Value Based Management Tools (PowerPoint PPTX)

This document covers 4 topics of value based management in exhaustive details –

•  Cost of Capital
•  Economic Profit or Economic Value Added
•  Bonus Banking
•  Total Shareholder Wealth or Wealth Added

It is extremely useful for all types of organization which are keen on moving towards a more value driven approach to performance management.

Each topic covers aspects such as -

•  Definition
•  Measurement approach
•  Advantages and Disadvantages
•  Examples

This PPT delves into the intricacies of the weighted average cost of capital (WACC), providing a comprehensive understanding of its components and the assumptions underlying its calculation. It emphasizes the importance of achieving returns that exceed the cost of capital to create value, and highlights the variability of cost of capital across different business units and industries. The document also covers the classical equations for calculating WACC and its real value, ensuring a solid grasp of the fundamentals.

It addresses the differentiation between market risk and specific risk, explaining how each affects a company's valuation and the strategies to mitigate these risks. The document includes detailed methodologies for levering and unlevering betas, providing a clear framework for adjusting beta estimates based on leverage. This section is crucial for accurately assessing the risk and return profile of investments.

The document also explores the components of debt holder required return, focusing on the after-tax cost of debt and its calculation. It provides insights into the economic profit and EVA, demonstrating their relevance in performance measurement and value creation. The discussion on bonus banking mechanisms, including hurdle rate and all-in bonus banks, offers practical guidance on aligning executive compensation with long-term value creation.