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Free Cash Flow (FCF), Economic Value Added (EVA), and Net Present Value (NPV)

2014
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Release : 2014
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Book Synopsis Free Cash Flow (FCF), Economic Value Added (EVA), and Net Present Value (NPV) by : Ronald E. Shrieves

Download or read book Free Cash Flow (FCF), Economic Value Added (EVA), and Net Present Value (NPV) written by Ronald E. Shrieves. This book was released on 2014. Available in PDF, EPUB and Kindle. Book excerpt: The paper assists the user of DCF methods by clearly setting forth the relationship of free-cash-flow (FCF) and economic value added (EVATM) concepts to each other and to the more traditional applications of DCF thinking. We follow others in demonstrating the equivalence between EVA and NPV, but our approach is more general in that it links the problems of security valuation, enterprise valuation, and investment project selection. Additionally, our approach relates more directly to use of standard financial accounting information. Beginning with cash budget identity, we show that the discounting of appropriately defined cash flows under the free-cash-flow valuation approach (FCF) is mathematically equivalent to the discounting of appropriately defined economic profits under the EVATM approach. The concept of net operating profit after-tax (NOPAT), found by adding after-tax interest payments to net profit after taxes, is central to both approaches, but there the computational similarities end. The FCF approach focuses on the periodic total cash flows obtained by deducting total net investment and adding net debt issuance to net operating cash flow, whereas the EVATM approach requires defining the periodic total investment in the firm. In a project valuation context, both FCF and EVATM are conceptually equivalent to NPV. Each approach necessitates a myriad of adjustments to the accounting information available for most corporations.

Free Cash Flow (FCF), Economic Value Added (EVATM), and Net Present Value (NPV)

2017
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Release : 2017
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Book Synopsis Free Cash Flow (FCF), Economic Value Added (EVATM), and Net Present Value (NPV) by : Ronald E. Shrieves

Download or read book Free Cash Flow (FCF), Economic Value Added (EVATM), and Net Present Value (NPV) written by Ronald E. Shrieves. This book was released on 2017. Available in PDF, EPUB and Kindle. Book excerpt: The paper assists the user of DCF methods by clearly setting forth the relationship of free-cash-flow (FCF) and economic value added (EVATM) concepts to each other and to the more traditional applications of DCF thinking. We follow others in demonstrating the equivalence between EVA and NPV, but our approach is more general in that it links the problems of security valuation, enterprise valuation, and investment project selection. Additionally, our approach relates more directly to use of standard financial accounting information. Beginning with cash budget identity, we show that the discounting of appropriately defined cash flows under the free-cash-flow valuation approach (FCF) is mathematically equivalent to the discounting of appropriately defined economic profits under the EVATM approach. The concept of net operating profit after-tax (NOPAT), found by adding after-tax interest payments to net profit after taxes, is central to both approaches, but there the computational similarities end. The FCF approach focuses on the periodic total cash flows obtained by deducting total net investment and adding net debt issuance to net operating cash flow, whereas the EVATM approach requires defining the periodic total investment in the firm. In a project valuation context, both FCF and EVATM are conceptually equivalent to NPV. Each approach necessitates a myriad of adjustments to the accounting information available for most corporations.

Economic Value Added: A Detailed Walkthrough

2013-02-20 Business & Economics
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Release : 2013-02-20
Genre : Business & Economics
Kind : eBook
Book Rating : 83X/5 ( reviews)

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Book Synopsis Economic Value Added: A Detailed Walkthrough by : Cornelius Kirsche

