You are previewing Corporate Value Creation: An Operations Framework for Nonfinancial Managers.
O'Reilly logo
Corporate Value Creation: An Operations Framework for Nonfinancial Managers

Book Description

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.

Table of Contents

  1. Cover Page
  2. Title Page
  3. Copyright
  4. Dedication
  5. Contents
  6. Preface
    1. ABOUT THIS BOOK
  7. Acknowledgments
  8. Foreword
  9. CHAPTER ONE: Basic Concepts
    1. INTRODUCTION
    2. FINANCIAL STATEMENTS
    3. THE INCOME STATEMENT
    4. THE BALANCE SHEET
    5. THE CASH FLOW STATEMENT
    6. REQUIRED REVENUE FOR A GIVEN LEVEL OF NET INCOME 23
    7. CASE STUDY: ADVANCED SOLAR SYSTEMS CORPORATION
  10. CHAPTER TWO: The Envelope Equations
    1. INTRODUCTION
    2. ROCE AND NiROCE
    3. NET INVESTMENTS 4,5
    4. INVESTMENT RATE
    5. INCORPORATING THE IR AND NiROCE INTO THE EXPRESSION FOR NET INCOME 13
    6. INCORPORATING IR INTO THE EXPRESSION FOR CASH FLOW AFTER INVESTING ACTIVITIES
    7. NI AND CFaIA—A SEQUENTIAL YEAR-BY-YEAR ANALYSIS
    8. NI AND CFaIA—THE GENERAL MODEL
    9. ESTIMATING GROWTH RATES OF CASH FLOW AFTER INVESTING ACTIVITIES AND NET INCOME
    10. GROWTH RATE OF CFaIAg WITH CONSTANT IR AND NiROCE
    11. GROWTH RATE OF NET INCOME (NIg)
    12. NET INCOME GROWTH RATE (NIg) WITH CONSTANT IR AND NIROCE
    13. ENVELOPE EQUATIONS METHODOLOGY FOR ESTIMATING NET INCOME, CASH FLOW AFTER INVESTING ACTIVITIES, AND GROWTH RATES
    14. EXAMPLE 2-1: IMPACT OF NET INCOME RETURN ON CAPITAL EMPLOYED AND INVESTMENT RATE ON CASH FLOW AFTER INVESTING ACTIVITIES WHEN NiROCE AND IR ARE CONSTANT
    15. EXAMPLE 2-2: IMPACT OF VARIABLE NiROCE AND IR ON CFaIA
    16. EXAMPLE 2-3: CALCULATING THE GROWTH RATE OF NI AND CFaIA KNOWING IR AND NiROCE
    17. EXAMPLE 2-4: IMPACT OF NiROCE AND TARGET NET INCOME GROWTH RATES ON THE INVESTMENT RATE AND CASH FLOW AFTER INVESTING ACTIVITIES
