THEORETICAL RELATIONSHIP BETWEEN MARKET VALUE, ROIC, AND GROWTH WACC = 8% *Assumes a competitive advantage period of 10 years, after which ROIC = WACC is assumed 0 1 2 3 4 5 6 7 8 9 10 0 5 10 15 20 25 Market value/capital ratio* Revenue growth Percent ROIC Percent 15 12 9 6
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THEORETICAL RELATIONSHIP BETWEEN MARKET VALUE, ROIC, AND GROWTH WACC = 8% *Assumes a competitive advantage period of 10 years, after which ROIC = WACC.
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THEORETICAL RELATIONSHIP BETWEEN MARKET VALUE, ROIC, AND GROWTH
WACC = 8%
*Assumes a competitive advantage period of 10 years, after which ROIC = WACC is assumed
0
1
2
3
4
5
6
7
8
9
10
0 5 10 15 20 25
Market value/capital ratio*
Revenue growthPercent
ROICPercent
15
12
9
6
EMPIRICAL RELATIONSHIP BETWEEN MARKET VALUE, ROIC, AND GROWTH
Sample of 563 North American companies
*Defined as market value of operations divided by invested capital including goodwill
**ROIC based on invested capital including goodwill
Revenue growth 1993-2003 CAGRPercent
0
1
2
3
4
5
6
7
8
0-5 5-10 10-15 15-20 20-25
<15
12-15
9-12
6-9
0-6
Market value/capital ratio, 2003* ROICPercent
P-value2
Percent
REGRESSIONS OF MARKET-VALUE-TO-CAPITAL WITH ROIC AND GROWTH
*Defined as market value of operations divided by invested capital including goodwill**P-value represents the probability that the tested relationship does not hold, with a P-value of 5% used as the threshold of statistical significance
0-66-99-1212-15>15
MV/IC*MV/IC*MV/IC*MV/IC*MV/IC*
93146124
61139
GrowthGrowthGrowthGrowthGrowth
0.250.763.222.147.99
0.520.822.831.433.18
6041
116
0
ROIC cohortPercent
Dependentvariable
Number ofobservations
R2
PercentNumber ofobservations
Dependentvariable
46 19.3 21.5 0563MVI/C*Full sample
Variable1 Slope1 t-Stat1
P-value1**
Percent
ROIC
Variable2 Slope2 t-Stat2
Growth 2.0 3.4 0
P-value1**
PercentVariable1 Slope1 t-Stat1
VALUE OF COMMODITY CHEMICAL COMPANIES DRIVEN BY ROIC AND GROWTH
*June 2002 (based on Invested Capital 2001)
Source: T. Augat, E. Bartels, and F. Budde, “Multiple Choice for the Chemicals Industry,” McKinsey on Finance, Number 8 (Summer 2003), pp. 1-7
DCF results relative to market value of equityIndex
Electric utilities
Pharmaceuticals
Consumer goods
Oil majors
105 108 10798 94
74
107 10392
76
108123
103 98 95
9788
98 99
126
ELE EN RWEA SSEZY UN NSRGY PG KFT LORLY
PFE GSK JNJ NVS MRK XOM BP RD/SC CVX TOT
EON
CHANGE IN EXPECTATIONS IS KEY DRIVER OF TOTAL RETURN TO SHAREHOLDERS
*Expectations measure is based on change in analyst consensus EPS forecast for running fiscal year (FY 0), the following fiscal year (FY 1) and change in analyst consensus 5-year growth expectation (LTG)
**Scaled based on actual revenues
***P-value represents the probability that the tested relationship does not hold, with p-value of 5% used as the threshold of statistical significance
EFFECT OF INVENTORY ACCOUNTING CHANGE ON SHARE VALUE
Source: S. Sunder, “Relationship Between Accounting Changes and Stock Prices: Problems of Measurement and Some Empirical Evidence,” Empirical Research in Accounting: Selected Studies, 1973
Cumulative abnormal returnPercent
110 firms switching to LIFO 22 firms switching from LIFO