Английский язык. Практический курс для решения бизнес-задач - стр. 71

If, however, the NPV is negative the company’s value should theoretically decrease.

In reality there are many complications to this simple scenario. Companies represent a composite portfolio of numerous investment projects that have been made at different points of time and they do not convey all the information investors need to adjust values accordingly. Complex investment project scenarios can be extremely difficult to analyze and there are many arguments about the correct discount rates to use.

In spite of the difficulties, and although investors cannot always delve into the results of individual projects, it is possible for them to study the accounts of companies and to infer from them whether value has been added or destroyed. Investors can also extend this approach further by analyzing the forecast for companies to determine whether they are likely to add value in the future. This can help with their investment decisions and will, in turn, affect share prices.

Strictly speaking, companies wishing to deliver and maximize shareholder value creation need to focus on two things:

– Maximizing the stream of future cash flows;

– Minimizing the interest charged against that stream by reducing the «cost of capital».

Some would argue that influencing the cost of capital charge significantly is almost impossible and that the sole focus therefore should be on cash flow maximization. At its most basic level, then, a successful VBM approach means achieving a positive stream of future cash flows to give shareholders a return on capital in excess of its cost.

There are many ways of measuring this value but two are the most well known. The first is total shareholder returnand the second is economic profit.

From an investor’s perspective, when measuring the value that has been created the most important measure to use is total shareholder return. It is the sum of two components, which represent the benefits to the shareholder from owning the share:

– The percentage share price appreciation over the period being measured;

– The dividend yield during the period, expressed as a percentage of the share price.

Internally, companies that adopted VBM often use the second most popular measure of value. This is known as «economic profit». It measures the return earned by the company in a period after deducting a charge for the cost of capital employed within the business. Economic profit is often considered as the internal VBM measure that acts as a proxy for the shareholder value measured externally by the total shareholder return.

BP is one of the few companies that regularly receives awards for its delivery of shareholder value. Peter Hall, the Director of Investor Relations at BP, highlights a number of key factors that keep BP near the top of the shareholder value league tables:

– The concept of shareholder value is very important within the business culture. The group actively attempts to manage and integrate the shareholder value perceived externally within the stock markets with the value created internally by the managers of the business. There is a very close link between the investor relations team and the Group CEO and CFO, who continually take a strong interest in the company’s share price. The group’s investor relations department is eight strong and has dedicated experts both in London and New York.