bcg’svaluemanagementframeworkanoverviewformbastudents

1、THE BOSTON CONSULTING GROUPP:MasterDkBCGs Value Management Framework -An Overview for MBA Students.PPTRt rt (Ppt) Slide 1March 2, 1998 2:01 PM- 1 -Copyright 1996BCG/HOLT Planning AssociatesAll Rights ReservedBCGS VALUE MANAGEMENT FRAMEWORKAN OVERVIEW FOR MBA STUDENTSByRawley ThomasDirector of Resear

2、chThe Boston Consulting Group200 South Wacker DriveChicago, Illinois 60606312-627-2618Thomas.RawleyBCG.comTHE BOSTON CONSULTING GROUPP:MasterDkBCGs Value Management Framework -An Overview for MBA Students.PPTRt rt (Ppt) Slide 2March 2, 1998 2:01 PM- 2 -Copyright 1996BCG/HOLT Planning AssociatesAll R

3、ights ReservedWHAT GETS MEASURED GETS DONETHE BOSTON CONSULTING GROUPP:MasterDkBCGs Value Management Framework -An Overview for MBA Students.PPTRt rt (Ppt) Slide 3March 2, 1998 2:01 PM- 3 -Copyright 1996BCG/HOLT Planning AssociatesAll Rights ReservedTraditional Valuation Techniques Versus BCGs Valua

4、tion FrameworkTraditional Valuation TechniquesForecast nominal cash flows by estimating P&L line items and changes to the balance sheetEstimate terminal value with a perpetuity of the forecasted last years net cash flowDetermine cost of capital by weighting equity CAPM cost with debt costDiscoun

5、t the cash flows and terminal value to present value with the weighted average cost of capitalObservations on Missing Elements No performance measure to determine if the business is achieving returns above or below the cost of capital or if the trend in those returns is up or downNo fade in performa

6、nce to determine likely cash flows in a competitive environmentDiscount rates determined by past price changes, not future likely cash flowsNo extensive empirical testingBCGs Valuation FrameworkTranslate accounting statements to gross cash flows and gross cash investments in constant dollars to prod

7、uce cash on cash returnsTranslate cash on cash returns to economic performance measures (CFROIs) by adjusting for asset life and mix of depreciating versus non-depreciating assetsDetermine sustainable asset growth ratesFade CFROIs and asset growth rates toward corporate averages consistent with life

8、 cycle theory and empirical evidence to estimate future cash flows (replaces terminal valuation)Estimate market derived real discount rate by equating the present value of the cash flows for a large aggregate to the sum of the prices of debt and equityApply the market derived discount rate to the ca

9、sh flows derived from fading economic performance to determine market valuation; subtract debt to determine equity valuationTest model values against actual stock prices for thousands of firms for 10-40 years across many countries; refine, refine, refineTHE BOSTON CONSULTING GROUPP:MasterDkBCGs Valu

10、e Management Framework -An Overview for MBA Students.PPTRt rt (Ppt) Slide 4March 2, 1998 2:01 PM- 4 -Copyright 1996BCG/HOLT Planning AssociatesAll Rights ReservedMANY ASSETS FOLLOW THE SAMEUSEFUL OUTPUT PATTERN AS A CAR .0.01.001234567 YearUsefulOutput(orSurvivors)Constant

11、DollarLevelAnnuityEconomicLifeLikelyActualOutputOutput Declinewith StraightLine DepreciationTHE BOSTON CONSULTING GROUPP:MasterDkBCGs Value Management Framework -An Overview for MBA Students.PPTRt rt (Ppt) Slide 5March 2, 1998 2:01 PM- 5 -Copyright 1996BCG/HOLT Planning AssociatesAll Rights Reserved

12、ISSUES WITH TRADITIONAL RETURN MEASURES(*) Economic depreciation = amount of annual sinking-fund payment earning COC required to replace assets ($357 = 0.1/1.114 - 1)(12,000 - 2,000)Investment profile of a new plantSubsequent annual measurementYr 1Yr 6Yr 12Income843843843Depreciation714714714Cash fl

13、ow1,557 1,5571,557Cash invested12,000 12,000 12,000Book capital11,286 7,7163,432ROCE (%)7.510.924.6ROGI (%)131313CFROI (%)101010ROCE = Income/book capitalROGI = Cash flow/ cash investedCFROI= (Cash flow - economic depreciation(*)/cash invested$12,000$1,557$2,000IRR = 10%THE BOSTON CONSULTING GROUPP:

