Cfroi - Method

7/25/2019 Cfroi - Method

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What Return to expect depending on the companies industry?

Historical - Rate of return of number 1 in industry through time

- Industry return as a whole

5, 1, !, ", # years return

$urrent - Rate of Return

%orward



&'erage performance of companies based on life



H()* +aluation odel

('er the long term, rms. /$R streams re0ect managerial sill andcompetition2 *he sill le'el of management is re'ealed in the trac records

of rms2 While the le'el of $%R(Is is a ey indicator of management sill,'ariability of $%R(Is and the rate of asset growth are others2

$onsistent with the competiti'e life cycle, empirical results indicate thatcompetition tends to compress $%R(Is toward the a'erage2 *he directionand magnitude of change o'er four-year spans for rms grouped by$%R(I was3 41 top-6uintile-$%R(I rms faded downward the most7 4!second-6uintile rms faded downward7 4" middle-6uintile rms, those with$%R(Is near the a'erage, faded little7 4# fourth-6uintile rms faded

upward7 and 45 bottom-6uintile rms faded upward the most2 *he fadee8ects of $%R(I 'ariability and asset growth also were consistent with life-cycle reasoning2

Sustainable growth for any year is the asset growth that would result froma continuation of the existing capital structure, the existing di'idend-payout policy, and the $%R(I for the same year2 H()*.s growth-ratecalculation procedures resol'e end-of-year and beginning-of-year dataproblems2

Warranted-'alue calculations are traced step-by-step for an actualcompany2 In treating all companies similarly and ob9ecti'ely, and in beingconsistent with the complete $%R(I model, H()*.s life-cycle proceduresser'e as useful baselines for organi:ing data and thought, but they shouldnot be considered sacrosanct2 If users ha'e better information about R(Ison future pro9ects and asset growth for near-term than is implied by thebaseline procedures, it should be used2

*he ad'antages of a total system way of thining become clear inenumerating the di8erent e8ects of 'ariables in'ol'ed with 6uantifying theimpact of share repurchase2

%inally, hypotheses are suggested for empirical tests to in'estigate whyrms. 6uarterly earnings surprises a8ect stoc prices so di8erently2 *heyin'oe the ey $%R(I model components of 4a $%R(I le'el, 4b importanceof future in'estments to warranted 'alue, and 4c the maret.s assessmentof management.s sill2



$%R(I an example

1 ;resent 'alue 4;+ of the in'estment3 <ross

! ;ayment 4;* or cash 0ow3 <ross cash 0ow

" ;ro9ect life 4/;=R3 <ross asset life estimate

#

<ross $ash %low #

Year 1

In0ation &d9usted gross In'estment !

11.2.1 Gross Investments

Depreciating assets *he rst step when calculating gross in'estment is to separate deprecia

Depreciating assets

1 =(> ad9usted gross plant 4ad9usted xed assetsaccumulated depreciati

! In0ation ad9ustment for gross plant

" $onstruction in progress

# $apitali:ed operating leases5 $apitali:ed research and de'elopment

@ In0ation ad9usted gross plant recaptured

A /on-depreciating assets 4net woring capital

B <ross In'estment

Example Theory

1&2 EOY Ad!sted Gross plant " In#ation ad!stment

A!stment gross plant

<ross ;lant 4ad9usted xed asset accumulated depreciation

- )and

- $onstruction in ;rogress 4$I;

In0ation ad9ustment

B *otal ad9usted <ross ;lant

%uture 'alue 4%+3 /on-depreciating assetsconstructionin-progress2 *he logic is that the



Asset delayering $Example%

>ears -# -"

/ominal <rowth Rate of asset !!2#C !!2#C

&sset )ayers 4$&;=D "! "E!

