Value Based Management

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GOTHENBURG STUDIES IN FINANCIAL ECONOMICS 971214 VALUE BASED MANAGEMENT: Economic Value Added or Cash Value Added? by Fredrik Weissenrieder Department of Economics Gothenburg University and Consultant within Value Based Management Anelda AB V. Hamngatan 20 S-411 17 Göteborg Sweden STUDY NO 1997:3 VALUE BASED MANAGEMENT: Economic Value Added or Cash Value Added? by Fredrik Weissenrieder VALUE BASED MANAGEMENT: Economic Value Added or Cash Value Added? by Fredrik Weissenrieder Table of Content: 1 Introduction 2 Value Based Management 3 CVA and the concept of Strategic Investments 4 EVA 4.1 EVA's corrections - Do they work in practice? 4.1.1 Not enough adjustments are carried out 4.1.2 Irrelevant issues are discussed 5 EVA instead of Cash Flow? 5.1 EVA at H&M/Wal-Mart 5.1.1 EVA at store no 6 5.1.2 EVA at the parent 5.2 CVA at H&M/Wal-Mart 5.2.1 CVA at store no 6 5.2.2 CVA at the parent 5.3 EVA compared to CVA at H&M/Wal-Mart 5.4 The EVA leverage 6 Completing the "Circular Reference" 6.1 CVA vs. EVA using straight line depreciation 6.2 CVA vs. EVA using annuity depreciation 6.3 CVA vs. EVA, 1st adjustment 6.4 CVA vs. EVA, 2nd adjustment 6.5 Further real analysis of the concepts' capital bases 7 Market Value Added - MVA 8 Conclusion 38 Appendix 1: What is value? © Fredrik Weissenrieder, 1998 Page: 3 3 5 7 8 9 10 10 11 12 13 14 15 16 17 20 22 23 25 27 29 30 33 35 2 http://www.anelda.com VALUE BASED MANAGEMENT: Economic Value Added or Cash Value Added? 1 Introduction Corporate managers now face a period where a new economic framework that better reflects value and profitability must be implemented in their companies. Accounting systems, which has been used up until today, are insufficient and will not stand the challenge from the increasingly efficient capital

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