14、MasterDkBCGs Value Management Framework -An Overview for MBA Students.PPTRt rt (Ppt) Slide 6March 2, 1998 2:01 PM- 6 -Copyright 1996BCG/HOLT Planning AssociatesAll Rights ReservedYr 1Yr 6Yr 12NOPAT(1)843843843Book capital(2)11,2867,7163,432Cost of capital(3)x10%x10%x10%Capital charge(4)1,129772343EV

15、A(1-4)(286)71500Cash flow(6)1,5571,5571,557Cash invested(7)12,000 12,000 12,000Cost of capital(8)x10%x10%x10%Capital charge(9)1,2001,2001,200Economic dep.(*)(10)357357357CVA(6-9-10)000VALUE-ADDED MEASURES REFLECT RETURN,COST OF CAPITAL AND SIZEReturn on New PlantMeasured Over Time(*) Economic deprec

16、iation = amount of annual sinking fund payment earning COC required to replace assets ($357 = 0.1/(1.114 - 1)(12,000 - 2,000)Investment profile of a new plant$12,000$1,557$2,000IRR = 10%THE BOSTON CONSULTING GROUPP:MasterDkBCGs Value Management Framework -An Overview for MBA Students.PPTRt rt (Ppt)

17、Slide 7March 2, 1998 2:01 PM- 7 -Copyright 1996BCG/HOLT Planning AssociatesAll Rights ReservedAccounting Measures Fail(E.P.S. Growth)Value Line Industrials - 1994R2 = 0.0705101520253035404550-100-80-60-40-20020406080100 E.P.S. Growth 1993-1994Price/EarningsAccounting Measures Fail(ROE Spread)Value L

18、ine Industrials - 1994R2 = 0.330.1110-50-40-30-20-1001020304050 ROE minus CAPM Cost of EquityPrice/Equity BookAccounting Measures Fail(ROCE Spread)Value Line Industrials - 1994R2 = 0.320.1110-20-15-10-5051015202530 ROCE minus CAPM Cost of CapitalTotal Capital Price/BookEconomic Cash Flow Measures Do

19、ubleAbility to Explain ValueCFROI Spread - V/L Industrials - 1994R2 = 0.610.1110-10-5051015202530 CFROI minus Discount RateValue/CostTHE BOSTON CONSULTING GROUPP:MasterDkBCGs Value Management Framework -An Overview for MBA Students.PPTRt rt (Ppt) Slide 8March 2, 1998 2:01 PM- 8 -Copyright 1996BCG/HO

20、LT Planning AssociatesAll Rights ReservedValue/Cost Versus ROCE - CAPM Cost of CapitalValue Line Industrials - 1994R2 = 0.280.1110-20 -15 -10-5051015202530 ROCE - CAPM Cost of CapitalValue/CostValue/Cost Versus ROE - CAPM Cost of EquityValue Line Industrials - 1994R2 = 0.260.1110-50 -40 -30 -20 -100

21、1020304050 ROE - CAPM Cost of EquityValue/CostEconomic Cash Flow Measures DoubleAbility to Explain ValueCFROI Spread - V/L Industrials - 1994R2 = 0.610.1110-10-5051015202530 CFROI minus Discount RateValue/CostTHE BOSTON CONSULTING GROUPP:MasterDkBCGs Value Management Framework -An Overview for MBA S

22、tudents.PPTRt rt (Ppt) Slide 9March 2, 1998 2:01 PM- 9 -Copyright 1996BCG/HOLT Planning AssociatesAll Rights ReservedHigh Returns Fade Downward and Low Returns Fade Upward;The Fade Pattern Occurs No Matter What the Starting Year .Average Operating CFROI by Decile - 1970, 1980 or 1987-10-505101520251

23、9701975198019851990YearAverageOperatingCFROI1-Decile2-Decile3-Decile4-Decile5-Decile6-Decile7-Decile8-Decile9-Decile10-DecileTracking the Sampleof 1970 Companiesthrough timeTracking the Sampleof 1980 Companiesthrough timeTracking the Sampleof 1987 Companiesthrough timeNote the averages &dispersi

24、ons have risenbetween 1970-1987,hypothesized to berelated to supply-sidepolicy changesTHE BOSTON CONSULTING GROUPP:MasterDkBCGs Value Management Framework -An Overview for MBA Students.PPTRt rt (Ppt) Slide 10March 2, 1998 2:01 PM- 10 -Copyright 1996BCG/HOLT Planning AssociatesAll Rights ReservedTHE