    18. REQUIRED REVENUE REVISITED
    19. EXAMPLE 2-5: CALCULATING REQUIRED REVENUE FOR THE STEPHENSON CORPORATION
    20. GROWING THE NET INCOME
    21. CASE STUDY: AMERICAN TECHNOLOGY CORPORATION
  11. CHAPTER THREE: The Weighted Average Cost of Capital
    1. WHY IS A COMPANY’S WEIGHTED AVERAGE COST OF CAPITAL IMPORTANT?
    2. WEIGHTED AVERAGE COST OF CAPITAL DEFINED
    3. OPERATING AND CAPITAL LEASES
    4. WEIGHTING OF THE COMPONENTS OF CAPITAL STRUCTURE
    5. MARKET VALUE OF DEBT AND EQUITY
    6. IMPACT OF TAXES ON THE WEIGHTED AVERAGE COST OF CAPITAL
    7. ESTIMATING THE COST OF DEBT AND EQUITY AND THE CAPITAL ASSET PRICING MODEL
    8. GENERAL EQUATIONS FOR ESTIMATING THE WACC FOR A COMPANY WITH ONE CLASS OF DEBT AND EQUITY
    9. LEVERED AND UNLEVERED BETAS 11
    10. ESTIMATING BETA FOR NON-PUBLIC COMPANIES OR BUSINESS UNITS
    11. EXAMPLE 3-1: ESTIMATING BETA USING THE COMPARABLE COMPANY METHOD
    12. SIGNIFICANCE AND USES OF THE WACC
    13. ORIGIN OF THE COEFFICIENTS USED IN CALCULATING A WACC
    14. EXAMPLE 3-2: CALCULATING THE COST OF EQUITY USING MARKET DATA FOR HOPE INC.
    15. EXAMPLE 3-3: ESTIMATING THE WACC OF A COMPANY WITH ONE CLASS OF DEBT AND EQUITY
    16. MULTIPLE HURDLE RATES
    17. EXAMPLE 3-4: RETAIL CORPORATION’S WACC
    18. EXAMPLE 3-5: RETAIL CORPORATION DECIDES TO ACCESS THE DEBT MARKETS
    19. EXAMPLE 3-6: COMPARISON OF RETAIL CORPORATION’S WACCS
    20. INTRODUCTION TO PRESENT VALUE
    21. EXAMPLE 3-7: CALCULATING THE VALUE OF A STREAM OF CASH FLOWS USING THE WACC
    22. CASE STUDY: OMEGA CORPORATION
  12. CHAPTER FOUR: Introduction to Valuation Models
    1. INTRODUCTION TO ESTIMATING VALUE 1,2
    2. EXAMPLE 4-1: VALUING A&D INCORPORATED'S FORECASTED CASH FLOWS
    3. EXAMPLE 4-2: COMPANY C'S VALUATION OF ACQUISITION TARGET COMPANY A
    4. EXAMPLE 4-3: COMPANY A VALUES VARIOUS BUSINESS PLANS
    5. VALUATION CONSIDERATIONS—LESSONS LEARNED
    6. MOST FREQUENTLY USED SINGLE-STAGE VALUATION MODELS
    7. MULTI-STAGE VALUATIONS
    8. EXAMPLE 4-4: MULTI-STAGE VALUATION OF COMPANY A'S PLAN 2
    9. EXAMPLE 4-5: COMPANY C'S MULTI-STAGE VALUATIONS OF COMPANIES A AND B
    10. EQUIVALENCE OF THE POST-FORECAST-PERIOD MODELS
    11. IMPACT OF 1/(k − g) ON THE PERPETUAL GROWTH MODEL
    12. CONSIDERATIONS OF THE TERMINAL VALUE MULTIPLIER AS IMPLIED BY THE EQUIVALENCY EQUATIONS
    13. CASE STUDY: NEXGENSONICS AND THE POWER OF DISCIPLINE!
  13. CHAPTER FIVE: ROCE and Cash Flow Analytics
    1. INTRODUCTION
    2. BASIC DRIVERS OF ROCE
    3. EXAMPLE 5-1: CALCULATING MAYFAIR COMPANY'S RETURN ON CAPITAL EMPLOYED
    4. EXAMPLE 5-2: ACHIEVING A TARGETED ROCE FOR THE RICHMOND COMPANY
    5. SOME PRACTICAL ASPECTS OF MANAGING RETURN ON CAPITAL EMPLOYED
    6. CASE STUDY: PHAROS CORPORATION—THE EARLY DAYS
  14. CHAPTER SIX: Strategies and Best Practices for Managing ROCE and Cash Flow
    1. INTRODUCTION TO MAXIMIZING RETURN ON CAPITAL EMPLOYED AND CASH FLOW
    2. BASIC PRICING-DRIVEN MODELS
    3. VALUE-ADDED MODELS
    4. INTRODUCTION TO FACTORS THAT IMPACT THE PERFORMANCE OF A COMPANY CORPORATE PERFORMANCE
    5. EXAMPLE 6-1: ESTIMATING THE R&D COST OF NEW TECH INC.'S NEXT GENERATION PRODUCT
    6. EXAMPLE 6-2: EXCEEDING CUSTOMER EXPECTATIONS
    7. DEPRECIATION AND AMORTIZATION
    8. EXAMPLE 6-3: DEPRECIATION OF ASSETS 7
    9. EXAMPLE 6-4: AMORTIZATION OF ASSETS
    10. EXAMPLE 6-5: CALCULATING BALANCE SHEET STATISTICS
    11. CASE STUDY: INNOVATIVE ENGINEERING CORPORATION
    12. PROLOGUE
  15. CHAPTER SEVEN: Productivity and Operating Margin
    1. PRODUCTIVITY
    2. CYCLE TIME
    3. CLOSING COMMENTS ON VALUE ADDED AND COST
    4. CASE STUDY
  16. CHAPTER EIGHT: The Expense Coverage Ratio
    1. THE EXPENSE COVERAGE RATIO
    2. CONCLUSION
    3. CASE STUDY: SAFETY SOLUTIONS CORPORATION
  17. CHAPTER NINE: Debt and Leverage
    1. INTRODUCTION
    2. DEBT AND LEVERAGE
