out of the 2014 income statement. Use a corporate tax rate of 35 % to calculate the tax shield on income taxes. Calculate the EVA. Handout Problem Set 2: EVA calculation 10 Prof. Dr. Gunther Friedl – SS 2015 Technische Universität München Question 4: Tax Shield Explain the role of the tax shield as it is subtracted (among others) from operating income to calculate the net operating profit after taxes (NOPAT). Handout Problem Set 2: EVA calculation 11 Prof. Dr. Gunther Friedl – SS 2015 Technische Universität München Use the formula of the weighted average cost of capital (WACC) to show that it depends on the definition of the WACC whether it is necessary to subtract the tax shield from operating income when calculating the EVA number. Handout Problem Set 2: EVA calculation 12 Prof. Dr. Gunther Friedl – SS 2015 Technische Universität München Question 5: Calculation of EVA: Pfizer Handout Problem Set 2: EVA calculation 13 Prof. Dr. Gunther Friedl – SS 2015 Technische Universität München Handout Problem Set 2: EVA calculation 14 Prof. Dr. Gunther Friedl – SS 2015 Technische Universität München Handout Problem Set 2: EVA calculation 15 Prof. Dr. Gunther Friedl – SS 2015
