Cover image for Economic value added : the practitioner's guide to a measurement and management framework
Title:
Economic value added : the practitioner's guide to a measurement and management framework
Author:
Savarese, Craig.
Personal Author:
Publication Information:
Warriewood, N.S.W. : Business + Publishing, [2000]

©2000
Physical Description:
xviii, 397 pages : illustrations ; 24 cm
Language:
English
ISBN:
9781875889310
Format :
Book

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HG4028.V3 S28 2000 Adult Non-Fiction Non-Fiction Area
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Summary

Summary

The shareholder value creation philosophy is a central element in many companies' financial management practices. A widely adopted approach to measuring financial performance and managing for value creation is economic profit (economic value added). A deceptively simple concept, companies often are not prepared for the challenges and issues they need to consider when measuring economic profit, nor for how to incorporate it into financial management practices. This book addresses these challenges by: developing a framework for linking economic profit to shareholder value; explaining the issues relevant to developing a company-specific economic profit measure; and demonstrating how to incorporate economic profit into financial management practices.


Table of Contents

Prefacep. ix
Acknowledgmentsp. xii
List of Figuresp. xiii
List of Tablesp. xv
Part 1 Understanding Economic Profitp. 1
1. What is Economic Profit?p. 3
Why economic profit measurement?p. 4
Performance measurement and shareholder valuep. 6
Defining economic profitp. 9
Computing economic profitp. 12
2. Economic Profit and Valuep. 15
Single-period economic profit and free cash flowp. 16
Free cash flow valuationp. 18
Economic profit valuationp. 20
Is positive economic profit the goal?p. 23
3. Linking Economic Profit to Shareholder Wealthp. 27
Economic profit forecastingp. 30
Terminal value and economic profit valuationp. 37
Economic profit growth forecastingp. 38
Validating the resultsp. 49
4. Measuring Shareholder Wealth Creationp. 61
Expectations and market valuep. 62
Expected shareholder returnp. 64
Excess shareholder returnp. 67
Which company creates more wealth?p. 75
Part 2 Measuring Economic Profitp. 77
5. Defining Financial Statement Adjustmentsp. 79
Determining where to measure economic profitp. 81
Applying economic profit to each type of centrep. 83
Adjustments and performancep. 85
Adjustments and behaviourp. 87
6. Financing Adjustmentsp. 99
Borrowingsp. 101
Non-borrowing liabilitiesp. 104
7. Fixed (Tangible) Assetsp. 107
What an asset costsp. 108
Plant and equipment depreciationp. 110
Plant, equipment and property asset valuesp. 119
8. Intangible Assetsp. 133
Internally generated identifiable intangiblesp. 134
Intangible asset expendituresp. 135
Intellectual capitalp. 144
9. Acquisitions and Major Investment Programsp. 153
Goodwill from acquisitionsp. 154
Deferred goodwill accountp. 157
10. Off-Balance Sheet Assets and Non-Current Investmentsp. 175
Off-balance-sheet assetsp. 176
Non-current investmentsp. 188
11. Other Adjustmentsp. 201
Taxesp. 202
Non-operating assetsp. 211
Abnormal and extraordinary itemsp. 216
Asset provisionsp. 226
Miscellaneous adjustmentsp. 229
12. The Cost of Capitalp. 231
Calculating the cost of capitalp. 232
Business unit cost of capitalp. 242
Practical considerationsp. 246
Dividend imputationp. 247
Maintaining the cost of capital each yearp. 253
13. Developing a Company-Specific Economic Profit Formulap. 257
Steps for identifying adjustmentsp. 258
Keeping it simplep. 263
Improving implementationp. 265
Part 3 Economic Profit and Financial Managementp. 267
14. Measuring Performance Within a Companyp. 269
Economic profit measurement at profit and cost centresp. 270
Cost allocations and transfer pricingp. 273
Performance driversp. 280
15. Management Practices Using Economic Profitp. 291
The financial management cyclep. 292
Financial objectives in planning and budgetingp. 294
Business financial planningp. 300
Decision making and financial analysisp. 313
16. Economic Profit-Based Management for Revalued Assetsp. 325
Market value added implicationsp. 327
Implications for financial management practicesp. 332
17. Management Variable Pay Plansp. 337
Traditional variable pay plansp. 340
Shareholder-focused cash variable pay plansp. 349
18. Making Economic Profit a Realityp. 361
Improving implementation successp. 362
How to proceedp. 363
Future directionp. 366
Appendixp. 369
Suggested readingsp. 387
Indexp. 391