Corporate Value Creation - An Operations Framework for Nonfinancial Managers

A detailed crash course in business management for value creationCorporate Value Creation provides an operations framework that management can use to optimize the impact decisions have on creating value by growing revenue and profitability. Designed to assist professionals without a strong business or financial education, this book provides a thorough understanding of the qualitative and quantitative aspects of managing a business for the purpose of value creation. Readers will find detailed information on financial reports, valuation, modeling and forecasting, and more, including discussion of best practices that functional management can embrace to leverage performance. The final chapter reviews key concepts and helps the reader tie them all together by using a step-by-step approach to build or modify a business plan that includes a complete set of financial statements. In addition, each chapter includes case studies or exercises so that the reader can practice using the material covered in the chapter.Corporate Value Creation can also be used as a handbook for managers who are looking for information on specific topics that range from developing financial statements to manufacturing management, to internet marketing and much more. In most cases, individual topics can be reviewed without reading the entire book. Finally, for the manager who wants to quickly understand what's involved in running a successful business, each chapter begins with the key takeaways from that chapter in a section called "Nuggets".Fundamentally, creating value is as simple as making more money - but therein lies the rub. Effective management of business growth involves a complex interplay of productivity, capital, debt, and margins, and finding the most efficient balance can be challenging. For managers who need a deeper understanding of the forces at work, Corporate Value Creation is a thorough, detailed guide but it is also valuable for managers who are looking for information on a specific topic or simply wanting to understand at a high level what's involved in running a successful business.

List of contents

Preface xiiiAcknowledgments xviiForeword xixChapter 1: Basic Concepts 1Introduction 2Financial Statements 2The Income Statement 3The Balance Sheet 10The Cash Flow Statement 18Required Revenue for a Given Level of Net Income 24Case Study: Advanced Solar Systems Corporation 27Chapter 2: The Envelope Equations 35Introduction 36ROCE and NiROCE 36Net Investments 39Investment Rate 42Incorporating the IR and NiROCE into the Expression for Net Income 43Incorporating IR into the Expression for Cash Flow after Investing Activities 45NI and CFaIA--A Sequential Year-by-Year Analysis 46NI and CFaIA--The General Model 49Estimating Growth Rates of Cash Flow after Investing Activities and Net Income 52Growth Rate of CFaIAg with Constant IR and NiROCE 52Growth Rate of Net Income (NIg) 54Net Income Growth Rate (NIg) with Constant IR and NiROCE 54Envelope Equations Methodology for Estimating Net Income, Cash Flow after Investing Activities, and Growth Rates 56Required Revenue Revisited 66Growing the Net Income 71Case Study: American Technology Corporation 71Chapter 3: The Weighted Average Cost of Capital 81Why Is a Company's Weighted Average Cost of Capital Important? 82Weighted Average Cost of Capital Defined 83Operating and Capital Leases 84Weighting of the Components of Capital Structure 84Market Value of Debt and Equity 85Impact of Taxes on the Weighted Average Cost of Capital 87Estimating the Cost of Debt and Equity and the Capital Asset Pricing Model 88General Equations for Estimating the WACC for a Company with One Class of Debt and Equity 90Levered and Unlevered Betas 90Estimating Beta for Non-Public Companies or Business Units 93Significance and Uses of the WACC 95Origin of the Coefficients Used in Calculating a WACC 96Multiple Hurdle Rates 100Introduction to Present Value 110Case Study: Omega Corporation 115Chapter 4: Introduction to Valuation Models 123Introduction to Estimating Value 126Valuation Considerations--Lessons Learned 166Most Frequently Used Single-Stage Valuation Models 167Multi-Stage Valuations 167Equivalence of the Post-Forecast-Period Models 176Impact of 1/(k . g) on the Perpetual Growth Model 180Considerations of the Terminal Value Multiplier as Implied by the Equivalency Equations 182Case Study: NexgenSonics and the Power of Discipline! 183Chapter 5: ROCE and Cash Flow Analytics 195Introduction 196Basic Drivers of ROCE 197Some Practical Aspects of Managing Return on Capital Employed 209Case Study: Pharos Corporation--The Early Days 210Chapter 6: Strategies and Best Practices for Managing ROCE and Cash Flow 225Introduction to Maximizing Return on Capital Employed and Cash Flow 227Basic Pricing-Driven Models 228Value-Added Models 230Introduction to Factors That Impact Corporate Performance 238Depreciation and Amortization 273Case Study: Innovative Engineering Corporation 301Prologue 311Chapter 7: Productivity and Operating Margin 313Productivity 314Incorporating Operating Margin into the Productivity Model 325Cycle Time 337Closing Comments on Value Added and Cost 339Case Study: Laser Technology Inc. Develops Its Productivity Strategy 339Chapter 8: The Expense Coverage Ratio 353The Expense Coverage Ratio 354Expense Coverage Ratio and EBITDA 367Conclusion 376Case Study: Safety Solutions Corporation 376Chapter 9: Debt and Leverage 389Introduction 391Debt and Leverage 391LIBOR and Pricing Loans 391Debt Financing Alternatives 393Credit Ratings 395Relative Cost of Debt Financing 398Impact of Debt on Return on Capital Employed and Return on Equity 399Financial Covenants 419Case Study: Edsson Corporation 424Chapter 10: Understanding Financial Statements 437Introduction 439The Income Statement 440The Balance Sheet 443Some Complications 450The Cash Flow Statement 451Case Study: Light Technologies Inc. 460Appendix A: Present Value Models 539Present Value of Any Stream of Cash Flows 539Present Value of a Cash Flow E That Takes Place at the End of Year n 540Present Value of the Terminal Value of a Cash Flow at the End of Year n 541Present Value of a Stream of Fixed Cash Flows E for n Years 542Present Value of a Fixed Stream of Cash Flows in Perpetuity (n = Infinity) 544Single-Stage Growth Models 545Present Value of a Stream of Cash Flows That Grow at a Fixed Rate for a Finite Period 546Present Value of a Stream of Cash Flows That Grow at a Fixed Rate in Perpetuity 550General Equation for Present Value of Single-Stage Cash Flows That Grow at a Fixed Rate 551Multistage Growth Models 554Two-Stage Growth Models 555Three-Stage Growth Models 558Appendix B: Business Valuation Models 565Introduction 565Stream of Distinct Cash Flows 565Stream of Distinct Cash Flows Followed by a Stream of Perpetual Fixed Cash Flows 566Stream of Distinct Cash Flows Followed by a Stream of Finite Fixed Cash Flows 567Stream of Distinct Cash Flows Followed by a Stream of Perpetual Growth Cash Flows 568Stream of Distinct Cash Flows Followed by a Stream of Finite Growth Cash Flows 569Stream of Distinct Cash Flows Followed by a Terminal Cash Flow 571Initial Cash Flow Sequentially Followed by a Finite Period of Cash Flows That Grow at a Fixed Rate gFG and a Terminal Cash Flow 572Initial Cash Flow Sequentially Followed by a Finite Period of Cash Flows That Grow at a Fixed Rate gFG and a Perpetual Fixed Cash Flow 573Initial Cash Flow Sequentially Followed by a Finite Period of Cash Flows That Grow at a Fixed Rate gFA for NA Periods and Perpetual Cash Flows That Grow at a Fixed Rate gPB 574Stream of Cash Flows That Grow at a Fixed Rate gA for NA Periods, Followed by a Stream of Cash Flows That Grow at a Fixed Rate gBfor NB Periods, and a Stream of Perpetual Growth Cash Flows That Grow at a Fixed Rate gC 575Appendix C: Growth Models 577Introduction 577General Compound Annual Growth Rate Model 577General Expression for CFaIAg, the Growth Rate of CFaIA 579General Expression for NIg, the Growth Rate of NI 580Appendix D: General Equations for Estimating NI and CFaIA 583Introduction 583ROCE and NiROCE 583The General Case for the Envelope Equations 585Special Case: Constant Investment Rate and Net Income Return on Capital Employed 589Special Case: Focus on Operational Cash Flows 590Net Income and Cash Flow Growth Equations 592Appendix E: R&D Growth and Investment Equation 593Introduction 593Generational Cost Factor 593Product Life Cycle 594Developing an Expression for the Cost of the Next Generation 595Lifetime Revenue Factor 596Growth Rates and Product Life Cycles That Satisfy the Requirement ICurrent = INext 599Appendix F: Inventory Considerations and the EOQ Model 601Introduction 601Components of Inventory Costs 601Economic Order Quantity 606Shortage Costs 607Selected References 611About the Author 613Index 615