25、MARKET EXPECTS THE PERFORMANCEOF MERCK TO FADE .(REGRESS TOWARD MEAN PERFORMANCE)Fade = 0%Fade = 10%Illustrates PerpetuityTrap:Overvalues HighReturn FirmsDramaticallyTHE BOSTON CONSULTING GROUPP:MasterDkBCGs Value Management Framework -An Overview for MBA Students.PPTRt rt (Ppt) Slide 11March 2, 199

26、8 2:01 PM- 11 -Copyright 1996BCG/HOLT Planning AssociatesAll Rights ReservedRelative Total Shareholder Return (TSR) versus Stern Model TSR 1990-1991-100-50050100150200-100-50050100150200250300 Stern Model TSRActual TSRRelative Total Shareholder Return (TSR) versus E.P.S. Model TSR 1990-1991-100-5005

27、0100150200-100-50050100150200250 E.P.S. Model TSRActual TSRRelative Total Shareholder Return (TSR) versus Cash Flow Model TSR 1990-1991-100-50050100150200-100-50050100150 Cash Flow Model TSRActual TSRRelative Total Shareholder Return (TSR) versus BCG Model TSR 1990-1991-100-50050100150200-100-500501

28、00150200250BCG Model TSRActual TSRR2=0.13N=750R2=0.40N=750R2=0.25N=750R2=0.25N=750THE BOSTON CONSULTING GROUPP:MasterDkBCGs Value Management Framework -An Overview for MBA Students.PPTRt rt (Ppt) Slide 12March 2, 1998 2:01 PM- 12 -Copyright 1996BCG/HOLT Planning AssociatesAll Rights ReservedStern St

29、ewart Performance 1000Market Value Added vs. Economic Value Added 1988 - After Outlier Elimination-50000500010000-1000-50005001000 Economic Value AddedMarket Value AddedOn the 24 groups of 25 firms, Stewartclaims a 44% R2. This higher correlationrelates to the elimination of 300 companiesinstead of

30、31 extreme outliers and the grouping of companies that serves toeliminate the intra-group variance.N=861R2=0.27MVA versus EVA Stern Stewart 1991-20000-1000001000020000300004000050000-3000-2000-1000010002000 Economic Value Added (EVA)Market Value AddedR2 = 0.21MVA versus CVA BCG 1991-20000-1000001000

31、020000300004000050000-2000-10000100020003000 Cash Value Added (CVA)Market Value AddedR2 = 0.67Total Shareholder Return (TSR) Versus % Change in Economic Value Added (EVA)1992-1993-60-40-20020406080100-1000100200300400% Change in EVATSRR2 = 0.10THE BOSTON CONSULTING GROUPP:MasterDkBCGs Value Manageme

32、nt Framework -An Overview for MBA Students.PPTRt rt (Ppt) Slide 13March 2, 1998 2:01 PM- 13 -Copyright 1996BCG/HOLT Planning AssociatesAll Rights ReservedAPPROACH TO IMPLEMENTATIONWhat Full Effort Might Look LikeModule 1Analytical diagnostic: “value audit”Module 2Measure selection and tailoringModul

33、e 3Value Driver analysis of BUsModule 4Install in planning, budgeting & reportingModule 5Install in compensationModule 6Apply to portfolio management Value analysis of company and business units Identify priorities and issues Review options against applica-tions Tailor as required Transfer appro

34、ach to BUs Link to operating decisions Re-examine processes and linkages Provide training and document-ation Structure Measures Targeting Resourceallocation Portfolio balancing External reportingTHE BOSTON CONSULTING GROUPP:MasterDkBCGs Value Management Framework -An Overview for MBA Students.PPTRt

35、rt (Ppt) Slide 14March 2, 1998 2:01 PM- 14 -Copyright 1996BCG/HOLT Planning AssociatesAll Rights ReservedCOMPARISON OF COST OF CAPITAL MEASUREMENT METHODSCAPMMarket DerivedAssumes investor discount rate risk premiums did not change during the past measurement period. Therefore, future risk premiums

36、equal past risk premiums.Assumes future cash flows can be estimated so that the discount rate equates the present value of those cash flows to the price. BondInterestRatesDividendDiscountModelsBCGMarket DerivedCost of CapitalP = Net Cash Flow(1 + DR)ttt=1n=DRTSRPremiumEstimatePremiumActualTHE BOSTON

37、 CONSULTING GROUPP:MasterDkBCGs Value Management Framework -An Overview for MBA Students.PPTRt rt (Ppt) Slide 15March 2, 1998 2:01 PM- 15 -Copyright 1996BCG/HOLT Planning AssociatesAll Rights ReservedSTUDIES USING MARKET DERIVED METHODSBlanchard, Oliver J., “Movements in the Equity Premium”, Brookin

