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© MARGA

A Business Simullations GmbH, Scchloss Gracht

Reviewing Company Performance
MARGA Business Simulation 
@ Nokia – Networks: 
Leading with Influence I
MARGA Business Simulations
Schloss Gracht, D-50374 Erftstadt
Phone : +49 (0) 2235 / 406 364
Phone.:
E-mail: info@marga.de

Parameters of the Capital Markets The globalized capital markets have massively increased performance pressure on  companies. • Globalisation of capital markets (greater variety of investment possibilities) • Transparency of capital markets (more selection possibilities) Increased requirements of capital investors Increased Competition for investment capital • Open communication and information according to international standards • Minimum request is a risk-adjusted return on the invested capital Value Based Corporate Management © MARGA Business Simulations GmbH page 2 .

MARGA Value Added A company gains value when the income exceeds the capital costs. Equity Debt EBIT ((Earnings g before Interest and Taxes) © MARGA Business Simulations GmbH Cost of Capital MARGA Value Added page 3 .

• without financing issues • without tax effects.EBIT EBIT shows the operating income • without extraordinary and onetime effects. Advatage: • Focus on the operational g strength • Easier to compare © MARGA Business Simulations GmbH page 4 .

Return rate in % Capital costs in EUR Interest bearing Interest-bearing capital in EUR Consider C id equity it and d debt d bt with different risk levels.Capital Costs A company´s cost of capital is the total cost for both equity and debt. They depend on  investment risk. Return rate in % Cost of equity Cost of debt Interest-bearing p in EUR capital © MARGA Business Simulations GmbH page 5 . The interest rate is determined b the by h capital i l markets k and varies according to the investment risk.

Interest rate High risk / low credit rating Market rule: High risk leads to low credit rating leads to high interest rate Factors influencing credit rating: • Gearing/Leverage (debt-equity ratio) • Amount of equity • Net income • cash flow over debt (pay-back ability) © MARGA Business Simulations GmbH • Management quality • Productivity • Product technology • Customer satisfaction page 6 .Cost of Debt The interest rate for debt depends on the risk the loan creditor is disposed to considering • Loss or delay of interest payments and • Loss or delayy of the loan value itself.

Cost of Equity The equity yield mirrows the requirements of risk‐appropriate interest calculation. i but diversified portfolio Risk p premium Risk-free return Capital Asset Pricing Model © MARGA Business Simulations GmbH =1 Beta-factor (Risk measure) page 7 . E it yield Equity i ld = risk-free i kf return t rate t + risk i k premium i Equity return t off a company Requested minimum return f a risk-carrying for i k i share h Return of a riskcarrying.

Weighted Average Cost of Capital (WACC) The weighted average cost of capital „WACC“ equals the return rate which the capital market  expects from the company. Return rate in % Total capital costs (EUR) = Interest-bearing capital (in EUR) x WACC (in %) Expected equity yield WACC Interest rate for debt Cost of equity Cost of debt The capital costs are the amount of cash the capital markets expect … …as payback on interest-bearing capital …according di tto th the company´s specific risk profile. Interest-bearing capital in EUR © MARGA Business Simulations GmbH page 8 .