Prof. Rushen Chahal
Managing for Shareholder Value
This chapter identifies methods to measure firm value and techniques that can be employed
to assure management and the firm‘s board of directors make decisions that increase the
value of the firm. Increases in firm value lead to increases in stock value, which aligns with
the firm‘s goal of maximizing shareholder wealth. Measures such as free
-cash flowvaluation, market value added, and economic value added can be used to evaluate the
performance. Management of the firm can be provided compensation incentives that guidetheir decisions toward increasing the value of the firm.
I. Top Creators of Shareholder WealthA. Market Value Added (MVA) measures wealth created by the firm1. MVA = Firm value
Firm value = market value of firm‘s outstanding debt and equity
securities3. Invested capital = total funds invested in the firmB. Value creation results from two activities:1. Identifying performance measures linked to value creation that are
under management‘s control
2. Designing incentives to encourage employees to base decisions onthese performance metrics.II. Business ValuationA. Accounting model1.
Focuses on firm‘s earnings
2. Assumes increases (decreases) in earnings will lead directly to increases(decreases) in stock price based on the price-earnings relationship