Book

Description

This book approaches corporate economic performance as a continuous process. It begins with the capital committed by providers of finance, follows its deployment in operations, and traces the resulting returns, income, reinvestment, and cash flows through to the valuation of the financial claims arising from those activities. The central question is not whether a valuation formula can produce a superficially plausible figure. It is whether that figure rests on a coherent economic history, explicit forecasts, clearly defined boundaries between the claims of shareholders and lenders, and traceable discounting dates. The book therefore places performance measurement before valuation in the logical order of analysis, while recognizing that value also reflects expectations about the future, risk, and market conditions. The investigation uses the multi-worksheet Model C as a practical setting in which to test the connections among financial statements, operating-capital positions, return on invested capital (ROIC), return on equity (ROE), net operating profit less adjusted taxes (NOPLAT), free cash flow to the firm (FCFF), free cash flow to equity (FCFE), economic value added (EVA), and discounted cash flow (DCF) valuation. The reference case covers 2005–2009, followed by a continuing-value horizon governed by specified assumptions. Five scenarios—A, B, C, D, and FIRST—make it possible to examine changes in operating assumptions, financing policy, the basis of discounting, and the period being compared. They are not simply five figures that can be ranked without qualification: some differ in dates, units, or presentation conventions. Establishing comparability must therefore precede comparison. Under the fixed-WACC assumptions of Scenario C, the book demonstrates the annual reconciliation of operating income, net investment, and FCFF. It also reconstructs FCFF from FCFE, movements in debt, and interest charges under explicitly stated sign conventions.