1. FIN-690 / Dr. Mo Vaziri “VALUATION” Chapter 4: “Metrics Mania: Surviving the Barrage of Value Metrics” Ｙｕｚｏ Ｔｏｂｉｓａｋａ

2. 1. What is “Metrics”?” Mathematics: A mathematical function defined for a coordinates system that associates properties to each pair of elements that are analogous to distance between points on a line

3. 2. What does it mean this Chapter?: Knowing what we are measuring and using right measures for managerial control and performance valuation.

4. 3. What are the measurements and objects discussed? (1) Stock Price Performance: Measurements from market for shareholders. (2) Intrinsic Value: Irrelevant to market measurement for managers. (3) Financial Indicators: Also good for managers when combined with above “(2)”for short ~ medium term. (4) Value Driver: Indirect measurements and indicators of business strength and can be combined with “(3)” as measurements for managerial targets

5. (1) Stock Price Performance: Measurements from market for shareholders. TRS (Total Return to Shareholders): The sum of dividend and share price appreciation. “Share prices can be affected by market and sector movements”. MVA (Market Value Added): Market value of stock – Equity capital supplied by shareholders = Share outstanding x Stock Price – Total common equity (net worth) = Market premium on liquidation value. Expressed often as market-to capital ratio (Value by Entrepreneur: Value of undertaken assets from shareholders). “Share prices can be affected by market and sector movements in short term.” “Market treadmills” and “Side effects from stock option”. “Need market! Has to be publicly traded””

6. (2) Intrinsic Value: Irrelevant to market measurement for managers. - DCF (Discounted Cash Flow): Cash flow discounted at rate that reflects the (opportunity) cost of capital. - EVA (Economic Value Added) = NOPAT (Net Operating Profit After Tax) – After Tax dollar cost of capital used = EBIT (1-Tax Rate) – (Operating Capital) x (After Tax Percentage Cost of Capital) = (Operating Capital – WACC). - CFROI (Cash Flow Return On Investment) = IRR of “NOPLAT + depreciation” from gross investment to PPE (property, plan and equipment) “Can be used for privately held companies or business units”

7. (3) Financial Indicators: Also good for managers when combined with above “(2)”for short ~ medium term. »- Economic Profit = Invested Capital x (ROIC) – WACC): The value created in a company in a single period. Spread between the return on invested capital and the cost of capital times amount of invested capital. »- ROIC (Return On Invested Capital) = NOPLAT (Net Operating Profit less adjusted tax) / Invested Capital = NOPAT [EBIT x (1-Tax rate)] / *Operating Capital »*Operating Capital = Net Operating Working Capital (Cash + Account Receivable + Inventory – Account Payable + Accrual) + Operating Long Term Assets. »- EPS (Earning Per Share) = Net Income / Number of Outstanding Share »- Profit Margin = Revenue – Cost of Revenue.

8. (4) Value Driver: Indirect measurements and indicators of business strength and can be combined with “(3)” as measurements for managerial targets. - Market Share: Indicator of performance and market influence. - Cost per unit: Indicator of operating efficiency and cost competitiveness. - R&D Value: Indicator of future market leadership. Much More!

9. 4. Question: Can discount method used for the past performance? Yes! We can review the marginal change of the past performance measured by discount method.

10. Case-1 Term-5-4-3-20Total Year199519961997199819992000 Cash Flow-In 40 200 Cash Flow- Out -100 Net Cash flow -10040 100 IRR29% NPV(10 %) 152

11. Case-2 Tern-5-4-3-20Total Year199519961997199819992000 Cash Flow- In 2030405060200 Cash Flow- Out -100 Net Cash flow -1002030405060100 IRR23% NPV(10 %) 144

12. Case-3 Year 199 5 19961997199819992000Total Cash Flow-In 6050403020200 Cash Flow- Out -100-100 -100 Net Cash flow -100-100 6050403020100 IRR 36 % NPV(10% ) 159

13. Period-5-4-3-201Total Year1995199619971998199920002001 Cash Flow -In 40 240 Cash Flow -Out -100 Net Cas h flow -10040 140 IRR33% NPV17415

14. Case-5 Period-5-4-3-2012Total Year1995 199 6 199719981999 200 0 20012003 Cash Flow- In 40 280 Cash Flow- Out -100 Net Cash flow -10040 180 IRR35% Marginal Performance 2%2% NPV19521 Marginal Performance 5

15. Case-6 Period-5-4-3-2012Total Year 199 5 199 6 199 7 199 8 199 9 200 0 200 1 200 3 CF-In40 280 CF-Out -100-100 -100 Net CF -100-100 40 180 IRR 35 % #N U M ! -14%-14% 10 % 22 % 29 % 33 % 35 % Marginal Performanc e #N U M ! 23 % 12 % 7%4%2% NPV-91-58-28024476786 Marginal Performanc e 33302725232119

16. Case-7 Period-5-4-3-2012Total Year19951996199719981999200020012003 Cash Flow -In 40 46286 Cash Flow -Out -100 Net Cash flow -10040 46186 IRR35% #NU M! -14%10%22%29%33%35% Marginal Performanc e #NU M! 23%12%7%4%3% NPV-91-58-28024476789 Marginal Performanc e 333027252321