TAILIEUCHUNG - Pearson Education Management Accounting for Decision Makers_11

Tham khảo tài liệu 'pearson education management accounting for decision makers_11', tài chính - ngân hàng, kế toán - kiểm toán phục vụ nhu cầu học tập, nghiên cứu và làm việc hiệu quả | 356 CHAPTER 9 STRATEGIC MANAGEMENT ACCOUNTING Two approaches to determining shareholder value Figure Both EVA and SVA can provide a measure of shareholder value. Total business value can be derived either by discounting the free cash flows over time or by discounting the EVA flows over time and adding the capital invested. Whichever approach is used the market value of borrowings must then be deducted to derive shareholder value. Let us go through a simple example to illustrate this point. Example Leo Ltd has just been formed and has been financed by a 20 million issue of share capital and a 10 million issue of loan notes. The proceeds of the issue have been invested in non-current fixed assets with a life of three years and during this period these assets will depreciate by 10 million per year. The operating profit after tax is expected to be 15 million each year. There will be no replacement of non-current assets during the three-year period and no investment in working capital. At the end of the three years the business will be wound up and the non-current assets will have no residual value. The required rate of return by investors is 10 per cent. The SVA approach to determining shareholder value will be as follows Year Free cash flows Discount rate Present value m 10 m 1 2 3 Total business value Loan notes Shareholder value The free cash flows will be the operating profit after tax plus the depreciation charge that is 15m 10m . In this case there are no replacement non-current assets against which the depreciation charge can be netted off. It must therefore be added back. MEASURING SHAREHOLDER VALUE 357 The EVA approach to determining shareholder value will be as follows Year Opening capital Capital charge Operating profit EVA Discount Present value invested C 10 X C after tax rate 10 of EVA m m m m m 1 2 3

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