does increased cashflows maximize shareholder value

These flows are discounted at the cost of equity. The Dividend Discount Model calculates the value of the equity of a firm directly from the expected cash flows received by the shareholders-the Dividends. Using the Scenario Manager, you can determine the impact on shareholder value of changing variables contributing to value drivers. Marketable Securities and Other InvestmentsĪfter completing your scratchpad analysis, which holds each of these variables constant throughout the forecast period, you can use a more explicit model in Strategic Modeling to evaluate these variables in greater detail and changing over time.

Incremental Working Capital Investment (W) To learn the value drivers, use scratch pad to estimate corporate value, so you can focus on key valuation variables. After each year's cash flow from operations is calculated, those flows are each discounted based on the cost of capital (K).īecause these value drivers determine the expected cash flow from operations, you can evaluate these factors to determine which ones have the greatest impact on corporate shareholder value. These variables, or value drivers, determine each year's cash flow from operations. Incremental Working Capital Investment (w) There are six key macro variables affecting values of discounted stream of cash flow from operations: Value Drivers: Key Factors Affecting Corporate Value Experienced practitioners not only can explain the differences (small, in most cases), but often gain insights by comparing the results from the different approaches. In practice, the results of the models are often different, because the required assumptions have been ignored. This approach discounts an expected cash flow in excess of a capital charge (cost-of-capital multiplied by the previous period's adjusted book value).Īll three methods can compute identical equity values, given certain assumptions (that is, keeping the ratio of market debt to market equity constant).

The Economic Profit model is a mixed model (mixing cash flow and book value concepts) often called the Economic Profit Model. Strategic Modeling captures these constraints and opportunities explicitly, providing support for your valuation assumptions. The dividends a company can afford to pay depend upon the cash consequences of its planned sales growth, cash margins on sales, cash taxes, required working and fixed capital investments, constrained by its target capital structure. One of the limitations in traditional dividend discount models is that they typically relate cash dividends to earnings, an accrual accounting flow, which can mask capital structure and funding effects. The Shareholder Value and Dividend Discount models are cash flow methods that provide information about the sources of value creation, the duration of the value creation period, and the discounted value of the future stream of cash flows.

Strategic Modeling supports three methods of valuation.

Does increased cashflows maximize shareholder value