In0ation !C !C

In0ation &d9ustement !@ !#In0ation ad9usted gross plant "#A #1@

In0ation ad9ustment factor

'apitali(ed operating leases

Ta)le 11. 'apitali(ing leases

/ominal bond rate 52C

=xpected In0ation Rate !25C

Real debt rate 4i !2##C 4/omFIn0atio

&sset )ife 4nper 1)ease expense 4pmt 1

$apitali:ed lease 4p' GA

* 'apitali(ed research and development

*able 1125 $apitali:ed RJ

>ear Infation rate

-# 1 !2AC-" 11 !2AC

-! 115 !2AC

-1 1!5 !2AC

1" !2AC

In0 ad9 5

+ In#ation ad!sted gross plant recapt!red

$ompany & buys

<ross plant 1

&ccumulated depr 5

,et -lant *

%air 'alue ad9ustment 4assume B net asset

RJ =xpenseper IFK



/et ;lantF <ross plant ratio 5C

L/et plantMFL/;F<; ratioM B A di'ided by

)ess3 reported gross plant

=6ual3 gross plant recaptured

&d9usted post ac6uisition $ompany &

<ross plant as reported post ac6uisition

;lus3 <ross plant recaputered

=6ual7 &d9 <; recaptured

Ji'ided by net plant as reported post ac6uis

E/!al0 Ad ,-G- ratio

11.2.2 ,ondepreciating assets

/on-depriciating assets include woring capital and other non-depreciati

$onceptually, non-deprecating assets include3

/on-Jepriciating assets

$urrent assets less in'entory

- $urrent non-debt monetary liabilities

In0ation ad9usted in'etories

In0ation ad9usted land

(ther tangible assets

/on-depriciating, non-goodwill intagible assets

B /on-depriciating assets

11.2.3 -roect 4i5e

Gross plant project life

)ife B 4&d9usted gross plant <ross ;lant recaptured F Jepreciating

Capitalized leases

Kince $%R(I is e6ui'alent to the weighted a'erage return on all of a rm

life2 *here are three inputs into the pro9ect life calculation3 ad9usted grospro9ect life3

)eased assets genrally consist of a similar asset mix as capital assets2 If



Capitalized leases

&sset

)ife Historic $ost

%ixes &ssets 1! 5

$apitali:ed leases "

$apitali:ed RJ # !

*otal 1

Harmonic ean

11.2. Gross cash #o6

/et income after tax

Jepreciation and amorti:ation

Interest expense

Rental expense

RJ expense

onetary holding gain 4loss %I%( prots

;ension expense 4%&KO A

inority interest

F- Kpecial items 4after tax

B In0ation-ad9usted gross cash 0ow

plant it should be used2

*he capitali:ed RJ pro9ect life is the same as the number of years RJ

opinion gi'en the company and industry





in'estment 4<I in the company ad9usted for in0ation2 <ross in'estment can be thought

4<$% ad9usted for in0ation and non-cash expenses2 <$% is the cash 0ow generated fro

by the depreciation expense and total depreciating assets2

/on-Jepreciating &sset

# #

! " #

ing and non-depreciating assets2 *he basic ad9ustments are as follows3

on

l B <ross in'estment

11.

Ex

Gro

"#E#"

!"A@

"A"1E B

Fig

hich include woring capital 4current assets less current liabilities and other non-deprese non-depreciating assets are released at the end of the pro9ect, or rein'ested in anoth



A!

<ro

-! -1 >R <; -

!!2#C !!2#C !!2#C -

# 5 A1E 2* B

!C !C !C

1E 1! ! In#5 5EE A1E !5! <; l

1.33 In0

Hist

Rea

In0

In#

'a

-1 Ren

;ro9Rea

'!r

'a

4!

pre

In0ation %actor In0 ad9 RJ *ele

1211! 111 5-y12" 11E # R

1255 1!1 " R

12!A 1! ! R

12 1" 1 R

@1 R

In0

In0

$ompany O Gro

In0

# 1! 1# <ro

" 5 <

1 9 @ In#

&s Reported postac6uisition $ompany &

*he *rue postac6uisition

balance sheet



!5C 5C #"C +od

5C B 1# De

1! In0

2 $

$ $

1! I

! *ota

1#

ition A

*:

,o

ng items such as land2 $ur

$,et

)an

)an

In5

/et

I

I

(

;

" *ota

Gro

*ota

*ota

In#

11.

Gro&d9

<

&d9

Jep

Gro

*hr

Ns pro9ects, and essential part of the $%R(I calculation is the pro9ect

s plant pro9ect life, capili:ed lease pro9ect life, and capitali:ed RJ

the leased assets ha'e a di8erent now asset life than that of gross



Thr

Tot

In0(pe

Weighting Harmonic mean

$ap

#1@2@@@@A 1 5 "!C "2E <!

