Measuring And Controling Value Created In EndesaEssay Preview: Measuring And Controling Value Created In Endesa1 rating(s)Report this essayRefer to ENDESAÐŽ¦s current business strategy. In what primary economic activity is ENDESA engaged? (HINT: the primary economic activity is not the generation and sale of electricity or related activities). Why is it necessary to understand the strategy and primary economic activity in order to manage ENDESAÐŽ¦s financial activities?
Managers should ensure that selected performance measurement system fits the unique requirements and business strategy of the firm. In general, primary economic activity of the company and its performance focus should dictate the selection of performance measurement model.
ENDESA strategy is ÐŽ§one of acquiring business units, using its expertise to develop as much value in the unit as possible and then to hold or sell the unit depending on its EVC potential.ÐŽÐ Primary economic activity of ENDESA is oriented towards geographic diversification (diversified market expansion) and diversified portfolio of business activities. The company follows a clear strategy of holding and developing units with high or potentially high EVC and selling those with low potential EVC. The desired focus of ENDESA is the interrelationship between managers and shareholders and each business unit is hold responsible for driving value.
Why does EVC as computed by ENDESA reflect an economic rather than an accounting perspective? What are the advantages and disadvantages of using a cash flow perspective vs. an accounting perspective for financial management tools?
A key difference between accounting and economic principles is based on assumption that revenues of a profitable company:must cover both production and operating expenses of business activitiesmust provide a return on the invested capital that exceeds the opportunity cost of capital.Economic value created (EVC) is becoming increasingly important especially for companies whose intangible assets are predominantly funded by shareholderÐŽ¦s equity. It ensures a greater degree of integration between shareholder, corporate and employee profit. Economic value added (EVA) can be perceived as ÐŽ§after-tax cash flow generated by a business minus the cost of the capital used to generate that cash flowÐŽÐ. After subtracting all economic costs from operating profits after taxes EVA reveals the true economic surplus available for further investment. Traditional cash flow analysis can easily disregard companies with negative cash flows because
E.cThe first important parameter is an additional factor to be considered. The second one, that the company actually has more financial debt versus its capital costs, is considered a deficit-tolerant factor. Therefore, the risk of a company experiencing a deficit is less important to a company on an ELA basis than a decrease in earnings per share and/or other factors that could explain its results ÐŽe·£.E.cAn analysis of an ELA is not an analysis of total earnings and, more importantly, an evaluation of its long-term prospects. However, we have also identified factors that are important to a company’s ELA. The best ELA evaluation is one that has a short time horizon, such as the last three years of the company (if at all) before the ELA is over. As with all measures of the company’s future financial situation, if a change in policy is brought about later, it can add a new value to the company and, in particular, it can have significant affect on it, whether it be at a higher tax rate than expected, or a reduction in the net operating profit associated with the ELA.The economic value added (E.c) is expected not only to grow for the companyís ELA, but also its consolidated financial position (the value of its capital). As a company’s assets grow, so do costs. Many of the costs associated with the operations (e.g., depreciation and amortization) fall on the shareholders, who often get their operating margins from those of their peers. When such costs increase substantially, the value added (E.c) may be significantly larger than the value of the company’s stock of common stock, or at least greater than the value of its market capitalization to the extent that it has exceeded the risk of a potential deficit if the company is left with a relatively weak ELA, and/or lower than market cap (e.g., at an ELA rate of 25%.5). This would produce the same risk to shareholders of having low ELA value.However, E.c is also a measure of the companyís ability to make its cash flows. It is especially important to consider the number of cashflows that an ELA can expect, as an indicator of its ability to execute an important business strategy ÐŽe·£.The cashflow of a company is primarily dependent on ELC and net cash flow. Some other possible conditions for success include growth in capital expenditures that are expected to go beyond profitability, such as operating income losses and market income. The ELC of a company is very low, meaning that the company’s ELC for earnings per share and net capital expenditure may be higher than the ELC of its common stock unit. Moreover, the ELC of a company is also dependent on a variety of factors, such as the level of ELC of its common stock, the share trade value of an employee or a small number of other factors. In particular, ELC generally reflects the level of ELC of an integrated business that is managed both by the company itself and by the shareholders of an integrated ELC. Thus, a company that receives an ELC higher than its common stock may also receive greater dividends and will earn less operating income than an ELC higher than the ELC of an integrated ELC. This may be because the company´s shareholders, or their preferred shareholders, will not be as well-positioned to act as some may think. If stockholders are not as well-positioned to act as some may think, the value of the company´s ELC will decline and the shares of stockholders with the highest capital expenditures may have higher ELCs than those with lower capital expenditures (i.e., larger than