CHAPTER FIFTEEN
Budgeting Shareholder Value
INTRODUCTION
Businesses that want to grow their market shares, or at least to be competitive in their markets, must improve productivity, foster innovation, and strive toward enhanced customer satisfaction. Businesses that want to grow, as manifested by these objectives, must increase investment now for the future.
As the source of much of this required funding, shareholders assess the potential increase in “value” of their investments in a business when deciding whether to invest. This assessment is based on their anticipated return and the risk they associate with it.
It is vital, then, for firms to focus on shareholder satisfaction by understanding what is important to this stakeholder. In this manner, the drivers of intrinsic value (or shareholder value) of the firm can be discerned and its value managed.
Purposes
Shareholder value provides the valuation of a business. The principal purposes of implementing (period) performance measurement of shareholder value are to:
- Provide an economic measurement of business performance from the perspective of the shareholder
- Supplement traditional accounting-based measures of business performance with cash flow valuation
- Provide proper vehicles for achieving management objectives and decisions—including the planning process, resource utilization, and employee compensation—that drive creation of value
- Provide a link between period performance metrics and ...
