Definition of Shareholder Value.
What
is Shareholder Value?
At the end of the
business cycle of a company, after all debts have been paid, money remains
(hopefully...). This money, the free
cash flow, is for the shareholder or shareholders.
"The shareholders always get paid last".
The free cash flow is
the amount of money that is left after all creditors are paid within the
appropriate period.
The definition of
Shareholder Value is the value of the company (firm) minus the Future
claims (debts). The value of the company can be calculated as the Net
Present Value of all future cashflows plus the value of the nonoperating
assets of he company.
So:
Shareholder Value =
Corporate Value (Firm Value)
– Future claims (Debts)
Shareholder Value = (NPV of all future free cash flows +
value of nonoperating assets) -
Future claims (Debts)
Non-operating assets
include:
Future claims include:
-
interest-bearing
debt (long-term and short-term),
-
capital lease
obligations,
-
underfunded pension
plans,
-
contingent
liabilities.
Economic Shareholder
Value is created by earning a Rate of Return on invested capital that
exceeds the firm's Weighted Average Cost of Capital.
Shareholder Value must
not be mixed up with the
Shareholder Value
Perspective.
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