Corporate finance and governance perspective, Corporate Finance

From a Corporate Finance and Governance perspective, the IMP is about answering three fundamental questions:

1. How much value does the organisation create/destroy today?

2. What are the options (investment decisions) available to management to increase the future value created by the organisation?

3. What are the key priorities (actions) which should be recommended to management?

To answer all three questions appropriately, you need to refer to an analytical framework, a tool enabling you to:

1. Define the concept of Value;

2. Identify the key Value Drivers;

3. Calculate them based on the information disclosed in the organisations' financial statements (position today);

4. Project them into the future, making sound and justified assumptions about operational improvements or new opportunities for investment (position in the future);

5. Rank them in order of contribution to future value creation for the organisation (recommendations to management)

6. Identify any relevant governance issues related to your evaluation. As we discussed during the CFG module, an organisation (or a project) creates value when it generates positive (higher than 0) cumulative free cash flows, discounted at a rate (the cost of capital) appropriate for the organisation/project. The tool that will help you in identifying the determinants of future free cash flows is the Strategic Value Analysis (SVA) framework. To determine the current financial position of an organisation or a business unit, you will need to derive its Value Drivers from the financial statements or from the information available to you. If you are dealing with a project, the starting point will be the initial investment needed to generate future incremental free cash flows. Then you will need to calculate the discount rate, the weighted average cost of capital (WACC), to bring the future free cash flows back to present values.

Sometimes it can be particularly hard to find all the relevant information: do not be afraid to make assumptions, just remember to state them. If the financial information available to you is too limited... well, look at another organisation or project. You need to be familiar with the organisation or project, but this does not imply that it is your organisation or your project. Once again, remember to state your perspective of analysis as an employee, a consultant or an analyst.

EBITDA

- Cash Taxes

= Operating cash flows

- RFCI: Replacement Fixed Capital Investment

- IFCI: Incremental Fixed Capital Investment

- IWCI: Incremental Working Capital investment

= Free Cash Flows to the Firm

Estimating free cash flows: the Value Drivers.

CASH PROFIT GENERATION

INCREMENTAL CASH NEEDED

Once you have defined the starting point of your analysis, you need to stretch the Value Drivers into the future (3-5 years or longer, if necessary). By changing the relevant Value Drivers according to the strategic direction of the organisation and the influence of the global business environment, you will be able to model the impact of managerial options on the net present of future cumulative cash flows. This process can be applied to the entire range of managerial investment decisions, from operational improvements to new incremental projects (including mergers, acquisitions and divestitures).

The Value created will result from the incremental free cash flow generated by each single option valuated, compared to a base case scenario (status quo). A basic sensitivity analysis will help you to quantify the role of uncertainty on future investment decisions. This should be underpinned by a discussion of and reasons for making assumptions in your evaluation. Your recommendations to management will be consistent to the quantitative outcomes of your SVA analysis.

Posted Date: 3/6/2013 2:13:38 AM | Location : United States







Related Discussions:- Corporate finance and governance perspective, Assignment Help, Ask Question on Corporate finance and governance perspective, Get Answer, Expert's Help, Corporate finance and governance perspective Discussions

Write discussion on Corporate finance and governance perspective
Your posts are moderated
Related Questions
In the apparel industry, three prominent developments contribute to the complexity of forecasting: shortening product life-cycles, increasing product variety, and globalization of

What will be impact on the operating leverage of a firm, if it proceeds for additional borrowings?

A tax rate of 20% has been introduced in the Frog Islands Republic. The value of Sun corporation is now 100.000€. Bright Star Co. debt has no changed. The required rate of return t

how do you calculate it

impact of real and nominal discount rates in capital budgeting

Cooper Toys sells a portable baby stroller called the Tot n' Trot. The past two years of demand for Tot n'Trots are shown in the table below. Use an appropriate method to forecast

Company X produces tea kettles, which it sells for $12 each. Fixed costs are $650,000 for up to 400,000 units of output. Variable costs are $8 per kettle. a. What is the

A owns all of the X stock with a basis of $200. A's three sons own all of the Y stock equally. X and Y each have E&P of $100, respectively. A sells one half of the X stock to Y

Some aggregate figures concerning the available data are shown in Table 1. The sizes of both the assortment groups and the product groups vary greatly across the groups. In Season

Ask que We are evaluating a project that costs $800,000, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the pr