    3. LIBOR AND PRICING LOANS
    4. DEBT FINANCING ALTERNATIVES
    5. CREDIT RATINGS 9
    6. RELATIVE COST OF DEBT FINANCING
    7. IMPACT OF DEBT ON RETURN ON CAPITAL EMPLOYED AND RETURN ON EQUITY
    8. EXAMPLE 9-1: IMPACT OF LEVERAGE ON CAPITAL STRUCTURE, ROCE, AND ROE
    9. FINANCIAL COVENANTS
    10. EXAMPLE 9-2: FINANCIAL PERFORMANCE COVENANTS
    11. CASE STUDY: EDSSON CORPORATION
  18. CHAPTER TEN: Understanding Financial Statements
    1. INTRODUCTION
    2. THE INCOME STATEMENT
    3. THE BALANCE SHEET
    4. SOME COMPLICATIONS
    5. CASE STUDY: LIGHT TECHNOLOGIES INC.
  19. APPENDIX A: Present Value Models
    1. PRESENT VALUE OF ANY STREAM OF CASH FLOWS 1
    2. PRESENT VALUE OF A CASH FLOW E THAT TAKES PLACE AT THE END OF YEAR n
    3. PRESENT VALUE OF THE TERMINAL VALUE OF A CASH FLOW AT THE END OF YEAR n
    4. PRESENT VALUE OF A STREAM OF FIXED CASH FLOWS E FOR n YEARS 2
    5. PRESENT VALUE OF A FIXED STREAM OF CASH FLOWS IN PERPETUITY (n = INFINITY) 4
    6. SINGLE-STAGE GROWTH MODELS
    7. PRESENT VALUE OF A STREAM OF CASH FLOWS THAT GROW AT A FIXED RATE FOR A FINITE PERIOD 5
    8. PRESENT VALUE OF A STREAM OF CASH FLOWS THAT GROW AT A FIXED RATE IN PERPETUITY 6
    9. GENERAL EQUATION FOR PRESENT VALUE OF SINGLE-STAGE CASH FLOWS THAT GROW AT A FIXED RATE
    10. MULTISTAGE GROWTH MODELS
    11. TWO-STAGE GROWTH MODELS
    12. THREE-STAGE GROWTH MODELS
  20. APPENDIX B: Business Valuation Models
    1. INTRODUCTION
    2. STREAM OF DISTINCT CASH FLOWS 1
    3. STREAM OF DISTINCT CASH FLOWS FOLLOWED BY A STREAM OF PERPETUAL FIXED CASH FLOWS
    4. STREAM OF DISTINCT CASH FLOWS FOLLOWED BY A STREAM OF FINITE FIXED CASH FLOWS
    5. STREAM OF DISTINCT CASH FLOWS FOLLOWED BY A STREAM OF PERPETUAL GROWTH CASH FLOWS
    6. STREAM OF DISTINCT CASH FLOWS FOLLOWED BY A STREAM OF FINITE GROWTH CASH FLOWS
    7. STREAM OF DISTINCT CASH FLOWS FOLLOWED BY A TERMINAL CASH FLOW
    8. INITIAL CASH FLOW SEQUENTIALLY FOLLOWED BY A FINITE PERIOD OF CASH FLOWS THAT GROW AT A FIXED RATE g FG AND A TERMINAL CASH FLOW
    9. INITIAL CASH FLOW SEQUENTIALLY FOLLOWED BY A FINITE PERIOD OF CASH FLOWS THAT GROW AT A FIXED RATE g FG AND A PERPETUAL FIXED CASH FLOW
    10. INITIAL CASH FLOW SEQUENTIALLY FOLLOWED BY A FINITE PERIOD OF CASH FLOWS THAT GROW AT A FIXED RATE g FA FOR N A PERIODS AND PERPETUAL CASH FLOWS THAT GROW AT A FIXED RATE g PB
    11. STREAM OF CASH FLOWS THAT GROW AT A FIXED RATE g A FOR N A PERIODS, FOLLOWED BY A STREAM OF CASH FLOWS THAT GROW AT A FIXED RATE g B FOR N B PERIODS, AND A STREAM OF PERPETUAL GROWTH CASH FLOWS THAT GROW AT A FIXED RATE g C
  21. APPENDIX C: Growth Models
    1. INTRODUCTION
    2. GENERAL COMPOUND ANNUAL GROWTH RATE MODEL
    3. GENERAL EXPRESSION FOR CFaIAg, THE GROWTH RATE OF CFaIA
    4. GENERAL EXPRESSION FOR NIg, THE GROWTH RATE OF NI
  22. APPENDIX D: General Equations for Estimating NI and CFaIA
    1. INTRODUCTION
    2. ROCE AND NiROCE 1
    3. THE GENERAL CASE FOR THE ENVELOPE EQUATIONS
    4. SPECIAL CASE: CONSTANT INVESTMENT RATE AND NET INCOME RETURN ON CAPITAL EMPLOYED
    5. SPECIAL CASE: FOCUS ON OPERATIONAL CASH FLOWS
    6. NET INCOME AND CASH FLOW GROWTH EQUATIONS
  23. APPENDIX E: R&D Growth and Investment Equation
    1. INTRODUCTION
    2. GENERATIONAL COST FACTOR
    3. PRODUCT LIFE CYCLE
    4. DEVELOPING AN EXPRESSION FOR THE COST OF THE NEXT GENERATION
    5. LIFETIME REVENUE FACTOR
    6. EXAMPLE E-1: CALCULATING THE R&D COST OF THE NEXT GENERATION
    7. GROWTH RATES AND PRODUCT LIFE CYCLES THAT SATISFY THE REQUIREMENT I CURRENT = I NEXT
    8. EXAMPLE E-2: DETERMINING g AND PLC WHEN I CURRENT = I NEXT
  24. APPENDIX F: Inventory Considerations and the EOQ Model
    1. INTRODUCTION
    2. COMPONENTS OF INVENTORY COSTS 1
    3. ECONOMIC ORDER QUANTITY
    4. SHORTAGE COSTS
  25. Selected References
    1. AUTHOR'S NOTE
  26. About the Author
  27. Index