Show me your GBER By Gaylen Bunker

1. FUNCTIONAL Categories Concept $ Financing Liabilities & Equity Investing PP&E Operating Revenue Expense Profit A/R & InvA/P Operate Balance Sheet Income Statement

Statement of Cash Flow

29D2EB1DE05B/0/Upd0703.pdf “ Under most of the presentation alternatives being considered jointly by FASB/IASB each comprehensive income item would need to be classified in one of the functional categories (operating, investing, or financing).”

2. The WACC Concept A calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation.

FUNCTIONAL Categories $ Financing Liabilities & Equity Investing PP&E Operating Revenue Expense Profit A/R & InvA/P Operate Balance Sheet Income Statement

Cost of Capital Liabilities & Equity Capital Structure Financial Leverage Risk and Return Trade-off DE Risk Return Cost of Capital WACC Cost of Debt (Interest) Cost of Equity Opportunity cost of Equity Dividend Yield & Growth (potential return rises with an increase in risk.) "Anyone who lives within their means suffers from a lack of imagination.“ Oscar Wilde Financing Return to the Provider of funds is a cost to the User of those funds

3. Residual Income Concept Residual income is a performance measure that consists of some measure of operating income minus some charge for the capital used by the manager (or unit) being evaluated. The concept appeared as early as the 1920s (e.g., in DuPont's bonus plan calculation of its "Executive Trust Fund"), and has been discussed in management accounting texts since General Electric adopted it in the 1950s. Despite its merits, residual income was not widely used in practice until recently [with EVA ].

Economic Value Added (EVA) is the financial performance measure that capturing the true economic profit of an enterprise. EVA® also is the performance measure most directly linked to the creation of shareholder wealth over time. Stern Stewart & Co. Put most simply, EVA is net operating profit minus an appropriate charge for the opportunity cost of all capital invested in an enterprise.

“…for 30 years [my mother] served the family nothing but leftovers. The original meal has never been found." Calvin Trillin Leftovers

Volume (X axis) Dollars (Y axis) Fixed Costs Total Costs Variable Costs Contribution Margin Revenue 0 4. Classical Break-Even Concept “Variables won't, constants aren't.” Osborn’s Law FC R BE = CM%

Integration WACC EVA Break-Even Functional Categories Of Concepts

FC R BE = CM% + (Cap Chrg. / (1 – Tax Rate) OBERGBER Volume (X axis) Dollars (Y axis) Variable Costs Total Costs Fixed Costs Contribution Margin Revenue Tax Line Pivot Point Capital Charge Line New Total Cost Line 0 “Success is the ability to go from one failure to another with no loss of enthusiasm.” Winston Churchill

Cost of Equity

GBER The revenue level required to cover all operating, investing, and financing costs.