Corporate Value Creation: An Operations Framework for Nonfinancial Managers(Wiley Corporate F&A)

A detailed crash course in business management for value creation Corporate Value Creation provides an operations framework that management can use to optimize the impact decisions have on creating value by growing revenue and profitability. Designed to assist professionals without a strong business or financial education, this book provides a thorough understanding of the qualitative and quantitative aspects of managing a business for the purpose of value creation. Readers will find detailed information on financial reports, valuation, modeling and forecasting, and more, including discussion of best practices that functional management can embrace to leverage performance. The final chapter reviews key concepts and helps the reader tie them all together by using a step-by-step approach to build or modify a business plan that includes a complete set of financial statements. In addition, each chapter includes case studies or exercises so that the reader can practice using the material covered in the chapter. Corporate Value Creation can also be used as a handbook for managers who are looking for information on specific topics that range from developing financial statements to manufacturing management, to internet marketing and much more. In most cases, individual topics can be reviewed without reading the entire book. Finally, for the manager who wants to quickly understand what's involved in running a successful business, each chapter begins with the key takeaways from that chapter in a section called "Nuggets". Fundamentally, creating value is as simple as making more money – but therein lies the rub. Effective management of business growth involves a complex interplay of productivity, capital, debt, and margins, and finding the most efficient balance can be challenging. For managers who need a deeper understanding of the forces at work, Corporate Value Creation is a thorough, detailed guide but it is also valuable for managers who are looking for information on a specific topic or simply wanting to understand at a high level what's involved in running a successful business.