38、gs Paper on Economic Activity, 2:1993, pp. 75-138.Corcoran, Patrick J. and Leonard G. Sahling, “The Cost of Capital: How High is It?”, The Federal Reserve Bank of New York: Quarterly Review, Summer 1982, p. 23-31.Farrell, James L., “The Dividend Discount Model: A Primer,” Financial Analysts Journal,

39、 1985, v41 (6), pp. 16-19, 22-25.Fuller, Russell J., “Programming the Three-Phase Dividend Discount Model,” Journal of Portfolio Management, 1979, v5(4), 28-32.Gordon, Myron J. and E. Shapiro, “Capital Equipment Analysis: The Required Return of Profit,” Management Science, 3 pp. 102-110 (October 195

40、6).Holland, Daniel M. and Stewart C. Myers, “Trends in Corporate Profitability and Capital Costs” in Robert Lindsay, ed. The Nations Capital Needs: Three Studies, Committee for Economic Development, New York, pp. 103-188.Rozeff, Michael S., “The Three-Phase Dividend Discount Model the ROPE Model,” J

41、ournal of Portfolio Management, 1990, v16(2), pp. 36-42.Williams, J.B., The Theory of Investment Value, Harvard University Press, Cambridge, Mass., 1938.THE BOSTON CONSULTING GROUPP:MasterDkBCGs Value Management Framework -An Overview for MBA Students.PPTRt rt (Ppt) Slide 16March 2, 1998 2:01 PM- 16

42、 -Copyright 1996BCG/HOLT Planning AssociatesAll Rights ReservedBCG/HOLT RESEARCH USING MARKET DERIVED METHODSby Rawley ThomasHOLTs Discount Rate, April 25, 1986, 122 pagesCovers cash estimation, market derived methodology, tax premiums, leverage, comparison to other academic research, and CAPMNew El

43、ectric Utility Discount Rate, September 6, 1987, 40 pagesShows discount rates for utilities that are higher than industrials. Postulates government regulation and the risk of unanticipated inflation may cause the higher risk.Valuation Model Improvements, March 3, 1989, 5 pagesCovers leverage researc

44、hNew System Adjustments, May 3, 1989, 4 pagesCovers revised leverage adjustmentsReal Equity Rates, October 1, 1989, 21 pagesUpdates cost of capital research on tax premiums and leverageReal Equity Discount Rates - Data, October 2, 1989, 23 pagesDisplays IRS, Federal Reserve, and HOLT data underlying

45、 discount rate research 1950-1988.Effect of Proposed Change on Stock Prices, October 3, 1989, 38 pagesAccounts for 200 point drop in market by analyzing effect of capital gains indexation versus lower capital gains tax ratesResponses to Equity Discount Rate Research, November 2, 1989, 4 pagesCongres

46、sional response to HOLT researchAnother Response to Discount Rate Research, December 4, 1989, 10 pagesDepartment of Treasury response to HOLT researchVolatility “Risk” Versus Inflation Risk, July 25, 1990, 11 pagesCompares CAPM volatility risk to inflation riskInvestors Discount Rate for Oil Compani

47、es, March 22, 1991, 63 pagesCorrelates oil industry market derived equity discount rates to government ownership and leverageTHE BOSTON CONSULTING GROUPP:MasterDkBCGs Value Management Framework -An Overview for MBA Students.PPTRt rt (Ppt) Slide 17March 2, 1998 2:01 PM- 17 -Copyright 1996BCG/HOLT Pla

48、nning AssociatesAll Rights ReservedMARKET DERIVED DISCOUNT RATEPrice = Discounted Present Value of Expected Future Net Cash FlowsCorporate Sector Cash Flowsvary with the structuralcharacteristics of an economyInvestors Discount Rateis volatileS&P 400DJIA 30etc.THE BOSTON CONSULTING GROUPP:Master

49、DkBCGs Value Management Framework -An Overview for MBA Students.PPTRt rt (Ppt) Slide 18March 2, 1998 2:01 PM- 18 -Copyright 1996BCG/HOLT Planning AssociatesAll Rights ReservedBCGS METHOD FOR DERIVING INVESTOR DISCOUNT RATES (WACCs) DIFFERS FROM TRADTIONAL CAPM METHODS.WE START WITH A SAMPLE AND A VA