Summary

A detailed crash course in business management for value creation

Corporate Value Creation provides an operations framework that management can use to optimize the impact decisions have on creating value by growing revenue and profitability. Designed to assist professionals without a strong business or financial education, this book provides a thorough understanding of the qualitative and quantitative aspects of managing a business for the purpose of value creation. Readers will find detailed information on financial reports, valuation, modeling and forecasting, and more, including discussion of best practices that functional management can embrace to leverage performance. The final chapter reviews key concepts and helps the reader tie them all together by using a step-by-step approach to build or modify a business plan that includes a complete set of financial statements. In addition, each chapter includes case studies or exercises so that the reader can practice using the material covered in the chapter.

Corporate Value Creation can also be used as a handbook for managers who are looking for information on specific topics that range from developing financial statements to manufacturing management, to internet marketing and much more. In most cases, individual topics can be reviewed without reading the entire book. Finally, for the manager who wants to quickly understand what's involved in running a successful business, each chapter begins with the key takeaways from that chapter in a section called "Nuggets".

Fundamentally, creating value is as simple as making more money - but therein lies the rub. Effective management of business growth involves a complex interplay of productivity, capital, debt, and margins, and finding the most efficient balance can be challenging. For managers who need a deeper understanding of the forces at work, Corporate Value Creation is a thorough, detailed guide but it is also valuable for managers who are looking for information on a specific topic or simply wanting to understand at a high level what's involved in running a successful business.

Product details

• Authors: KARLSON, Lawrence C Karlson, Lawrence C. Karlson, Karlson Lawrence C.
• Publisher: Wiley, John and Sons Ltd
• Languages: English
• Product format: Hardback
• Released: 03.12.2014
• EAN: 9781118997529
• ISBN: 978-1-118-99752-9
• No. of pages: 656
• Series: Wiley Corporate F&A; Wiley Corporate F&A
• Subjects: Social sciences, law, business > Business > Business administration; Rechnungswesen, Buchhaltung, Accounting, Allg. Rechnungswesen