2.  Mergers and acquisitions  Fundamental analysis for share valuation  Evaluation of a business strategy

3.  In the real market, a firm creates value by earning a return on invested capital greater than the opportunity cost of capital.  The more a firm invest at returns above the cost of capital, the more value it creates

4.  A firm selects strategies that maximize the present value of expected cash flows or economic benefits  The value of a company’s shares in the stock market is based on the market’s expectations of future performance of the company.

5.  After an initial price is set, the return that shareholders earn depends more on the changes in expectations about the company’s future performance than its actual performance.

6.  NOPLAT (Net operating profits less adjusted taxes) represents the profits generated from the company’s core operations after subtracting the income taxes related to the core operations.

7.  Invested capital represents the cumulative amount the business has invested in its core operations – primarily property, plan and equipment and working capital.  Invested capital is the total of equity and total borrowings in the balance sheet of a company, reduced by the amount of non- operating assets.

8.  Net investment is the increase in invested capital from one year to the next  Net Investment = Invested capital t+1 - Invested capital t

9.  FCF is the cash flow generated by the core operations of the business after deducting investments in new capital.  FCF = NOPLAT – Net Investment

10.  ROIC is the return the company earns on each rupee invested in the business  ROIC = NOPLAT /Invested capital

11.  IR is the portion of NOPLAT invested back into the business.  IR = Net investment/NOPLAT

12.  WACC is the rate of return that investors expect to earn from investing in the company and therefore, the appropriate discount rate for the free cash flow

13.  ‘g’ is the rate at which the company’s NOPLAT and cash flow grows each year  If the company’s revenue and NOPLAT grow at a constant rate and the company’s IR is also constant, its FCF will grow a constant rate

14.  Enterprise Value = FCF t+1 /(WACC-g)

15.  FCF = NOPLAT – Net Investment  FCF = NOPLAT – (NOPLAT x IR)  FCF = NOPLAT x (1-IR)

16.  g = ROIC x IR  IR = g/ROIC  Technically one should use the return on new or incremental capital

17.  FCF = NOPLAT x (1 – IR)  FCF = NOPLAT x (1-g/ROIC)

18.  Value = [NOPLAT t=1 ×(1-g/ROIC)] WACC – g  Value drivers : Growth; ROIC; and Cost of capital

19.  The value of a company equals the amount of capital invested, plus a premium equal to the present value of the value created each year.

20.  Economic Profit = Invested capital x (ROIC – WACC)  PV of economic profit = EP/(WACC-g)

21.  Value = Invested capital + PV of projected EVA

22.  Value = NOPLAT T=1 x (1-g/ROIC) WACC – g  Value = (1-g/ROIC) NOPLAT t=1 WACC - g

23.  A Company’s earnings multiple is driven by both its expected growth and its return on capital

24.  NOPLAT = Invested Capital x ROIC  Value = Invested CapitalxROICx(1-g/ROIC) WACC - g

25.  Value= ROICx(1-g/RONIC) Invested Capital WACC – g Drivers are : WACC;ROIC; and g

26.  Revenue growth  Profit margin (per cent)  Cash tax rate  Working capital/Revenue (per cent)  Capital expenditure/Revenue (per cent)  Cost of capital (per cent)  Value growth duration period (years) ◦ Value growth duration period represents the future period for which the entity has a foreseeable competitive advantage.