50、LUATION MODEL TO DERIVE A WACC. THEN WE SPLIT THE WACC INTO ITS DEBT AND EQUITY COMPONENTS. FROM THE EQUITY RATE, WE CALCULATE THE RISK PREMIUM OVER GOVERNMENT BOND RATES.Sample of CompaniesCaculate CFROI for SampleCalculate Growth rates for Country EconomyEmploy Present Value Valuation ModelDetermi

51、ne Market Derived Investor Discount Rate (WACC)Cost of DebtMarket LeverageMarket Derived Real Equity RateInflationary ExpectationsMarket Derived Equity Risk PremiumGovernment Bond RatesTHE BOSTON CONSULTING GROUPP:MasterDkBCGs Value Management Framework -An Overview for MBA Students.PPTRt rt (Ppt) S

52、lide 19March 2, 1998 2:01 PM- 19 -Copyright 1996BCG/HOLT Planning AssociatesAll Rights ReservedCFROIS CORRELATE HIGHLY WITH THE FUNDAMENTALS OF INFLATION, AND CORPORATE TAXES1996 DISCOUNT RATE SAMPLE01234567891011121950 1955 1960 1965 1970 1975 1980 1985 1990 1995Year%10.8596 Actual11.4197 Forecast“

53、Best Fit Line”Fundamental CFROI = 14.65 - 0.438 * GDP Deflator Inflation - 0.122 * Corporate Tax Ratet-Statistics: -9.54 on GDP Deflator Inflation; -7.00 on Corporate Tax RateCorrelation between Inflation and Tax Rates: 0.00%CFROI ActualR2 = 0.76THE BOSTON CONSULTING GROUPP:MasterDkBCGs Value Manage

54、ment Framework -An Overview for MBA Students.PPTRt rt (Ppt) Slide 20March 2, 1998 2:01 PM- 20 -Copyright 1996BCG/HOLT Planning AssociatesAll Rights ReservedTO SMOOTH ECONOMIC CYCLES, BUT INCORPORATE STRUCTURAL SHIFTS, BCGS VALUATION MODEL ASSUMES CURRENT CFROI LEVELS FADE TOWARD THE 5-YEAR PAST MEDI

55、AN OF THE DISCOUNT RATE SAMPLE AT A 10% RATE01234567891011121950 1955 1960 1965 1970 1975 1980 19851990 1995Year%Annual CFROIs5-Year Past Median CFROIsTHE BOSTON CONSULTING GROUPP:MasterDkBCGs Value Management Framework -An Overview for MBA Students.PPTRt rt (Ppt) Slide 21March 2, 1998 2:01 PM- 21 -

56、Copyright 1996BCG/HOLT Planning AssociatesAll Rights ReservedBCGS VALUATION MODEL ANTICIPATES THAT THE GROSS ASSET GROWTH RATE OF ALL COMPANIES IN THE USA FADE TOWARD THE LONG TERM ECONOMY AVERAGE-3-2-1012345678919501955 1960196519701975 198019851990 1995Year%Annual GDP Growth Rates3.2 % Compounded

57、Annual Growth Rate in GDP from 1950-1996Unlike CFROIs, where clear trends are evident, there does not appear to be a clear trend in growth rates for the economy. Consequently, a long term average smooths out the annual fluctuations with no loss in investor anticipated trend.THE BOSTON CONSULTING GRO

58、UPP:MasterDkBCGs Value Management Framework -An Overview for MBA Students.PPTRt rt (Ppt) Slide 22March 2, 1998 2:01 PM- 22 -Copyright 1996BCG/HOLT Planning AssociatesAll Rights ReservedPrice = Discounted Present Value of Expected Future Net Cash FlowsTHE INVESTORS DISCOUNT RATE IS THAT RATE WHICH EQ

59、UATES THE PRESENT VALUE OF CASH FLOWS FROM BCGS VALUATION MODEL TO THE MARKET VALUE OF DEBT AND EQUITYMarket Value of Debt andEquity of S&P 400 Sample$3,474 Billion$1,903 Billion of AssetsReturning 11.1% and Growingat 3.2% per yearFading 10% toward10.8% CFROISolve for the Rate at WhichPresent Va

60、lue of Cash FlowsEquals PriceSeptember = 5.77%(Weighted Averaged Real After-Corporate-TaxCost of Capital)Answer tells us what the Marketis presently requiring as aRate of ReturnTHE BOSTON CONSULTING GROUPP:MasterDkBCGs Value Management Framework -An Overview for MBA Students.PPTRt rt (Ppt) Slide 23March 2, 1998 2:01