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Excess Return
is the difference between actual wealth and
expected wealth at the end of the measurement period. Good methodology to
evaluate top management of listed companies.
Actual Wealth is the
future value of all
the cashflows received over the measurement period. Expected Wealth is the
future value of the initial investment
(= II0(1+cost of equity)N,
where N is the number of periods over which the Excess Return is calculated.
Unlike
MVA, Excess Return charges a company
for the capital it has used since the beginning of the measurement period,
while crediting companies for the returns their shareholders should have
earned from dividends and share buybacks, reinvested in the market. Also
unlike MVA, Excess Return does take into account intermediate cash returns
to shareholders.
Therefore Maximizing
Excess Return should
be the financial goal of any value-based corporation.
Excess Return can only be used at firm /
corporate level and is not practical for performance evaluation over a
specific period of time, since it is stock-based, i.e. it expresses value
accumulated as of a certain date.
More valuation methodologies
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