Jyoti Gupta - Financial Objectives: Value Creation for Firms

Financial Objectives: value creation for firms

Jyoti Gupta

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Financial objectives

Value creation: EVA; MVA. Return on capital employed. Return on Equity. Market value/ Book value.

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Introduction

The annual report of the should indicate clearly: the vision of the company, and it should include some indication of the main objectives of the firm. With the globalization of the shareholding of firms, the shareholders are becoming the central focus. The Focus is shifting on value ti

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Major financial objectives

Growth in Net income of the company. Growth in the EPS. Growth the assets of the company. Maximizing the corporate wealth. Maximizing the Shareholders wealth.

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Income Statement

Sales + other revenues Total sales revenues -Variable costs -Sales and administrative costs = EBITDAR (Earnings before interest, taxes, depreciation and amortization and rentals).

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Income statement

- Rentals = EBITAD (Earnings before income, taxes, amortization and depreciation) -Amortization and depreciation =EBIT - Net interest payment =EBT

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Income statement

-Exceptional expenses/income -Tax =Net Income NOPAT=EBIT(1-T) T= corporate tax rate. NOPAT= The net income of the company if the firm was only equity funded, and if no exceptional expenses were incurred.

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Balance sheet

Cash & marketable securities Short term financial debts (Overdraft facilities, credit lines…) Trade related payables Medium & long term debts Shareholders equity

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Receivables Inventories Fixed assets

Balance sheet

Current assets=( Cash & marketable securities + Receivables + Inventories). Current Liabilities = Short term debts + trade payables. Working Capital (WC) = Current assets – Current liabilities Operating working capital (OWC) = Receivables + Inventories – trade Payables.

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Return on Equity

ROE = NI/Shareholders equity. ROE should be compared with the cost of equity. ROE > Cost of equity. Cost of Equity = Return expected by the...