Article Abstract:
Shareholder value has become a popular financial measure for corporations. Otherwise known as free cashflow analysis, shareholder value analysis (SVA) is deemed as a more realistic approach of determining corporate value, as compared to such accrual-based accounting standards as earnings per share and return on equity. Using SVA, companies can explicitly quantify how the value of their business is affected by their strategies, such as mergers and acquisitions, capital expenditures, and R&D. The three main ingredients of SVA are cash flow, cash as measured throughout a particular timeframe, and risk or cost of capital. Companies that embrace SVA should see to it that it is implemented at all levels of their organization to ensure that managers share the same economic interests as their shareholders.
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Article Abstract:
Internal financial planning and control systems are often the biggest obstacles that prevent the top management of a company from appreciating the need to adopt value-creation perspectives that can ensure that shareholder value is safeguarded. A key reason for this is that such internal financial controls are often erroneously used as a basis for determining executive compensation even though the system does not accurately reflect value creation. In addition, these internal financial controls are also extremely oriented to the short-term, hence they encourage executives to strive for short-term results rather than long-term value. Moreover, these internal financial controls often lead executives to misunderstand the key principles of value creation.
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Article Abstract:
A corporation's value may be estimated by shareholder value analysis (SVA), a variation of discounted cash flow (DCF) analysis. DCF is often used to evaluate capital allocation projects. Two broad measurements of value are used in SVA: expected cash flow and the cost of capital or discount rate reflecting minimum returns expected by shareholders. The benefits of SVA include: providing a consistent basis for capital allocation decisions; avoiding accounting measures never intended for future investment decisions; minimizing corporate game-playing over budgeting and planning; and providing a standard investor communications vehicle. Management can anticipate probable market reaction to its plans with SVA and evaluate business units more effectively.
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