Question 1: Comprehensively explain, using numerical examples, why companies create value by investing capital, from investors, to generate future cash flow at rate of return exceeding the cost of capital.
Fact 2: Anything that doesn’t increase cash flows, via improving revenues and returns on capital, doesn’t create value.
Question 2: Comprehensively explain, using numerical examples, how, as a corrolary to Fact 1, value is created by companies, for shareholders, when companies generate higher cash flows, not when rearanging investors’ claims on those cash flows.
Fact 3: Too many times, the price of a stock does not reflect the financial results of a company.
Question 3: Explain why and how a company’s performance on the stock market is driven by changes in the stock market expectations, not just by the company’s actual performance.
Fact 4: There is no such number as an inherent value for a business, rather a business has a given value only relative to who owns and operates it.
Question 4: Comprehensively explain how the value of a business depends on who is managing it and what strategy they pursue. Different owners will generate different cash flows for a given business based on their unique ability to add value.
answers with numerical examples.
Overview: Companies exist to meet customer needs in a way that translates into reliable returns to investors. When people invest they expect their investment to increase by an amount that sufficiently compensate them for the risk they took, as well as for the time value of their money (i.e..TVM). Therefore, knowing how to create and measure value is an essential tool for managers and executives.