Question

A leading author in accounting and finance, Alfred Rappaport focuses in his work on the importance of a firm's management continually taking steps that increase shareholder value. In a recent article he set out his "Ten Ways to Create Shareholder Value:"

1. Do not manage earnings or provide earnings guidance; do not focus on earnings as it reflects neither the company's value or the change in value over the reporting period.
2. Make the strategic decisions that maximize expected value, even at the expense of lowering near-term earnings; this may mean divesting units that do not contribute to the company's long-term strategic goals though they do contribute to current profits.
3. Make acquisitions that maximize expected value, even at the expense of lowering near-term earnings; do not make acquisitions that improve only current earnings per share, but those that are expected to contribute to long-term value.
4. Carry only assets that maximize value; continually review assets and be prepared to sell units, brands, real estate, or other assets that can be sold for a price that is greater than their value to the company.
5. Return cash to shareholders when there are no credible value-creating opportunities to invest in the business; through cash dividends and stock buybacks.
6. Reward CEOs and other senior executives for delivering superior long-term returns.
7. Reward operating unit managers for adding superior multiyear value.
8. Reward middle managers and frontline employees for delivering superior performance on the key value drivers that they influence directly.
9. Require senior executives to bear risks of ownership just as shareholders do.
10. Provide investors with value relevant information.

Required: Based on Chapter 20, identify managerial concepts that you would apply for each of the 10 steps. Compensation concepts, management comp programs, business valuation techniques. Please do not simply write "Book Value" valuation. Explain why you would use such concepts and valuation models and why.

Answer 1

The author Mr Alfred Rappaport is saying in the article " Ten Ways to create

Share holder value " that above steps should be taken for the increasing the value of shareholder is right in many ways the explanation can be given for each steps as follows-

1. In first steps the author is saying that the company should not focus on his earning because the impact on share price of the company is  a little bit consider the earning capacity now a days , in present time the share price are very sensitive about the company's strategic decisions which will be taken in near future .

2. The company should take decision on the basis of his future earning and also the company should take decision on his own strength , opportunities , weakness and future's coming threats. On the basis of these the company can disinvest his present earning units even the unit are in profit but company should bother about his long term earning not short term.

3. The entity should invest in on the basis of long term vision , because even company or entity with the any decision earn low income in present scenario but if the company realise that the taken decision will be more fruit full in near future then company should go for the long term decision , this steps ensure that the company have long term vision and in shareholder this thinking is set on the mind that the company will grow in near future   so because of the company is increasing the opportunity in potential earning the impact on share price will be gain more .

4. The entity should review his assets and liabilities periodically so the company can be in position to make decision on the assets that will not generate future benefit and also liabilities which should  be paid immediately or can be postponed , if company realise that assets which are overvalued by the prospective client and markets then these should be sold at greater price even if that are the intangible  assets. this will gain synergy and the share price will go up.

5.If the company have not investment opportunity which will give more return then a shareholder can earn in the investment in the open market or in other areas then if a company have excess fund which have no use then company should use this fund for the buy back of his own shares and can give dividend to the shareholder.

6.Human Resource is also a valuable assets for the company so for increasing loyalty among them the company should give more rewards like increasing in salary of the CEO and Senior most Members who is part for the strategic decision , so that employees will be more serious for making decision and they consider that the company and his own future is same , they realise that both 's prosperity are in same and they are not distinct entity.

7. company should give reward to operational manager who gave significant time in supervisory level work in the company so that they realise that company has a respect for the man , after experience more then a certain years they are assets for the company so they give more efficient production and the rewards interrupt to the people to switch the other company,

8. The company should also rewards the employee who are in middle management because after experience more then a certain years they are assets for the company so they give more efficient production and the rewards interrupt to the people to switch the other company.

9. The senior most employees of the company should be given shares of the company and also some percentage of total shares should be given to the employee so they realise risk in the value of shares ,

10. The company should make proper arrangement for not making insider trading and also make proper arrangement for giving informations   so that each shareholder have faith on the informations and make proper decision , the transparency give more reliability among the share holders of the company and further reliability will increase the value of shares.