Download or read book Economic Value Added: A Detailed Walkthrough written by Cornelius Kirsche. This book was released on 2013-02-20. Available in PDF, EPUB and Kindle. Book excerpt: Essay from the year 2013 in the subject Business economics - Investment and Finance, grade: 2,0, International University of Applied Sciences, course: Current Issues in Accounting & Finance, language: English, abstract: In the past, key financial instruments were focusing on concepts like the return on investment, return on equity and return on capital employed. However, within recent years, the flaws of the named ratios made it difficult to thoroughly rely on such figures any longer. As one key drawback connected to those solely finance-related ratios was that all non-financial aspects are missed out on. Further, the economic value creation was not respected in past models. EVA®, economic value added, is a concept on the rise that counteracts the flaws of recent financial ratios. By accounting for both the capital charges for investors and creditors, it allows a more sophisticated look into the value creation of a company. However Stern Steward & Co, who founded EVA®, give recommendations, so called adjustments, in order to make EVA® even more effective as it is without. As economic decision are not only covered by introducing a new ratio, it is important to contrast and to integrated EVA® to other frequently used financial models. Here, the net present value calculation is used most when evaluating on whether or not to take on a project. Now, the author shows that EVA® even can be used for net present value calculations, which is usually done by taking into consideration future cash flows. Further, economic profit is not all a modern business has to care about. In this respect, cash management has evolved in becoming a crucial cornerstone in financial management. Hence, the author has compared the cash conversion cycle to the EVA®. The questions is, does liquidity also affect the EVA® result? Finally, the author concludes on whether or not EVA® can be regarded as ‘the one financial ratio’ an how it interplays with other important models used in modern companies.

The relevance of Discounted Cash Flow (DCF) and Economic Value Added (EVA) for the valuation of banks

2004-07-28 Business & Economics
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Release : 2004-07-28
Genre : Business & Economics
Kind : eBook
Book Rating : 229/5 ( reviews)

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Book Synopsis The relevance of Discounted Cash Flow (DCF) and Economic Value Added (EVA) for the valuation of banks by : Dennis Schön

Download or read book The relevance of Discounted Cash Flow (DCF) and Economic Value Added (EVA) for the valuation of banks written by Dennis Schön. This book was released on 2004-07-28. Available in PDF, EPUB and Kindle. Book excerpt: Bachelor Thesis from the year 2003 in the subject Business economics - Investment and Finance, grade: 1,3 (A), Northumbria University (Newcastle Business School), language: English, abstract: This study investigates the underlying theories and assumptions of two modern capital market-based valuation approaches, the Discounted-Cash-Flow (DCF) and the Economic-Value-Added (EVA) approach, which are nowadays applied principally for industrial and manufacturing firms. This general examination is then transferred into a more specific investigation exploring whether these valuation concepts can be applied to the strongly regulated and more specific field of bank valuation. A questionnaire addressing bank analysts was created to analyse this question. The project indicates that the ideas of shareholder value which have been enforced over the last decade have implemented the need for a more shareholder-focused valuation. The application of DCF is basically attributed to this movement. It is revealed that this concept uses cash flow streams which depict a more realistic picture of an organization’s true earning power. Moreover, it employs a discount rate based on the capital market and thus reflecting the yield expectations of the investors. EVA, on the other hand is a relatively new concept, copyrighted in 1994 by Stern Stewart. It highlights an organization’s true economic profits. The study examines its components NOPAT, Capital and Cost of Capital, establishes a relation to DCF, points out some general limitations due to the fact that it falls back on accounting figures and critically assesses its dependence on the CAPM whose inherent assumptions of efficient markets that are not transferable into reality, might affect the valuation. The primary research undertaken finally reveals that the concepts of DCF and EVA are basically suitable to be applied to the valuation of banks. However, there are some peculiarities, primarily due to difficulties associated with the definition and measurement of debt and reinvestments which make slight adjustments in the valuation process indispensable. Nevertheless, the end result is just as effective as in other industries.

Performance Measures in Value Management

2002 Industrial management
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Release : 2002
Genre : Industrial management
Kind : eBook
Book Rating : 352/5 ( reviews)

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Book Synopsis Performance Measures in Value Management by : Otto Max Schaefer

Download or read book Performance Measures in Value Management written by Otto Max Schaefer. This book was released on 2002. Available in PDF, EPUB and Kindle. Book excerpt:

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