chapter 4 measuring corporate performance.pptVIP

Value and Value Added Market-to-Book Ratio Ratio of market value of equity to book value of equity. Every one dollar invested it has grown by 6.7 times Value and Value Added Book Value Book Values are determined by GAAP “Market Values” are usually higher than their “Book Values” Example According to GAAP, your firm has equity worth $6 billion, debt worth $4 billion, assets worth $10 billion. The market values your firm’s 100 million shares at $75 per share and the debt at $4 billion. Q: What is the market value added of your assets? . Market Value (Capitalization) Assets=Liabilities + Equity A = 4 bil + 7.5 bil = 11.5 bil Book Value Assets=Liabilities + Equity Asset = 4 bil + 6 bil = 10 billion Market Value vs. Book Value Example (continued) Book Value Balance Sheet Assets = $10 bil Debt = $4 bil Equity = $6 bil Market Value Balance Sheet Assets = $11.5 bil Debt = $4 bil Equity = $7.5 bil Market Value Added = Market capitalization minus book value of equity = 11.5 bil – 10billion = 1.5 billion Accounting Return Financial Ratios These are called book rates of return, because they are based on accounting Information Does not take into account the concept of time value of money Email - AFC108 Sam Lim: Thiancheng.lim@xjtlu.edu.cn Qing YE: Qing.Ye@xjtlu.edu.cn Sun LIU: Sun.Liu@xjtlu.edu.cn Ning ZHANG: Ning.Zhang@xjtlu.edu.cn Yi HONG: Yi.Hong@xjtlu.edu.cn Uthpala (Mali): Uthpala.Ekanayake11@Student.edu.cn Chapter 4 Learning Objectives 1 Calculate and interpret the market value and market value added of a public corporation. 2 Calculate and interpret key measures of financial performance, including economic value added (EVA) and rates of return on capital, assets, and equity. 3 Calculate and interpret key measures of operating efficiency, leverage, and liquidity. 4 Show how profitability depends on the efficient use of assets and on profits as a fraction of sales. 5 Understand how a company’s sustainable growth depends on bot