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Market Value Added, Synergy, Value Drives/Balance Scorecard, Maximizing Shareholder Value

6. Define market value added. Does market value added provide the same performance insights to the corporate executive as economic profit (i.e. EVA)?

3. What are the advantages/disadvantages of tailored value drives versus the balance scorecard?

4. Define synergy. Describe how synergies might enhance a corporation's value.
Unit 6 Questions

2. What might be an example of an incentive to management to focus on maximizing shareholder value?

3. Looking at the recent history of management fraud, what is the potential danger in incentives for maximizing shareholder value?

http://www.sec.gov/news/speech/spch586.htm

4. Having established a culture to maximize shareholder value (for example, just-in-time inventory), why would there be a need to implement a corporate-wide verification process?

5. Why should management be cautious in forecasting earnings?

6. What is the inherent danger to stock prices in the requirement that management forecast future sales and earnings?
http://money.cnn.com/2003/10/23/markets/earnings/

8. What is the common thread running through mergers and acquisitions and joint ventures in seeking to maximize shareholder value?

Solution Preview

Running Head: MAXIMIZING SHARE HOLDERS VALUE
Maximizing Share Holders Value

6. Define market value added. Does market value added provide the same performance insights to the corporate executive as economic profit (i.e. EVA)?

MVA is calculated as the difference between the market value of a company's debt and equity and the amount of capital invested. (Mckinsy et al, 2003).
Unlike MVA, EVA does not focus on market values. For corporate Executives, EVA provides indication to managers how efficiently they are using the capital deployed by the company in a particular year while MVA also measures the same thing but it measures efficiency in managing capital since inception of the company (Gapenski, 1996)

3. What are the advantages/disadvantages of tailored value drives versus the balance scorecard?

Valuation of any business depends upon the choice of the value drivers that influences the value of any business. In finance literature related to shareholder valuation of any business, there is description of wide range of value drivers (KazlauskienÄ— & Christauskas, 2008). Rapport (1998) defines 'value driver' those factors that influence the value of an enterprise either positively or negatively.

The advantage of using Balanced Score Card is that it provides a framework what should be the value drivers for a company and tried to bring some objectivity in choosing holistic value drivers for a company.

While tailored value drivers concept also mean that identifying and choosing value drivers tailored to the company being valued but it bring lot of subjectivity in picture.

4. Define synergy. Describe how synergies might enhance a corporation's value.

Synergy can be defined as the interaction between two or more groups and companies to create an enhanced combining effect to achieve the targets of the company. This combining effect is greater than the effect of individuals. Synergy refers to the benefits other than economies of scale. It may arise from operating economies, enhanced managerial efficiency, creativity, innovativeness, R&D and market coverage capacity due to the complementarities of resources and skills and a widened horizon of opportunities (Ross, Westerfield, & Jaffe, 2004).
Combining two business units also removes the constraints of financing. A unit may be constrained to grow through the internal development because of the shortage of funds. Besides, the combined form of business unit also may have more stability of the cash flows. This will reduce the risk of insolvency and enhance the debt capacity of the new unit. This way synergy enhances the corporate value in the market (Hill & Jones, 1998).

2. What might be an example of an incentive to management to focus on maximizing shareholder value?
The investors generally perceive that all the expectations of return and risk are captured by the equity share price and due to this reason it is always considered as correct. In the macro economics, share prices are regarded as the best allocators of capital. In order to maximize the value of shareholders, the organization can use the compensation strategy and increase in the price of shareholder's stock. In this system, shareholders receive a fixed percentage of profit on quarterly or yearly basis (Ferson & Khang, 2002). This kind of incentive would help management to focus on maximizing shareholder value.

3. Looking at the recent history of management fraud, what is the potential danger in incentives for maximizing shareholder value?

http://www.sec.gov/news/speech/spch586.htm
The management uses various strategies and incentive methods to maximise the value of the ...

Solution Summary

The solution examines market value added and synergy for corporate-wide verification processes.

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