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    Value A Guide To Managers and Investors, Who Is Regarded As Father of Share Holder Value, The Following

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    Jubit Johnson
    1. The ALCAR Approach is a value-based management technique developed by ALCAR Group Inc. that uses discounted cash flow analysis and seven "value drivers" to assess the shareholder value impact of business strategies. 2. The seven value drivers that affect shareholder value according to the ALCAR Approach are: rate of sales growth, operating profit margin, income tax rate, investment in working capital, fixed capital investment, cost of capital, and value growth duration. 3. The ALCAR Approach forecasts cash flows under a strategy over several periods, discounts them using the weighted average cost of capital, and estimates residual value to determine the total shareholder value created by the strategy compared to the status quo.

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    Value A Guide To Managers and Investors, Who Is Regarded As Father of Share Holder Value, The Following

    Uploaded by

    Jubit Johnson
    1K views2 pages
    1. The ALCAR Approach is a value-based management technique developed by ALCAR Group Inc. that uses discounted cash flow analysis and seven "value drivers" to assess the shareholder value impact of business strategies. 2. The seven value drivers that affect shareholder value according to the ALCAR Approach are: rate of sales growth, operating profit margin, income tax rate, investment in working capital, fixed capital investment, cost of capital, and value growth duration. 3. The ALCAR Approach forecasts cash flows under a strategy over several periods, discounts them using the weighted average cost of capital, and estimates residual value to determine the total shareholder value created by the strategy compared to the status quo.

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    ALCAR Approach

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    1. The ALCAR Approach is a value-based management technique developed by ALCAR Group Inc. that uses discounted cash flow analysis and seven "value drivers" to assess the shareholder value impact of business strategies. 2. The seven value drivers that affect shareholder value according to the ALCAR Approach are: rate of sales growth, operating profit margin, income tax rate, investment in working capital, fixed capital investment, cost of capital, and value growth duration. 3. The ALCAR Approach forecasts cash flows under a strategy over several periods, discounts them using the weighted average cost of capital, and estimates residual value to determine the total shareholder value created by the strategy compared to the status quo.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    1K views2 pages

    Value A Guide To Managers and Investors, Who Is Regarded As Father of Share Holder Value, The Following

    Uploaded by

    Jubit Johnson
    1. The ALCAR Approach is a value-based management technique developed by ALCAR Group Inc. that uses discounted cash flow analysis and seven "value drivers" to assess the shareholder value impact of business strategies. 2. The seven value drivers that affect shareholder value according to the ALCAR Approach are: rate of sales growth, operating profit margin, income tax rate, investment in working capital, fixed capital investment, cost of capital, and value growth duration. 3. The ALCAR Approach forecasts cash flows under a strategy over several periods, discounts them using the weighted average cost of capital, and estimates residual value to determine the total shareholder value created by the strategy compared to the status quo.

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    © All Rights Reserved
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    Value Based Management (VBM)

    ALCAR Approach

    ALCAR Approach is a VBM technique, developed by ALCAR Group Inc., a management education and
    software company, which is based on discounted cash flow analysis.

    Determinants of shareholders’ value: According to Alfred Rappaport, author of Creating share holder
    value; a guide to managers and investors, who is regarded as father of share holder value, the following
    seven factors called “value drivers” affect shareholders value and these seven factors are the base of
    ALCAR Approach.

    1. Rate of sales growth


    2. Operating profit margin
    3. Income tax rate
    4. Investment in working capital
    5. Fixed capital investment
    6. Cost of capital
    7. Value growth duration

    Shareholders’ Value Creation Network-ALCAR Approach

    ALCAR Approach-Assessment of the shareholder value impact of the business unit (strategy)

    Steps

    1. Forecast the operating cash flow stream for the business unit (strategy) over the planning period
    2. Discount the forecasted operating cash flow stream using the weighted average cost of capital
    3. Estimate the residual value of the business unit (strategy) at the end of the planning period and find
    its present value
    4. Determine the total shareholder value
    5. Establish the pre-strategy value
    6. Infer the value created by the strategy
    Illustration
    DCM Ltd. is debating whether it should maintain the status quo or adopt a new strategy. If it maintains the
    status quo:
     The sales will remain constant at Rs 1,000 million
     The gross margin and selling, general, and administrative expenses will remain unchanged at
    25% and 10% respectively
     Depreciation charges will be equal to new investments
     The asset turnover ratios will remain constant
     The discount rate is 16%
     The income tax rate is 40%

    Income Statement and Balance Sheet for year ‘0’


    Income Statement Million Balance Sheet Million
    Sales 1000 Assets
    COGS 750 Net Fixed assets 300
    Gross Margin 250 Current assets 200
    S, G & A Expenses 100 Total assets 500
    PBT 150 Liabilities
    PAT 90 Equity 500
    If DCM adopts a new strategy, its sales will grow at a rate of 10% per year for five years. The margins, the
    turnover ratios, the capital structure, the income tax rate, and the discount rate, however will remain
    unchanged. Depreciation charges will be equal to 10% of the net fixed assets at the beginning of the year.
    What value will the new strategy create?

    Years 0 1 2 3 4 5 Residual
    Income Statement Projections
    Sales
    Gross Margin
    S, G & A Expenses
    EBT
    Less: tax
    PAT
    Balance Sheet Projections
    Net Fixed assets
    Current assets
    Total assets
    Equity
    Cash Flow Projections
    PAT
    Add: Depreciation
    Less: CAPEX
    Less: Increase in CA
    Operating cash flow
    PV Factor
    PV of the OCF
    Total of PV of OCF
    Residual Value
    PV of Residual Value
    Total Value
    Pre-strategy Value
    Value of the Strategy

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