"A5 125 #5 !EC !2" Ole

5 " @ "EC 125 Ass

1!E12@@@A 155 A2A

9.9

11.

>o

$ur

$

,et

x C>o

=I=

in'

D C

%I%

D C

=I=

Gro/et

J

I

R

%I

;

is capitali:ed2 *he capitali:ation period should re0ect the analyst.s

ImpliedJepcreciati

on

&sset lifecycle

&sset lifecycle

in'estment



&

F-

Tot

11

Gro

In0

In0

In0

In0

;ro9

'=



f as the gross amount in'ested in the company2

the gross in'estment2

$%R(I @2"@C

2.1 Gross Investments

mple 7oda5one

ss -lant

)and and Ouildings

achinery and e6uipment

$onstruction in progress

*angible and intangible asset imparement 4%&KO 1!1

*otal <ross plant

re 11.3

iating assets such as land andr pro9ect2



tment gross plant

s ;lant 4ad9usted xed asset accumulated depreciation

)and

$onstruction in ;rogress 4$I;

*otal ad9usted <ross ;lant

tion Ad!stment 5or gross plant ife 4<;FJepr exp, "-year median

tion ad9ustment factor

orical <rowth Rate

l Historical $ost

tion ad9ustment

tion ad!sted gross plant

itali(ed leases

t =xpenses 4pmt

ect life 4n-roundedl debt rate 4per a corp bond rate

rent gross leased property

itali(ed 8&D Amo!nt In#ation =ac

5, /ote 5 and

ious years

com RJ life years 5

ar in0ation ad9ustment factor 12#1E! =xpense !1 A! 1211

=xpense !! 11 12

=xpense !" 1@# 125

=xpense !# 1A1 12"

=xpense !5 !1E 12

tion &d9usted $apitali:ed RJ A"@

tion C !2AC

ss plant recapt!red

tion &d9ustment factor

s plant recaptured

; recaputered in0ation ad9ustment

tion ad!steed gross plant recapt!re



afone Jepreciating &ssets

reciating Asset

tion &d9usted gross plant

onstruction-in-progress

apitali:ed leasesapilali:ed RJ =xpense

0ation ad9usted gross plant recaptured

l In0ation ad9usted depreciating assets

Depreciating Asset

ent assets less in'entory

urrent non-debt liabilities monetary assets

In0ation ad9ustment factor

tion ad!sted land

monetary assets

'entory

0ation ad9usted land

ther tangible assets

epaid ;ension

ad9ustmentl In0ation ad9usted non depreciating assets

ss Investment

l in0ation ad9usted non-depreciating assets

l in0ation ad9usted depreciating assets

tion ad!sted gross investment

2.3 -roect 4i5e

ss plant proect li5e gross plant

ross plant recaptured

gross plant for asset life

reaciation expense

ss -lant -roect li5e ;

e year median <; pro9ect life



eeyear median G- proect li5e

l proect li5e

tion ad9usted gross plant <; recapturedrating leases

itali:ed RJ

o5 depricating assets

ded asset life using implied depreciation

et 4i5e !sed 5or '=8OI calc!lation $ro!nded%

2. Gross cash #o6

etary ?olding gain $loss%

ent assets less in'entories - O(>

urrent non-debt liabilities - O(>

>onetary assets $lia)ilities% @OY

change in <J; de0atoretary holding gain $loss%

prots

ntory boo 'alue - O(>

of in'entory using %I%(

in'entory

change in ;;I

prots

ss 'ahs =lo6 income after tax

preciation and amorti:ation

terest expense

J expense

ntal expense

onetary holding gain 4loss

%( prots

nsion expense 4%&KO A



inority interest

ssociate and P+ income

Kpecial items 4after tax

l in#ation ad!sted gross cash #o6

3 '=8OI 'alc!altion 5or 7ODA=O,E

ss 'ash =lo6

tion ad9usted depreciating assets

tion ad9usted non-depreciating assets 4%+

tion ad9usted gross in'estment 4;+

tion ad9usted gross cash 0ow 4pmt

ect life 4nper

OI calc!lation BExcel =!nction ; rate$



etrics

Amo!nt <o!rce

1"!@ /ote 1!

