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Chapter 4

FINE 2000 Chapter Notes - Chapter 4: Sustainable Development, Quick Ratio, Reserve Requirement


Department
Finance
Course Code
FINE 2000
Professor
Anthony Mayadunne
Chapter
4

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Chapter 4: Measuring Corporate Performance
4.1 Measuring Market Value and Market Value Added
oMarket capitalization is the total market value of equity, equal to share price times
number of shares outstanding.
-For example, AZN stocks: if each share was worth $46.19, then 1.438 million
outstanding shares would mean $66,421.22 million which in conversion is
over 66 billion.
-Book value measures the cumulative investments in a firm by shareholders.
oMarket value added is market capitalization minus book value of equity
-The difference between the market value of the firm and the amount of money
that shareholders have invested in the firm.
-For AZN that would be, marketing capitalization – total equity attributable to
equity holders of the company = 66,421 – 23,213 = 43, 208 million.
-Book value in this case is seen as total equity attributable to equity holders of
the company
-MVAa=MVa-BVz = (MVe +MWd) – (Be-BVd)
-^d stands for debt and e stands for equity
oMarket-to-book ratio is the ratio of market value to book value
-Market-to-book value = market value of equity/book value of equity =
66421/23213 = 2.8
-Reflects investors expectations about the future performance
-Market value can fluctuate due to risks or external events out the managers
control
4.2 Economic Value Added and Accounting Rates of Return
oThe cost of capital that the company employs is usually not included
oEconomic value added (EVA) is the operating profit minus a charges for the cost of
capital employed. This is also known as the residual income.
oNet operating profit after tax (NOPAT) is the after-tax profits from operations, as if
the firm had no debts. This equals net income plus after-tax net finance/interest
expense.
oReturn on capital (ROC) is net operating profit after taxes (NOPAT) as a percentage
of invested capital (debt plus equity).
oReturn on assets (ROA) is net operating profit after taxes (NOPAT) as a percentage of
total asset.
oReturn on equity (ROE) is net income as a percentage of shareholder’s equity.
4.3 Measuring Efficiency
oAsset Turnover ratio
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