imported>Doug Williamson |
imported>Doug Williamson |
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| (EVA). | | The European Financial Stability Facility (EFSF) was established in 2010 as a temporary rescue mechanism.The EFSF’s mandate is to safeguard financial stability in Europe by providing financial assistance to Euro zone Member States. |
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| The important insight from EVA analysis is that a whole firm, a project or a division is <u>destructive</u> of [[shareholder value]]: | | The EFSF is authorised to use instruments and techniques including: |
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| (1) Whenever its returns are inferior to the relevant economic [[cost of capital]].
| | #Lending to countries in financial difficulties. |
| | #Intervening in the debt primary and secondary markets. |
| | #Financing recapitalisations of banks and other financial institutions through loans to governments. |
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| (2) Even if it appears to be profitable when measured on an accounting basis (for example on an [[Earnings per share]] basis).
| | To fulfill its mission, the EFSF issues bonds or other debt instruments on the capital markets. |
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| | | The EFSF is backed by guarantee commitments from the Euro zone Member States. This Facility was replaced by the European Stability Mechanism (ESM) in 2012 which finances new programmes. However, it continues to be used for the ongoing programmes in Greece, Portugal and Ireland. |
| EVA can be considered at the whole-firm level or in relation to smaller business units or projects.
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| == EVA at the whole-firm level ==
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| The periodic addition to shareholder value resulting from the efficient management and allocation of a whole firm's resources. | |
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| EVA can be quantified at a whole-firm level as:
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| EVA = [Return on book capital LESS Market cost of capital] x Book capital.
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| '''''Example'''''
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| Taking a simplified example, take an all-equity financed firm with:
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| (1) A market capitalisation (P<sub>0</sub>) of $130m. | |
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| (2) Book value of equity $100m.
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| (3) Annual after tax returns of $13m.
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| ''To keep this illustration simple, we will assume no growth.''
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| ''In other words the whole of the annual after tax returns of $13m are paid out as dividends (D<sub>1</sub>).''
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| Return on book capital = 13/100
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| = 13%.
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| Market cost of capital = 13/130
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| = 10%
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| (Using Ke = D<sub>1</sub>/P<sub>0</sub>).
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| EVA = [13% - 10% = 3%] x $100m
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| = '''$3m'''.
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| ''In practice a number of adjustments would be made both to the market values and to the book values used in the calculation of the EVA.''
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| ''So the application of EVA analysis is both more complicated, and arguably more subjective, than the simple calculation illustrated above.''
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| '''''Example'''''
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| Turning back for now to our simple example, EVA is also closely related to Market value added (MVA).
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| MVA is the total present value of the expected EVA in the current and future periods.
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| For example in this case the EVA is a simple fixed perpetuity of $3m.
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| The total present value of the fixed perpetuity of $3m is evaluated using:
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| (1) The simple fixed perpetuity formula 1/r.
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| (2) The market cost of capital 10%.
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| MVA = $3m/0.10
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| = '''$30m'''.
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| == EVA at the individual project level ==
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| It is also possible to calculate and analyse EVA at the individual project level.
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| In simple terms, EVA is positive when the project Internal rate of return exceeds the (appropriately risk-adjusted) [[Weighted average cost of capital]].
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| A simple decision rule when using EVA at the project level is:
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| (1) Reject all negative EVA projects.
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| (2) Positive EVA projects will be considered further.
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| == See also == | | == See also == |
| * [[Net present value]] | | * [[euro zone]] |
| * [[Internal rate of return]] | | * [[Stability Bond]] |
| * [[Book value]] | | * [[European Stability Mechanism]] |
| * [[Cost of capital]]
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| * [[Earnings per share]]
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| * [[Excess Return]]
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| * [[Market value added]]
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| * [[Return on capital employed]]
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| * [[Shareholder value]]
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| * [[Wealth Added Index]]
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The European Financial Stability Facility (EFSF) was established in 2010 as a temporary rescue mechanism.The EFSF’s mandate is to safeguard financial stability in Europe by providing financial assistance to Euro zone Member States.
The EFSF is authorised to use instruments and techniques including:
- Lending to countries in financial difficulties.
- Intervening in the debt primary and secondary markets.
- Financing recapitalisations of banks and other financial institutions through loans to governments.
To fulfill its mission, the EFSF issues bonds or other debt instruments on the capital markets.
The EFSF is backed by guarantee commitments from the Euro zone Member States. This Facility was replaced by the European Stability Mechanism (ESM) in 2012 which finances new programmes. However, it continues to be used for the ongoing programmes in Greece, Portugal and Ireland.
See also
