OUTLINE OF SEMINAR

1. Basic introduction of Return

2. Factors effecting Return

3. Factors effecting market prices of stock Factors effecting demand & supply of stock and managerial interests like

EPS, Earning expectation etc…….

4. Intrinsic value or fundamental value of equity by Alfred Rappaport method

5. Factors on which intrinsic value depends: Sales growth Operating profit margin Cash tax rate Incremental investment in capital expenditure Investment in working capital Time period of competitive advantage Cost of capital

6. Comparison between market value and intrinsic value

7. Trade off between fundamental value or market value maximization

8. Comparing trade off in point 7 with trade off between short term and long term

9. Ten Way to Create Shareholder Value by Alferd Rappaport

10. history of frauds like Enron, WorldCom, Nortel Networks

Principle 1: Do not manage Earnings or provide earning Guidance

throwing earning expectation leads to managing earning to meet expectation thus making value destroying decisions and stretching accounting limits that eventually catches up with company

Principle 2: Make strategic decision that maximize expected value, even at expense of lowering near-term earning

Check effect of each strategy on value, find out strategy with greatest value and then find out sensitivity of value of that strategy to potential shifts. Make decisions of capital investment or divestiture based on value effects.

Principle 3: Make acquisition that maximize expected value, even at expense of lowering near-term earnings

Acquisitions are major step to create or destroy value of company, acquisition decision should not be based on immediate EPS effect but it must be based on present value of incremental expected cash flows from acquisition, if there is high risk of generating synergy then dilution of ownership must be considered.

Principle 4: Carry only assets that maximize value

Monitor if buyers are willing to purchase your detachable assets at premium then it indicates that your assets are more valuable in hands of others so either increase its vale for you be improving performance other wise sale it if can not generate enough value from that asset. Secondly create value by focusing on activities you can do most efficiently, and out source activities that some one else can do more efficiently then you.

Example of K-mart and Marriot international

Principle 5: Return cash to share holders when there are no credible value-creating opportunities to invest in business

Do not sit on idle retained earnings if no value creating opportunity exists pay cash to owners either by share buyback or dividends this have two advantages 1. Shareholders do have chance to earn better returns from somewhere else and 2. Managers will not use excess cash in value destroying acquisitions. Paying dividend is better choice when price of share is high in market.

Principle 6: Reward CEO's and other senior executives for delivering superior long term performance.

Company needs an incentive program to motivate their human resource to deliver superior long term performance.

Because of their nature not every kind of incentives and compensation can be offered to every kind of employee and top management positions.

Stock options are one of the most used and effective incentive plans to senior executives.

But stock options are an imperfect vehicle company should not use it as it as but favorable changes needs to made in order to adjust it with company’s objectives and environment of the organization.

Some of the problems associated with this are short vesting period, not able to segregate organization's performance from bull market, and de motivation due to underwater options.

Some examples of adjusted options are discounted equity risk options (DERO), Indexed Stocks.

Principle 7: Reward operation unit executives for adding superior multiyear value.

The problem with stock options rewards to operation unit executives is that stock performance cannot be directly linked with operational performance because there are many functions of a business and each of this may not be directly linked with other one.

This is the problem stock options are not appropriate for operational unit executives.

For this purpose shareholders value added metric can be best measure. We determine it be discounting back all forecasted operational cash flows that are driven by sales growth and operational margin and subtracting investment made in the period from it.

This program should be evaluated on long term basis to achieve long term superior performance.

Principle 8: Reward middle managers and frontline employees for delivering superior performance on the key value drivers they influence directly.

The same problem lies with frontline employees and middle managers rewarding stocks options.

But on the other side shareholders value added are drivers that are too broad for low level staff and cannot provide day to day guidelines for low level management and employees.

So the best way is to identify three to five key performance indicators and emphasize on them in long term value creation activity.

Identifying and improving the key performance indicators are very crucial in this process.

Principle 9: Require senior executives to bear the risk of ownership just as shareholders do.

The purpose of stock options was to align owner's objective with the management so that agent-principle problem is avoided.

But giving stock options often make executives to manipulate options in their way. Because of vesting out of their stocks whenever they are performing well and not looking to the objectives of the firm.

Several measures have been taken to control this situation. One such strategy was the requirement of minimum stocks till executive's life at the organization. But problems arise with this because this options is considered "pay for pulse" rather than "pay for performance" so objectives are not achieved even then.

Balance should be created between the benefits of requiring senior executives to have meaningful and continuing ownership stack in the firm and the resulting restrictions on their liquidity and diversification

Principle 10: Provide investor with value relevant information.

The final principle is about communication with stack holders. Better disclosures portray a clear and trustful picture to the stack holders.

It helps to reduce potential cost of capital by reducing uncertainty in investors mind and potentially increase share price.

Corporate performance statement is one way to communicate your true image to the shareholders and in corporate world.

Corporate performance Statement:

Separate out cash flows and accruals providing a historical baseline for estimating a company's cash flow.

Classifies accrual with long cash conversion cycle into medium and high levels of uncertainty.

Provide a range and most likely estimate for each accrual rather than traditional single point estimates.

Excludes arbitrary, value irrelevant accruals such as depreciation.

Detail risk and assumptions for each line item while presenting key performance indicators