Novell Proxy Statement Ownership Compensation Performance

Share Ownership Eric E. Schmidt –Owns 421,240 shares of Novell shares –Has a right to acquire 1,775,000 through option exercise through March 31, 2000 –Owns 405,000 restricted stocks –The unrestricted shares actually owned constitute.13% of total Novell shares outstanding

Executive Compensation Eric E. Schmidt, Chairman & CEO YearSalary Bonus*Stock Award 1998$602,308$619,420 $0 1999$602,308$600,540 $0 * Bonus is tied to company performance

Executive Compensation (Continued) Stock Option Grants in Fiscal Year 1999 Name# of Securities Exercise PriceExpiration Date Schmidt 500,000 $ /17/2009 Fair market value of the common stock at the end of fiscal year 1999 was $ Fiscal year ends on October 31.

Executive Compensation (Continued) Year End Value of “In the Money” Options Schmidt: 3,250,000 options held 1,420,833 are exercisable; value = $16,339,579 1,829,167 are not exercisable; value = $15,285,420

What is the Wealth Leverage of Eric Schmidt? What are the Present Value and Wealth Leverage of Mr. Schmidt’s: Salary?: Bonus?: Stocks?: Options?:

Wealth Leverage (Continued)

Novell Chart

Chapter 10 Making Capital Investment Decisions

What is the Criterion? Maximizing Firm Value

What Cash Flows (CF t ) are Relevant? Only those cash flows that occur with the project but not without the project are relevant, i.e., only incremental cash flows are relevant. –Sunk Costs? –Opportunity Costs? –Externalities, e.g., erosion

How are Cash Flows Defined? Total Cash Flows = OCF -  NWC -  Fixed Assets OCF = Bottom Up: Net Income + Depreciation Top-Down: Sales - Costs - Taxes Tax Shield: (Sales-Costs)*(1-T) + T*Depreciation

Problems 19 and 29

NPV and Economic Value Added (EVA) NPV is the Difference between the PV of cash inflows and the PV of cash outflows. EVA is the periodic difference between the after-tax return provided by the firm’s assets [EBIT*(1-T)] and the after- tax return (in $) investors require from those assets [r*Initial Invested Capital]. EVA = [EBIT*(1-T)]- r*Initial Invested Capital Under some circumstances, NPV and the PV of all EVAs are identical!!!

The EVA Financial Management System by Stern, Stewart, and Chew The EVA system makes the cost of capital explicit. To increase shareholder wealth with EVA, managers must –Increase operating efficiency (that is, increase EBIT) without investing more in the company’s assets. –Invest in new projects so long as EVA is positive –Stop investing in projects whose EVA is negative EVA calculations capitalize, rather than expense, such things as R&D that add to the long-term profitability of the firm.

The EVA Financial Management System (Continued) EVA can help in such tasks as –Communicating financial goals within the firm and investment community –Evaluating business plans –Allocating resources –Evaluating ongoing performance –Compensating employees for their contributions

The EVA Financial Management System (Continued) EVA and Corporate Rewards: –Pay cash bonuses that reward managers for improvements in EVA over time. Performance rewards are symmetric for up and down movements in EVA. Annual bonuses are banked and held in “at risk” accounts. Objective formulas for rewards replace subjective negotiation. –Managers are encouraged to buy leveraged stock options The options are in-the-money and are purchased, not granted. The exercise price increases at the cost of capital. Managers must use proceeds from their EVA bonuses to purchase the LSOs