Framework for Economic Profit and Discount Rate Calculation PPT

This PPT slide, part of the 106-slide Corporate Performance Measurement PowerPoint presentation, presents a structured framework for corporate performance measurement, focusing on the calculation of economic profit and discount rates. It outlines a systematic approach for both publicly traded and non-publicly traded firms, detailing the steps necessary to determine the appropriate risk-free rate, market risk premium, cost of debt, and equity.

For publicly traded firms, the process begins with using published estimates of beta (?) to assess risk. The slide suggests taking the average of the highest quality sources, including BARRA estimates for U.S. firms. In contrast, for non-publicly traded firms, it emphasizes calculating an industry average for unlevered beta, using a long-term average of the difference between expected market returns and risk-free rates. This involves finding comparable firms and applying a specific formula to derive the average.

The slide also addresses the determination of the cost of debt (K?), noting that it may not always equal the coupon rate of bonds. It advises calculating the yield on outstanding debt and provides guidance on obtaining ratings from agencies like Moody's or S&P if necessary. Furthermore, it discusses how to assess the market value of debt and equity, suggesting methods such as using the book value of debt as a proxy and calculating the market value of equity based on share price and outstanding shares.

Finally, the slide concludes with the calculation of the firm's tax rate and WACC, providing a formula that integrates these components. This structured approach is essential for executives aiming to enhance their understanding of corporate performance metrics and make informed financial decisions.

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