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Main Functional Metrics Employed to Measure ShareHolder Value - Essay Example
Finance & Accounting
Pages 5 (1255 words)
Main Financial Metrics Employed to Measure Shareholder Value Introduction Today, shareholder value has become considerably a significant subject among investors more than ever. The shareholder value is formed when the profitability surpasses the investors’ anticipations as determined by the cost of capital…
Many firms calculate the profitability in their own method of calculation where as investors take a different method to do the same, and it makes a hard time for the management of the firm to coordinate the results. An investor always focuses on the economic profits of the firm as well as looks at the extent of debt and equity that is invested in the business. Some of the important financial metrics employed to measure shareholder value are given below; 1. Shareholder Value Analysis (SVA) The shareholder value analysis (SVA) approach was developed by Alfred Rapport during 1980s and is used to estimate the value of the shareholders’ stake within a company or business unit which can also be adopted as the fundamental measure to formulate and evaluate strategic decisions (CIMA, 2004. p.10). The estimation of the value of a firm’s operations is usually carried out through the process of discounting anticipated future operating “free cash flows” at a suitable cost of capital. Here, the free cash flow shows the cash flow derived from a business for a specified period, i.e. the cash flow before extracting any financial-related cash flows associated with share or debt. ...
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