Table of Contents:
Preface xiii Acknowledgments xvii Foreword xix Chapter 1: Basic Concepts 1 Introduction 2 Financial Statements 2 The Income Statement 3 The Balance Sheet 10 The Cash Flow Statement 18 Required Revenue for a Given Level of Net Income 24 Case Study: Advanced Solar Systems Corporation 27 Chapter 2: The Envelope Equations 35 Introduction 36 ROCE and NiROCE 36 Net Investments 39 Investment Rate 42 Incorporating the IR and NiROCE into the Expression for Net Income 43 Incorporating IR into the Expression for Cash Flow after Investing Activities 45 NI and CFaIA—A Sequential Year-by-Year Analysis 46 NI and CFaIA—The General Model 49 Estimating Growth Rates of Cash Flow after Investing Activities and Net Income 52 Growth Rate of CFaIAg with Constant IR and NiROCE 52 Growth Rate of Net Income (NIg) 54 Net Income Growth Rate (NIg) with Constant IR and NiROCE 54 Envelope Equations Methodology for Estimating Net Income, Cash Flow after Investing Activities, and Growth Rates 56 Required Revenue Revisited 66 Growing the Net Income 71 Case Study: American Technology Corporation 71 Chapter 3: The Weighted Average Cost of Capital 81 Why Is a Company’s Weighted Average Cost of Capital Important? 82 Weighted Average Cost of Capital Defined 83 Operating and Capital Leases 84 Weighting of the Components of Capital Structure 84 Market Value of Debt and Equity 85 Impact of Taxes on the Weighted Average Cost of Capital 87 Estimating the Cost of Debt and Equity and the Capital Asset Pricing Model 88 General Equations for Estimating the WACC for a Company with One Class of Debt and Equity 90 Levered and Unlevered Betas 90 Estimating Beta for Non-Public Companies or Business Units 93 Significance and Uses of the WACC 95 Origin of the Coefficients Used in Calculating a WACC 96 Multiple Hurdle Rates 100 Introduction to Present Value 110 Case Study: Omega Corporation 115 Chapter 4: Introduction to Valuation Models 123 Introduction to Estimating Value 126 Valuation Considerations—Lessons Learned 166 Most Frequently Used Single-Stage Valuation Models 167 Multi-Stage Valuations 167 Equivalence of the Post-Forecast-Period Models 176 Impact of 1/(k − g) on the Perpetual Growth Model 180 Considerations of the Terminal Value Multiplier as Implied by the Equivalency Equations 182 Case Study: NexgenSonics and the Power of Discipline! 183 Chapter 5: ROCE and Cash Flow Analytics 195 Introduction 196 Basic Drivers of ROCE 197 Some Practical Aspects of Managing Return on Capital Employed 209 Case Study: Pharos Corporation—The Early Days 210 Chapter 6: Strategies and Best Practices for Managing ROCE and Cash Flow 225 Introduction to Maximizing Return on Capital Employed and Cash Flow 227 Basic Pricing-Driven Models 228 Value-Added Models 230 Introduction to Factors That Impact Corporate Performance 238 Depreciation and Amortization 273 Case Study: Innovative Engineering Corporation 301 Prologue 311 Chapter 7: Productivity and Operating Margin 313 Productivity 314 Incorporating Operating Margin into the Productivity Model 325 Cycle Time 337 Closing Comments on Value Added and Cost 339 Case Study: Laser Technology Inc. Develops Its Productivity Strategy 339 Chapter 8: The Expense Coverage Ratio 353 The Expense Coverage Ratio 354 Expense Coverage Ratio and EBITDA 367 Conclusion 376 Case Study: Safety Solutions Corporation 376 Chapter 9: Debt and Leverage 389 Introduction 391 Debt and Leverage 391 LIBOR and Pricing Loans 391 Debt Financing Alternatives 393 Credit Ratings 395 Relative Cost of Debt Financing 398 Impact of Debt on Return on Capital Employed and Return on Equity 399 Financial Covenants 419 Case Study: Edsson Corporation 424 Chapter 10: Understanding Financial Statements 437 Introduction 439 The Income Statement 440 The Balance Sheet 443 Some Complications 450 The Cash Flow Statement 451 Case Study: Light Technologies Inc. 460 Appendix A: Present Value Models 539 Present Value of Any Stream of Cash Flows 539 Present Value of a Cash Flow E That Takes Place at the End of Year n 540 Present Value of the Terminal Value of a Cash Flow at the End of Year n 541 Present Value of a Stream of Fixed Cash Flows E for n Years 542 Present Value of a Fixed Stream of Cash Flows in Perpetuity (n = Infinity) 544 Single-Stage Growth Models 545 Present Value of a Stream of Cash Flows That Grow at a Fixed Rate for a Finite Period 546 Present Value of a Stream of Cash Flows That Grow at a Fixed Rate in Perpetuity 550 General Equation for Present Value of Single-Stage Cash Flows That Grow at a Fixed Rate 551 Multistage Growth Models 554 Two-Stage Growth Models 555 Three-Stage Growth Models 558 Appendix B: Business Valuation Models 565 Introduction 565 Stream of Distinct Cash Flows 565 Stream of Distinct Cash Flows Followed by a Stream of Perpetual Fixed Cash Flows 566 Stream of Distinct Cash Flows Followed by a Stream of Finite Fixed Cash Flows 567 Stream of Distinct Cash Flows Followed by a Stream of Perpetual Growth Cash Flows 568 Stream of Distinct Cash Flows Followed by a Stream of Finite Growth Cash Flows 569 Stream of Distinct Cash Flows Followed by a Terminal Cash Flow 571 Initial Cash Flow Sequentially Followed by a Finite Period of Cash Flows That Grow at a Fixed Rate gFG and a Terminal Cash Flow 572 Initial Cash Flow Sequentially Followed by a Finite Period of Cash Flows That Grow at a Fixed Rate gFG and a Perpetual Fixed Cash Flow 573 Initial Cash Flow Sequentially Followed by a Finite Period of Cash Flows That Grow at a Fixed Rate gFA for NA Periods and Perpetual Cash Flows That Grow at a Fixed Rate gPB 574 Stream of Cash Flows That Grow at a Fixed Rate gA for NA Periods, Followed by a Stream of Cash Flows That Grow at a Fixed Rate gB for NB Periods, and a Stream of Perpetual Growth Cash Flows That Grow at a Fixed Rate gC 575 Appendix C: Growth Models 577 Introduction 577 General Compound Annual Growth Rate Model 577 General Expression for CFaIAg, the Growth Rate of CFaIA 579 General Expression for NIg, the Growth Rate of NI 580 Appendix D: General Equations for Estimating NI and CFaIA 583 Introduction 583 ROCE and NiROCE 583 The General Case for the Envelope Equations 585 Special Case: Constant Investment Rate and Net Income Return on Capital Employed 589 Special Case: Focus on Operational Cash Flows 590 Net Income and Cash Flow Growth Equations 592 Appendix E: R&D Growth and Investment Equation 593 Introduction 593 Generational Cost Factor 593 Product Life Cycle 594 Developing an Expression for the Cost of the Next Generation 595 Lifetime Revenue Factor 596 Growth Rates and Product Life Cycles That Satisfy the Requirement ICurrent = INext 599 Appendix F: Inventory Considerations and the EOQ Model 601 Introduction 601 Components of Inventory Costs 601 Economic Order Quantity 606 Shortage Costs 607 Selected References 611 About the Author 613 Index 615

About the Author :
LAWRENCE C. KARLSON currently serves on the board of directors of a number of public corporations. He has broad experience investing in and building the corporate value of companies of all sizes, both public and private, through internal growth and acquisition. Since his retirement, Mr. Karlson has served on numerous boards and led various committees, including audit, finance, corporate governance, and compensation committees in these organizations. He has also provided consulting services to a wide range of companies in Europe and the United States.