At Trinity: DCF (Discounted Cash Flow), P / L accounts and shareholder value

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A series of anticipated (extra) benefits over the period is the ultimate result of a strategic investment. It starts with generating cash and after deducting differences in value and taxes, the net profit remains. Profit for the period, share capital (intrinsic value – what is really present), shareholder value (economic value – what could happen, in addition to existing activities or “the market value of the company’s shares” and cash flows, are all interrelated.

Everything that is known, including what is believed to be known about the future, should be dealt with in order to obtain the best possible starting data, for example estimates of future revenue between the lowest pessimistic levels and the lowest levels. optimistic upper limits. Investments, initial (pre-operational) expenses, operational costs, savings, additional income, etc., the figures that are given in the case of an investment proposal are well given. They are indicated in the quotes submitted, for example, but these quotes are by no means fixed agreements. The figures given are the result of calculations, estimates and expectations. Deviations are always possible. What is their effect? Which (small) deviations are important and which (large) deviations have only marginal significance? What are the essentials and what are the secondary issues? By means of the so-called Kendall method (Kendall, M., Multivariate analysis, Charles Griffin & Co., London, 1975), with which the parameters can be modified independently of each other, or by multiple discriminant analysis, one can search the sensitivity of the changes and therefore the most important changing parameters that deserve the greatest attention. It is not general information, but specific information that matters. As soon as the effect of a deviation is known, by means of a sensitivity analysis, the chances of such a deviation occurring should be considered. There are many methods available to do this; see probability theory, mathematical statistics and game theory.

The simulation calculations result in projected annual accounts, presenting the PAT, that is to say the profit after tax to be forecast; overall, this is a flight plan. Then it becomes a matter of careful monitoring. The calculated economic life (indeed calculated, not estimated) and all resulting calculations are subject to the dynamics of the company. At any time, management’s view of product life cycles will change, so the expected useful life of assets will vary over time. As soon as a data changes, all calculations must be discarded. Based on the new data set, new calculations need to be done. Management constantly needs up-to-date, clear and complete financial accounts that speak for themselves, contain proven numbers and show the future. These ex ante accounts are milestones on the way to the future. While walking on the road, ex post accounts are established for past periods and new data will generate new road signs for the road ahead.

To create more value for owners, VBM (Value Based Management or Value Based Measurement, aligning internal objectives with those of investors) presupposes an exact measurement of what is valued. The additional shareholder value, including current loans and liabilities, is – in its bare form – the NPV concept of the net cash flows resulting from an additional strategic investment. The investment, part owner’s capital and part debt, is a two-in-one. All active capital generates net cash inflows. Calculations should be based on full net cash inflows, full operating cash flow. Unquestionably, the net cash inflows and therefore the NPV at the standard net WACC are the basis, the foundation, the bottom line.

There is a lot of noise about WACC in the business literature. While there are many different WACCs proclaimed by famous authors (according to incomplete definitions, including fairness for example, when fairness is accidental market value), these are not good places to start. Indeed, such an arbitrary WACC is not an unequivocal measure of the cost of capital. The one and only standard WACC, measuring standard costs, just costs, that’s what matters, regarding my free downloadable article ‘The One and Only Standard WACC’ http://ssrn.com/abstract=756105.

“Profit” versus “capital charge” indicates “residual income”. The latter is called NVA. In fact, the VER (period) is the proven net profit over a given period minus the demand. Demand is that amount of profit, which is acceptable to executives and / or shareholders. Here it is, the capital charge (minimum demand) is WACC x invested capital. Very often the requests are not scientific matters. They will depend on many things, namely the risk of the investment, the level of production, the results of alternative investments, the state of the general economy, the level of interest rates, etc. All of this results in what should be considered NORMAL demand, for the time being, in this business.

The total balance is share capital (or owner’s capital) plus debt. There are HC-based tax reports in addition to those that are usually published. Compare these ‘de jure’ accounts with the real recurring accounts which are prepared only for the internal use of company executives, to help them manage. Suppose in the latter case there are different possible accounts, it could be this, it could be that, it would in itself be misleading information. Good management is not imaginable, anytime, anywhere, with accounts you choose.

My free downloadable article ‘A Trinity: DCF, P / L-accounts & Shareholder Value’ http://ssrn.com/abstract=864444, its reading is sufficient to give you an introductory, preliminary, yet fundamentally correct introduction and the same patterns can be repeated – when calculations are exercised regarding actual investments and / or actual businesses to be valued – including literally everything. Prepare Time to Study Business Economics VI Revolutionary ISBN 9781086355635 available at www.amazon.com

This book pushes the boundaries of knowledge and rewrites / improves major elements of business economics with 8 scientific perfections. One of them is the Profit Formula® and these 8 Scientific Perfections are explained in detail in this book. Schools / universities that ignore this book, they train totally wrong students in business economics course. Here is the content of the book:

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Written by Jan Jacobs.

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