7/25/2019 Cfroi - Method http://slidepdf.com/reader/full/cfroi-method 1/29 What Return to expect depending on the companies industry? Historical - Rate of return of number 1 in industry through time - Industry return as a whole 5, 1, !, ", # years return $urrent - Rate of Return %orward
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7/25/2019 Cfroi - Method
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What Return to expect depending on the companies industry?
Historical - Rate of return of number 1 in industry through time
- Industry return as a whole
5, 1, !, ", # years return
$urrent - Rate of Return
%orward
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&'erage performance of companies based on life
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H()* +aluation odel
('er the long term, rms. /$R streams re0ect managerial sill andcompetition2 *he sill le'el of management is re'ealed in the trac records
of rms2 While the le'el of $%R(Is is a ey indicator of management sill,'ariability of $%R(Is and the rate of asset growth are others2
$onsistent with the competiti'e life cycle, empirical results indicate thatcompetition tends to compress $%R(Is toward the a'erage2 *he directionand magnitude of change o'er four-year spans for rms grouped by$%R(I was3 41 top-6uintile-$%R(I rms faded downward the most7 4!second-6uintile rms faded downward7 4" middle-6uintile rms, those with$%R(Is near the a'erage, faded little7 4# fourth-6uintile rms faded
upward7 and 45 bottom-6uintile rms faded upward the most2 *he fadee8ects of $%R(I 'ariability and asset growth also were consistent with life-cycle reasoning2
Sustainable growth for any year is the asset growth that would result froma continuation of the existing capital structure, the existing di'idend-payout policy, and the $%R(I for the same year2 H()*.s growth-ratecalculation procedures resol'e end-of-year and beginning-of-year dataproblems2
Warranted-'alue calculations are traced step-by-step for an actualcompany2 In treating all companies similarly and ob9ecti'ely, and in beingconsistent with the complete $%R(I model, H()*.s life-cycle proceduresser'e as useful baselines for organi:ing data and thought, but they shouldnot be considered sacrosanct2 If users ha'e better information about R(Ison future pro9ects and asset growth for near-term than is implied by thebaseline procedures, it should be used2
*he ad'antages of a total system way of thining become clear inenumerating the di8erent e8ects of 'ariables in'ol'ed with 6uantifying theimpact of share repurchase2
%inally, hypotheses are suggested for empirical tests to in'estigate whyrms. 6uarterly earnings surprises a8ect stoc prices so di8erently2 *heyin'oe the ey $%R(I model components of 4a $%R(I le'el, 4b importanceof future in'estments to warranted 'alue, and 4c the maret.s assessmentof management.s sill2
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$%R(I an example
1 ;resent 'alue 4;+ of the in'estment3 <ross
! ;ayment 4;* or cash 0ow3 <ross cash 0ow
" ;ro9ect life 4/;=R3 <ross asset life estimate
#
<ross $ash %low #
Year 1
In0ation &d9usted gross In'estment !
11.2.1 Gross Investments
Depreciating assets *he rst step when calculating gross in'estment is to separate deprecia
/on-depriciating assets include woring capital and other non-depreciati
$onceptually, non-deprecating assets include3
/on-Jepriciating assets
$urrent assets less in'entory
- $urrent non-debt monetary liabilities
In0ation ad9usted in'etories
In0ation ad9usted land
(ther tangible assets
/on-depriciating, non-goodwill intagible assets
B /on-depriciating assets
11.2.3 -roect 4i5e
Gross plant project life
)ife B 4&d9usted gross plant <ross ;lant recaptured F Jepreciating
Capitalized leases
Kince $%R(I is e6ui'alent to the weighted a'erage return on all of a rm
life2 *here are three inputs into the pro9ect life calculation3 ad9usted grospro9ect life3
)eased assets genrally consist of a similar asset mix as capital assets2 If
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Capitalized leases
&sset
)ife Historic $ost
%ixes &ssets 1! 5
$apitali:ed leases "
$apitali:ed RJ # !
*otal 1
Harmonic ean
11.2. Gross cash #o6
/et income after tax
Jepreciation and amorti:ation
Interest expense
Rental expense
RJ expense
onetary holding gain 4loss %I%( prots
;ension expense 4%&KO A
inority interest
F- Kpecial items 4after tax
B In0ation-ad9usted gross cash 0ow
plant it should be used2
*he capitali:ed RJ pro9ect life is the same as the number of years RJ
opinion gi'en the company and industry
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in'estment 4<I in the company ad9usted for in0ation2 <ross in'estment can be thought
4<$% ad9usted for in0ation and non-cash expenses2 <$% is the cash 0ow generated fro
by the depreciation expense and total depreciating assets2
/on-Jepreciating &sset
# #
! " #
ing and non-depreciating assets2 *he basic ad9ustments are as follows3
on
l B <ross in'estment
11.
Ex
Gro
"#E#"
!"A@
"A"1E B
Fig
hich include woring capital 4current assets less current liabilities and other non-deprese non-depreciating assets are released at the end of the pro9ect, or rein'ested in anoth