Ch. 13:
Managing for Shareholder Value
2002, Prentice Hall, Inc.
Top Creators of Shareholder Value
1999
invested cost of
MVA capital return capital
Microsoft 328,257 10,954 56.16% 12.64%
Gen Elect 285,320 65,298 19.29% 11.92%
Intel 166,902 23,626 35.44% 12.92%
Wal-Mart 159,444 36,188 13.24% 9.82%
Coca-Cola 157,536 13,311 31.22% 11.24%
Market Value Added
MVA = Firm Value - Invested Capital
Firm value = market value of the firm’s
outstanding debt and equity securities.
Invested Capital = the sum total of the
funds that have been invested in the firm.
Value Creation
•The combination of opportunity and
execution.
•Opportunities must be recognized, and
•Employees must be ready, willing and
able to take advantage of the
opportunities.
Business Valuation:
The Accounting Model
•Using the P/E ratio:
•If a firm’s P/E ratio is 20, then a dollar
increase in earnings per share will create
$20 in additional equity value per share.
•Problem: ignores R&D, which would
reduce earnings per share, but should
increase future earnings!