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ROI Final

ROI Final

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Published by: Neekita Dhakne on Apr 23, 2012
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Management Control System

Return On Investment
Group Members :Vinod Dhone. Neekita Dhakne. Aarti Kokate.

Points we are going to cover…  Meaning of Return on investment  Organizational Goals: Economic Goals Profits Profitability  Maximization of Shareholders Value .

.  To compare the efficiency of a number of different investments.MEANING A performance measure used to evaluate the efficiency of an investment.

500. then what is the ROI? 700000-500000 ROI= ----------------------*100 = 40% 500000 .g. ‘ABC’ Ltd arrange a new marketing program that is expected to cost Rs.000 in increased profits during the same time.700.How to Calculate ROI…??? E.000 over the next five years and deliver an additional Rs.

 Establishing goals of introducing a new model of car each year and providing the highest quality spare parts to customers will enable it to achieve that mission.Organizational Goals Organizational goals explain how an organization intends to go about achieving its mission. For example. a car manufacturer might identify its mission as increasing market share & making a profit. .

Economic Goals Market share Profit margin Return on investment Technological advancement Customer satisfaction Shareholder value.  Profit in the short run & value in the long run. .

Profits .

Profitability Factors      Degree of Competition Strength of Demand State of the Economy Substitutes Discriminate price .

” .Maximization of Shareholders value “Shareholder value is defined as the present value of free cash flows from now until infinity. discounted at a rate that reflects the risks of these cash flows.

.Conti… Position and power of Shareholders  Medium-sized or large corporations are owned by thousands of shareholders  Shareholders  Shareholders diversify holdings in many firms are concerned with performance of entire portfolio and not individual stocks.

Conti…  Most shareholders are not well informed on how well a corporation can do and thus are not capable of determining the effectiveness of management.. . a cash flow. i.e.  Not likely to take any action as long as they are earning a “satisfactory” return on their investment  Views the firm from the perspective of a stream of earnings over time.

 Future cash flows must be discounted to the present.Conti…  Must include the concept of the time value of money.  The discount rate is affected by risk. Rupees earned in the future are worth less than rupees earned today. .

All firms face business risk to varying degrees.Conti…  Two • • major types of Risks: Business Risk Financial Risk  Business Risk involves variation in returns due to the ups and downs of the economy. the industry. . and the firm.

 The higher the leverage.  Leverage is the proportion of a company financed by debt. the greater the potential fluctuations in stockholder earnings.Conti…  Financial Risk concerns the variation in returns that is induced by leverage.  Financial risk is directly related to the degree of leverage .

P= D1 (1+ k ) + (1+ k ) 2 + (1+ k )3 +  + (1+ k ) n D2 D3 Dn P = present price of the stock D = dividends received per year K = discount rate N = life of firm in years .Conti…  The present price of a firm’s stock should reflect the discounted value of the expected future cash flows to shareholders (dividends).

  Market value includes value of both equity &debt. While the market value of the company will always be positive.Market Value Added (MVA)  MVA represents the difference between the market value of the company and the capital that the investors have paid into the company. MVA may be positive or negative. .

If EVA is negative.(EVA)  EVA = Actual Profit – Expected Profit. .  If EVA is positive then shareholder wealth is increasing. then shareholder wealth is being destroyed.

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