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What is Shareholder Value? - Definition

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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:

  • marketable securities (stocks),

  • excess real estate,

  • overfunded pension plans.

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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2016 Value Based Management.net - Last updated: Jan 6th, 2016 - All names by their owners

 

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