By James L. Grant

I took a couple of classes with Professor supply on the college of Massachusetts Boston, the place this was once one of many required texts. i have to say his classes and his texts has became out to be most dear and invaluable in the course of my ultimate years as a scholar of undergraduate finance. All of his texts have been reader-friendly and insightful.
Dr. supply makes use of energetic businesses within the inventory industry (GE, Dell, IBM) and their ancient info to figure out whether or not they are developing or destroying wealth for his or her shareholders and bondholders utilizing value-based metrics like eva.
His calculations during this e-book have been in particular effortless to keep on with and comprehend - scholars of finance can relate with me when you have learn a few of these cryptic finance texts.
I might hugely suggest Dr. Grant's textual content to all scholars. And while you are a UMass Boston scholar, you need to take his path.

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Leibowitz, “The Franchise Factor Valuation Approach: Capturing the Firm’s Investment Opportunities,” Corporate Financial Decision Making and Equity Analysis, ICFA (Charlottesville, VA: Association for Investment Management and Research, 1995). 19 20 FOUNDATIONS OF ECONOMIC VALUE ADDED builds on a wealth-discovery theme by examining the role of economic profit in the theory of finance. We’ll begin with the neoclassical Fisherian Wealth Model3 to show the fundamental link between NPV and the annualized EVA equivalent.

20% for the 11year reporting period shown in the exhibit. Taken together, the capital return and capital cost findings for Microsoft indicate that the “residual return on capital” was substantially positive for the reporting period. 77% by year-end 2000. The exhibit also reveals that volatility in this technology firm’s residual capital return (and therefore, its EVA) is due primarily to variations in the after-tax return on capital (ROC). In contrast, the cost of capital (COC) for Microsoft was relatively stable during the 11-year reporting period.

Since CFROI is based on both current and distant cash flows—while EVA seems a snapshot of the firm’s current economic profit—it is tempting to argue that the former economic profit measure is more closely aligned with promoting shareholder value over the long term. Such a comparative interpretation is incorrect however when one realizes that economic profit (EVA) is the annualized equivalent of the firm’s net present value (as we have seen in the two-period NPV model). Also, if for some reason the firm’s managers compare CFROI to a hurdle rate that is inconsistent with the weighted average cost of capital, COC, a wealth-destroying agency problem exists between the firm’s managers and owners.

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