""@1A /ote 1!

/ote 1!

$alculated

"#E#"



Amo!nt <o!rce

"#E#" /ote 1!

/ote 1!

/ote 1!

"#E#"

Amo!nt <o!rce years

12@ In0ation calculation In0ation %a

1E2@C $alculated >eaar

"#E#" ;er abo'e 5

!"A@ $alculated

3931C

1

Amo!nt <o!rce

1""A /ote 5

2 $alculated 15"25!C =xternal data

E1"

!

or In#ation ad!sted

8&D

11E

1A"

1A@

!1E

A@A

Amo!nt <o!rce

12@ pr2 <ross plant

"!11 $alculated

!12" $alculated

"#!E



Amo!nt <o!rce

"A"1E $alculated

/ote 1!

E1" /ote 5A@A /ote 5

"#!E $alculated

*+C

Amo!nt <o!rce

E!@ OFK, /ote 15

-1###5 OFK, /ote 1A-51AA

/ote 1!

12@ per gross plant

-51AA

#" OFK

OFK

!E@ /ote 15

-E /ote "!

#!A5 $alculated1@15

Amo!nt <o!rce

1@15 $alculated

5@E $alculated

*2313

Amo!nt <o!rce"#E#" $alculated

"!11 $alculated

"15# $alculated

#5! /ote 1!

2#

!" 2@

!#



!5 2#

.

4i5e

#A# 2# #51E1" 2# 1E"

A@A 5 15"

5@E @E

2"1

.3

Amo!nt <o!rce

11"11 OFK, /ote 15

-1!EA! OFK, /ote 1A

-1@@1

!2!C =xternal data"A

Amo!nt <o!rce

#5 OFK

1C OFK

#5 $alculated

-!25C =xternal Jata

-11

Amo!nt <o!rce-A5# IFK

1E5E /otes 5, 1"

EE5 /ote A

!1E /ote 5

1""A /ote 5

"A $alculated

-11 $alculated

1A /ote "!

Asset7al!e

ImpliedDepriciation



@! IFK

-!!15 IFK /otes ", 1

-!E"21 /ote # and IFK

129*

Amo!nt

5@E

1@15

5!"1"

1!A#5

2"

1.+:





tor table

In0ation rate In0ation factor

12C 521C

"2C 152EC

52C !A2@C

12C 125C

"2C "#2#C

52C @!2EC

12C 1@21C"2C 552C

52C 1A2EC

12C !!2C

"2C 2@C

52C 1@52"C









Consolidated Balance Sheet As at 31 March 2005

£m £m

Fixed assets 83,464 93,622

Intangible assets 18,398 18,083

Tangible assets 20,250 22,275

Investments

Investments in associate !nerta"ings 19,398 21,226

#ther Investments 852 1,0$9

122,112 133,980

Current assets

%toc"s 430 $58

&ebtors' amo!nts (alling !e a(ter more than one )ear 2,096 1,380

&ebtors' amo!nts (alling !e *ithin one )ear 5,602 5,521

Investments 816 $,381

+ash at ban" an in han 2,850 1,$09

11,94 13,1$9

!14,83" 15,026-

#et current lia$ilities !3,043" 1,877-

%otal assets less current lia$ilities 119,069 132,103

!12,382" 12,975-

&ro'isions (or lia$ilities and char)es !4,552" $,197-

102,135 11$,931

+a.ital an reserves

+alle !. share ca.ital 4,286 $,280

%hare .remi!m acco!nt 52,284 52,15$

Merger reserve 98,92 98,927

#*n shares hel !5,121" 1,136-

#ther reserve 629 713

/ro(it an loss acco!nt !51,688" $3,01$-

%otal e*uit+ shareholders (unds 99,31 111,92$

!it) minorit) interests 1,965 2,132

one!it) minorit) interests 853 875

102,135 11$,931

31 -arch2005

31 March200$

Creditors. amo!nts (alling !e *ithin one )ear

Creditors. amo!nts (alling !e a(ter more than one )ear

Documents

Cfroi - Method