ITM - Institute of Financial Market

 
A 
PROJECT REPORT
 ON

  Submitted by: Tanay Sinha

Roll No. 38
PGDM‐FM: 2008‐10
 To study the various methods to measure the shareholders value.
 Analyze how the intrinsic values affect the shareholder value.
 To identify the key drivers that drive shareholders value.
 To analyze shareholders value across Time, Cross Section and
Sectors.
 Shareholders want good return, hence organizations main focus
should be on enhancement of the shareholder value .
 Shareholder Value is the part of its capitalization that is equity as
opposed to long-term debt.
 In a vehicle as it is very important to know what drives it, in the
same way it is also necessary to know what factors increase or
decrease the shareholder value.
 Many firms use the book value of capital invested as their measure
of capital invested. To the degree that book value reflects
accounting choices made over time, this may not be true.
 In cases where firms alter their capital invested through their
operating decisions (for example, by using operating leases), the
capital and the after-tax operating income have to be adjusted to
reflect true capital invested.
 The accounting definition of return on capital may not reflect the
economic return on capital.
 In particular, the operating income has to be cleansed of any
expenses which are really capital expenses (in the sense that they
create future value). One example would be R& D. The operating
income also has to be cleansed of any cosmetic or temporary
effects.
 Economic Value Added 

 EVA is the difference between return achieved on resources

invested and the cost of resources.
 Higher the EVA, better the level of resource utilization.
 EVA = (r-c)*K = NOPAT – c*K
 Where
r -  is the firm's return on capital, 
NOPAT-  is the Net Operating Profit after Tax, 
c - is the Weighted Average Cost of Capital(WACC) and 
K - is capital employed
Dependent Variable on the basis of Market Value
 Market Value Added
 Market Value Added (MVA) is the difference between the
current market value of a firm and the capital contributed by
investors.
 It is the sum of all capital claims held against the company plus the
market value of debt and equity. 
 The higher the Market Value Added (MVA) is, the better it is. 
 If MVA is positive, the firm has added value.
 If it is negative, the firm has destroyed value.
 The formula for MVA is:
 MVA = V – K
 Where
V is the market value of the firm , including the value of the firm's
equity and debt
K is the capital invested in the firm
 Stock Return
 The size premium is due almost entirely to the extreme positive
returns of small stocks that move to a big stock portfolio from
one year to the next.
 Three factors contribute to the value premium.
 Plus transition, with their high returns, occur more often for
value stocks than for growth stocks.
 Minus transitions and their low returns are more likely for
growth stocks.
 Value stocks that remain in the same portfolio from one year to
the next have higher average returns than the matching (small
or big) growth stocks.
 Small growth stocks are more likely than small value stocks to
move to a big portfolio from one year to the next.
 The average returns from these size transitions are huge, and
their greater weight in the small growth portfolio pushes up its
average return and lowers the value premium
 Sales Growth
 Forecasting sales is necessary because it is the future neither
current, nor past - cash flow and revenue that analysts must
look at.
 Expansion of existing sales involves major promotional
campaigns or expansion of an existing plant.
 Introduction of new products is the most risky of all projects
for the firm because the firm will have to deal with unfamiliar
customers and competitors.
 The gross profit is the difference between the sales revenue
and cost of goods sold.
 Gross Profit Margin = (Sales revenue - cost of goods sold)/
Sales revenue
 Profit margin is the end result of unit cost and volume
strategies.
 Firms do not necessarily set total revenue as their goal instead
it is profit that they seek to maximize at the point where
marginal revenue is equal to margin cost.
 Net Margin
 A company's profitability is very often evaluated by comparing
earnings to sales rather than to investment.
 This is done in order to judge management's strategy with
respect to administrative, general and overhead expenses.
 Interest
 Interest expense was analyzed from the stand point of
determining if the firm will be able to borrow in the future.
Here the concern is whether the interest expense is in line with
management strategy.
 Compensation for loss of purchasing power, i.e. inflation
 Compensation for the non-use of money
 Liquidity preference
 Length of contract
 Monetary policy impact
 Market risk premium
 Taxes
 The corporate income tax reported in the income statement is not the actual tax
paid.
 The actual tax liability is calculated on the income tax return with all tax rules on
income recognition and allowable deductions that are permitted and most
advantageous to the firm.

 Asset Turnover
 FAT = Sales / Fixed assets
 This ratio is compared over several years and with other companies in the industry.
 TAT = Sales / Total assets
 This approach is often conducted in the context of the DuPont break out. A low
ratio compared to prior years and other firms in the industry may be indicative of
inefficiency (i.e. the company may have assets that are fully utilized). A high ratio
compared to industry or prior years may be indicative of excessive use of assets
that may result in breakdowns.
 Leverage
 The degree to which an investor or business is utilizing borrowed
money.
 Leverage is not always bad, however; it can increase the
shareholders' return on their investment and often there are tax
advantages associated with borrowing also called financial leverage.
 Cost of Capital
 Potential default
 Bankruptcy potential cost
 Minimum average cost of capital
 Size of Company
 Size also influences shareholders value because there is an
economy of scale in issuing larger loans. A large business will have
an easier time to borrow and a lower rate.
 Net profit margins and size of companies
 Return on equity and size of firms
 Sensex
 In the stock market, share prices are dependent on so many
factors. So, it is hard to point out just one or two factors that
affect the price of the stocks. There are still some factors that
are that directly influence the share prices.
 Demand and Supply
 News
 Market Cap
 Earning Per Share
 Price/Earnings Ratio
 Gross Domestic Product
 Buy in an emerging market sell in the established capital markets.
On the surface, the formula for arbitrage success appears fairly
straightforward.

 Wholesale Price Index

 Inflation is a rise in the general price level over a period of time.
 In any economy, prices are rising and falling all the time - some rise
by quite a lot and others will fall.
 This is not just the prices in shops for food but also prices of things
like insurance for both individuals and businesses, the prices of raw
materials like oil, copper and steel, tuition fees for education at
university and the price we pay for different sorts of
entertainment like the cinema.
 Ownership Patterns
 Current shareholders and prospective purchasers of shares of a
corporation are those for whom financial statements are
primarily intended, along with auditor's opinion and other text
describing company's financial position.
 Minority and majority shareholders 
 Small shareholders
 Minority shareholder
 Majority shareholders

 Company’s global linkages

 Trade is growing, and growing lighter; exports are expanding
primarily by reaching new markets with smaller shipments; and
fragmented production networks are becoming the norm. All of
these changes put a premium on speed, on flexibility, and on
information, increasing the potential for transmission of shocks
between trading partners.
 FOREX Earning
 When there is less autonomy, and management of the company
has to report to an owner which delegates only a portion of the
responsibilities, then the processes of decision making and
analysis occur in two different locations.
 FOREX Expenses
 Hedging can contribute greatly to a company's success and value
creation. Corporate treasury risk management is as much similar
to art as science given the company specific mix of numerous
hard and soft factors that determine the appropriate approach.
 Hedging has the potential to create significant value, but it also
has the potential to destroy value if it is not based on an
appropriate strategy.
 Foreign Direct Investment
 FDI is associated positively with output growth because it
either increases the volume of investment and/or its
productivity or thus puts the economy on a path of higher long-
term growth.
 From these results, we may infer that investors were uncertain
concerning the strength of the put provision in any particular
covenant.
 On average, equity investors restored some of the risk premia
when ratings indicated weak protection for bondholders.
 Likewise, equity investors surrendered premia when these
ratings indicated the strongest protection existed.
 The market appears to have been less than perfectly efficient
in determining the impact of the super poison put innovation.